“Inspired Amateurs Should Avoid Politics”

On May 12, 2014, the Wall Street Journal carried an op-ed piece that was truly opposed to what the newspaper claims to stand for.  (Contrary to popular opinion, “op-ed” doesn’t mean “opinion-editorial,” but “opposite the editorial page.”  An op-ed piece presumably reflects the personal opinion of the writer, not necessarily the official stance of the newspaper.  Look it up.)

The Non-Essential National Debt

On May 22, 2013, the Wall Street Journal published an op-ed piece by Phil Gramm and Steve McMillin, “The Debt Problem Hasn’t Vanished.”  We thought it was pretty good — except that the authors assumed as a given that the currency had to be backed by government debt.

To the Wall Street Journal (Again)

Back in early April (the fourth, to be exact), we sent yet another letter to the Wall Street Journal about one of their editorials.  There seemed to be some little confusion between the role of taxes, and the role of financial institutions in funding economic growth.  Naturally we put in our two cents:

Don't Confuse Economists with the Facts!

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Yesterday's Wall Street Journal carried a review of Federal Reserve Chairman Benjamin Bernanke's book, The Federal Reserve and the Financial Crisis.  While we agree that the book probably doesn't address anything substantive, the review made a few errors itself.  Naturally, we couldn't let that go by. . . .

The Wall Street Journal (Again)

We figure that the Wall Street Journal either has a black list, or restricts the number of letters from a single individual they even bother to read. Possibly both. In any event, right after the editorial to which we responded on August 14, the Journal had another one on the European debt crisis. Not astonishingly, our analysis was similar. Even less astonishing, the Journal didn't publish this letter, either.

Dear Sir:

The Eurozone's problems are a direct result of being the first currency based on the principles of "Modern Monetary Theory." Per Knapp's "chartalism," the money supply consists entirely of State-emitted bills of credit. A bill of credit is backed solely by the present value of future taxes, i.e., the "faith and credit" of the issuing government. As the productive capacity of the European economy erodes, the present value of future taxes declines.

Paradoxically, transforming the Euro from a debt-backed to an asset-backed currency is simple, although not easy:

• One, phase out central bank open market operations in government securities.

• Two, supply liquidity to the private sector to rebuild the tax base and spur economic growth by discounting and rediscounting qualified bills of exchange.

• Three, implement an aggressive program of expanded capital ownership financed by discounting bills of exchange collateralized with capital credit insurance, thereby increasing consumer demand naturally to sustain the economy and reducing the need for State assistance.

• Four, as tax revenues increase over costs, pay down the debt, eliminating debt-backed money from the economy, stabilizing the currency and providing a foundation for sound economic growth.

#30#

Response to the Wall Street Journal

A couple of weeks ago we saw an interesting item regarding the now-perennial European debt crisis on the editorial page of the Wall Street Journal. The basic problem, of course, is that the Euro has been mishandled from the very beginning. Unlike most currencies throughout history it was not originally asset-backed, falling by default into debt backing as governments increased their hold on the economy by assuming control over the currency, and then restricting the money supply for consumption to government-issued bills of credit. No, the Euro was from the first a managed currency on the Keynesian model, almost pure chartalism, a certain recipe for disaster.

Naturally the letter was not published, but we present it now to you for your edification and enjoyment:

Dear Sir:

Solving the problems noted in "Germany's Wealth Grab" (WSJ, 08/14/12, A14) is straightforward. Given that the purpose of production is consumption, the proper use of existing savings (past reductions in consumption) is to spend on consumption, not to reinvest in new capital. Financing for new capital should come from future increases in production, not past decreases in consumption.

Financing for new capital can come from monetizing the present value of the future marketable goods and services to be produced by the very capital being financed. Discounting bills representing the present value of future increases in production at a commercial bank, and then rediscounting the bills at the Federal Reserve, as Dr. Harold Moulton of the Brookings Institution noted in his book, The Formation of Capital (1935), can provide adequate, asset-backed financing for all feasible capital projects, replacing the current money supply backed predominantly by government debt.

This is what the Federal Reserve was designed to do, not finance government deficits by monetizing the present value of the government's ability to collect taxes in the future. Adding a proviso that all new capital financed in this way be broadly owned by people who will first use the capital income to repay the acquisition debt and then for consumption will ensure that consumption levels can be maintained without increasing consumer debt or government manipulation of the currency to "stimulate" demand.

#30#

To the Wall Street Journal

On May Day we composed a letter to the Wall Street Journal about Representative Paul Ryan's budget proposals. We haven't heard too much about that subject lately, what with President Obama and Probable Candidate Romney sniping at each other over who's worse. (Choosing between them is a little like asking someone if he'd rather be shot or hit with an ax.) No one is looking at the obvious, that profits are okay, great, in fact . . . but everybody should be in a position to be able to make profits, not rely on redistribution of what belongs to others, either directly through the tax system, or indirectly through inflation.



Anyway, on May first we took pen in hand and fired off yet another missive to the Wall Street Journal that we thought just might get through.  Since they haven't published it by now, we're assuming that they have no intention of doing so — and, since we hate to waste any of our immortal words (especially when coming up against a deadline), here's the letter as today's posting.  So it's a month late . . . .


Dear Sir(s):

In Rerum Novarum Leo XIII challenged the belief that the State has responsibility for every citizen's individual good: "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." (§ 7.) His Holiness explained that State provision for the poor "save in extreme cases" (§ 22) is a demand not of justice, but of charity, "a duty not enforced by human law." (Ibid.)

As William McGurn states in "Paul Ryan's Cross to Bear" (WSJ, 05/01/12, A13), you best help the poor by "breaking down barriers to ownership and opportunity." The pope concurred: "The law . . . should favor ownership, and its policy should be to induce as many as possible of the people to become owners." (RN § 46.)

How to do this is the real question facing Mr. Ryan. Louis O. Kelso and Mortimer Adler proposed in The Capitalist Manifesto (1958) and The New Capitalists (1961) that ownership of new capital be spread out among those who currently own no capital, financing capital acquisition by monetizing the present value of future increases in production, not past cuts in consumption. As the subtitle of the latter book put it, "A Proposal to Free Economic Growth from the Slavery of Savings."

By financing capital acquisition by the poor with "future savings," the rich can be secure in their accumulations of past savings. "Capital Homesteading" is a proposed package of monetary, tax and legal reforms designed to accomplish this goal in a financially sound manner that is also consistent with the social teachings of major faiths and philosophies. Capital Homesteading has the potential to eliminate the basis of "Welfare Blackmail," by means of which people are persuaded to trade their birthright as free citizens for State entitlements and welfare.

#30#

"Changes in Income Inequality and Economic Growth"

The last couple of days seems to have generated quite a bit of discussion in the media about how to (re)establish income equality and achieve sustainable economic growth.  The focus seems to be on showing how the proposals currently out of the table really don't do anything other than perpetuate the unjust system that caused the problem in the first place.  The obvious thing to do, then, is to start looking at solutions that are not out on the table (crazy thought) . . . and to join us this Friday outside the Federal Reserve Board of Governors building in Washington, DC (on the Constitution Avenue side) from 11:30 am to 1:30 pm . . . and bring some Spam, Coke, and Hershey Bars to share.

Or you could write letters to the Wall Street Journal and other periodicals to alert them to the fact that there is an alternative to the present system (and send CESJ some donations for Spam, Coke and Hershey Bars):

Dear Sir(s):

Kamran Dadkhah has the right of it in his letter in today's Wall Street Journal addressing "Changes in Income Inequality and Economic Growth." Increasing tax rates to try and equalize income and stimulate economic growth puts the cart before the horse by implying that the economic growth has already taken place so that it can be redistributed — an illogical assumption at best.

I disagree, however, that education works toward equalizing income. On the contrary, education results from having a surplus to spend on education. It does not itself cause the surplus. We would otherwise not have the spectacle of students burdened for decades with unrepayable loans taken out to finance education.

The real key to unleashing people's entrepreneurial potential is to open up equality of access to the means of acquiring and possessing private property in capital: capital (not consumer) credit. The venture capitalist is essential for financing startups and speculative ventures. The way to sustainable economic growth, however, is to finance expansion by discounting and rediscounting bills of exchange drawn on the present value of future marketable goods and services. To generate the mass purchasing power necessary to keep the economy going, it is also essential that ownership of the capital that will produce this wealth is broadly and directly owned by people who will use the income first to pay for the capital, and then for consumption, not reinvestment.

Yours,
Blah, Blah

#30#

An Open Letter to George Melloan

This is getting to be quite a habit with us.  Writing open letters to George Melloan of the Wall Street Journal and points east, west, south, and north, that is.  In other words, we don't quite know how to go about getting in touch with Mr. Melloan, so we've been doing the internet equivalent of going around the web with a bullhorn.  (We also sent something c/o the Wall Street Journal.)  Anyway, here's our latest.

Dear Mr. Melloan:

As a result of reading your articles, "Obama's Perplexing Populism" (WSJ, 11/04/11, A19) and "A Free-Trade Plan to Save Japan" (WSJ, 11.07/11), may I offer some input? Much of the ineffectiveness, even damage caused by the efforts to save the U.S. and various economies around the globe is, in my opinion, due to a reliance on outmoded monetary and fiscal policies that serve only to strip ordinary people of economic power and concentrate that power in private and public sector elites. What can be regarded as the four "pillars" of an economically just society are undermined by this concentration of power:

• A limited economic role for the State,

• Free and open markets as the best means of determining just wages, just prices, and just profits,

• Restoration of the rights of private property, especially in corporate equity, and

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

This last, widespread direct ownership of capital, is the "fatal omission" from every economy on earth, and the reason why the other three are emasculated. Power, as Daniel Webster reminded us in the Massachusetts Constitutional Convention of 1820, naturally and necessarily follows property. Webster did not refer to consumer goods, even a primary dwelling, but landed, industrial, and commercial capital that produces marketable goods and services.

The necessity of as many people as possible owning capital in addition to their labor has been recognized from the earliest times, but has increased in urgency as technology advances and displaces labor from the production process at an accelerating rate. In 1848 William T. Thornton published A Plea for Peasant Proprietors, a proposal to end the Great Famine in Ireland. The plan was based on making land available at a reasonable cost to the Irish to enable them to shift to other sources of food. Abraham Lincoln's 1862 Homestead Act helped America recover from the Civil War and the shift from cotton to wheat. In 1891, Pope Leo XIII declared, "We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." In the early 20th century Peter S. Grosscup, one of Theodore Roosevelt's "trust busters," advocated "people-ization" of America's corporations by spreading out ownership.

The list could go on endlessly, but what was needed was a viable means of financing capital acquisition by people who had no accumulated savings and could not afford to cut consumption in order to save. In the late 1950s and early 1960s, Louis O. Kelso and Mortimer Adler, building on the work of Harold G. Moulton, president of the Brookings Institution from 1916 to 1952, developed a financially feasible plan whereby workers could become owners of the corporations that employed them. Their two books, The Capitalist Manifesto (1958) and The New Capitalists (1961), detailed their proposal that became the Employee Stock Ownership Plan (ESOP), which was embodied in U.S. law after 1973 when the late Senator Russell Long of Louisiana championed the initial enabling legislation.

The main question, of course, was how, without raising taxes or redistributing existing wealth, through inflation or otherwise, could someone without existing savings or the capacity to reduce consumption acquire and possess capital? The answer was given in the subtitle of Kelso and Adler's second book, "A Proposal to Free Economic Growth from the Slavery of [Past] Savings."

The "problem" here is obvious. Keynesian, Monetarist/Chicago and Austrian economics are all based solidly on the assumption that the only way to finance new capital formation is to cut consumption, accumulate money savings, then invest. Moulton completely disproved this assumption in 1935 in The Formation of Capital, presented as an alternative to the Keynesian New Deal. Moulton explained how, by discounting and rediscounting "bills of exchange" drawn on the present value of existing and future marketable goods and services, commercial banks and the central bank (the Federal Reserve) can create an elastic, asset-backed currency to replace the government debt-backed currency that has stifled growth and concentrated wealth in the hands of a few. The potential of "pure credit," that is, credit that is not dependent on existing accumulations of savings, is bounded only by what can be produced in the future, not by what has been withheld from consumption in the past.

Kelso and Adler added two critical improvements to Moulton's work. One, replace traditional collateral with capital credit insurance and reinsurance, using the risk premium charged on all loans as the premium on an insurance policy. Two, make certain that all new capital financed using pure credit is owned by people who previously owned little or no capital, and who will use the income first to repay the capital acquisition loan and then to meet consumption needs instead of reinvestment.

In order to restore the global economy in the shortest possible time, it is essential that the United States implement a program of expanded capital ownership at the earliest possible date. We at the Center for Economic and Social Justice (CESJ) have developed a proposal to do just that. Following up on Ronald Reagan's call in 1974 for an "Industrial Homestead Act," we propose a "Capital Homestead Act" to duplicate and even improve on the economic power and rapid growth potential unleashed by Lincoln's land-based Homestead Act.

I believe that some time ago you corresponded with Dr. Norman Kurland, president of CESJ, on this topic. In view of your writings on the current world situation, Dr. Kurland is most interested in reopening the discussion with you. I can help in setting up a good time for a telephone conversation at your earliest convenience.

Thank you. We look forward to hearing from you.

#30#

“The Perils of Ignoring History”

It’s completely insane; utterly irrational. A column in today’s Wall Street Journal, “The Perils of Ignoring History” by David Wessel, is so filled with historical errors and misrepresentations that anyone even remotely familiar with the principles of binary economics, to say nothing of the school of classical economics based on the Banking Principle (e.g., Adam Smith, Henry Thornton, Jean-Baptiste Say, etc.) can only be tempted to take the column as satire.

The horrifying thing is that it is not satire.

This is not to say that Mr. Wessel is satanic, evil, or even socially unacceptable. He’s probably kind to children, dogs, and might even go to mosque, temple, or church on Friday, Saturday, or Sunday, respectively, whichever is appropriate. He may even be fun at parties, have great lyrics, and a beat you can dance to. It does, however, show the damage that the best-intentioned people can do when they get hold of some really, really bad ideas.

Since we exceeded by a country mile the limit of what the Wall Street Journal will even consider in the way of letters and wild-eyed raving (a.k.a., “op-ed” pieces), we figure they’re not going to publish it. Besides, we needed to come up with something topical for today’s posting as we bask in the glow of our guest appearance on the Skip Mahaffey Show yesterday. If you didn’t take advantage of the links with which we provided you last week to listen in, you missed a good time . . . ours, if not yours. Your penance is to listen to Russell Williams’s “The Challenge” this Saturday . . . which, come to think of it, is a reward, not a penance. So send a honking big contribution to CESJ, instead. Believe it or not, we take postage stamps, even beads (if they’re a minimum of 14k gold).

Anyway . . . .

September 29, 2011

Letters, The Wall Street Journal
wsj.ltrs@wsj.com
200 Liberty Street
New York, NY 10281

Dear Sir(s):

David Wessel's "Capital" column, "The Perils of Ignoring History" (WSJ, 09/29/11, A4) displays an egregious ignorance of history. By commenting favorably on Liaquat Ahamed's claim that "the Federal Reserve's failure to understand its role as lender of last resort" exacerbated the Great Depression of the 1930s, Wessel completely ignored the fact that the Federal Reserve was intended to be the "lender of last resort" for private sector needs, not government.

As clearly stated in the original Federal Reserve Act of 1913 — carefully ignored by politicians since the 1930s anxious to embrace what Dr. Harold G. Moulton, president of the Brookings Institution in 1943 called "the new philosophy of public debt" and growing State control of the economy required by mindless adherence to Keynesian dogma — the purpose of the Federal Reserve System was to provide an "elastic currency" for the private sector by rediscounting eligible industrial, commercial, and agricultural paper when liquidity in the private sector ran low.

Federal Reserve open market operations were to be confined to supplementing rediscounting by buying and selling securities issued by non-member banks, companies and individuals. Dealing in secondary issues of government securities was permitted to 1) regulate reserve requirements of commercial banks, and 2) provide for the retirement of the government debt-backed National Bank Notes (1863-1913) and their eventual replacement with private sector asset-backed Federal Reserve Notes — a program that ended in the late 1930s. Instituting a 100% reserve requirement for commercial banks by mandatory rediscounting of all qualified paper would remove the remaining legitimate justification for dealing in government securities in any form.

As Moulton pointed out in 1936, when he accurately predicted the "depression within the depression," the keys to sustainable economic recovery are, 1) production, and 2) employment. In the late 1950s and early 1960s, Louis Kelso and Mortimer Adler refined Moulton's analysis, explaining that for sustainable economic growth, it is essential that "full employment" be construed as full employment of both labor and capital in the production of private sector marketable goods and services, not boondoggling or government "make work," and that universal ownership of an adequate capital stake is essential to sustain non-inflationary growth supported by private sector consumer demand, not government spending.

Wessel failed to take into account the substantial difference between good uses of asset-backed credit for investment in broadly owned new capital to finance private sector production of marketable goods and services, and bad uses of debt-backed credit to finance consumption, speculation, and government expenditures. In 1929, just prior to the Crash, the "experts" who didn't understand that commercial and central banks can create money as needed for private sector growth and development by discounting and rediscounting bills drawn on the present value of existing and future marketable goods and services, and assumed that all money is backed by the present value of unconsumed marketable goods and services on which the State has asserted a claim by emitting bills of credit were baffled by the fact that there seemed to be enough money for both speculation and investment in new capital formation. After the Crash, when commercial banks stopped creating money by discounting and rediscounting, the "experts" were again baffled by the dearth of money.

The answer is that before the Crash of 1929 and our current downturn, both bad and good uses of credit were widespread, and afterwards both bad uses and good uses of credit dried up. Temporary over-capacity was exacerbated by the drop in the value of collateral and the panic that resulted when the speculative bubble collapsed. The only way to correct this situation and implement a sustainable program of economic recovery is to limit all new money creation to the financing of feasible new capital that is broadly owned by people who will use the income generated by the production of marketable goods and services first to repay the acquisition loan and afterwards for consumption, with the discount rate set by the administrative costs of the system plus a just profit for the commercial banks, plus a risk premium to purchase capital credit insurance in lieu of traditional collateral. All consumption, speculation, and government expenditures should be financed out of existing accumulations of savings, with the interest rate set by the market. This will provide adequate financing for new capital formation, and thus job creation that can be sustained without government manipulation.

No more money should be created by discounting, rediscounting, or open market purchases of primary or secondary government securities. Since financing for feasible private sector capital can be created at will by commercial bank discounting and central bank rediscounting, dividends should be made tax deductible at the corporate level, and taxed as regular income at the individual level. This would provide sustainable consumer demand to match the production of marketable goods and services, and restore the functioning of Say's Law of Markets.

Yours,
Blah, blah, blah.

#30#

"Nader Kindles Fires of Revolt"

This is the second in our series of letters we've written to the Wall Street Journal in the past week or so, otherwise known as "Letters That the Wall Street Journal Ain't Gonna Publish, or, I'm Too Lazy to Write a Special Blog Posting for Today, So I'm Glad They Didn't." Or you could just call it "Today's Blog Posting." Anyway:

Dear Sir(s):

Color me (pleasantly) surprised. I had no idea, from my previous experience with Ralph Nader [this was written for Norman Kurland to send], that he would come out in favor of restoring the rights of private property to corporate shareholders. ("Nader Kindles Fires of Revolt," Wall Street Journal, June 24, 2011, C1.)

Nader's demand that Cisco Systems start paying out bigger dividends probably wouldn't increase share value. It would, however, restore some of the traditional rights of private property, e.g., the right to receive the "fruits of ownership" (income), taken away from minority owners in such decisions as Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668. (Mich. 1919), in which the Michigan Supreme Court did affirm the right of minority shareholders to a dividend . . . but only if (under the "Business Judgment Rule") the withholding of dividends did not harm the company.

Kudos to Nader for championing the property rights of minority owners, and challenging the erroneous belief that retained earnings are essential to financing new capital formation. Let's finance growth by using the commercial banking system and the Federal Reserve as intended, by discounting and rediscounting eligible paper. Let's make all dividends tax deductible at the corporate level, and put corporate income in the hands of people who will spend it on consumption to sustain effective demand at the level needed to make new capital financially feasible and accessible to enable all citizens to become owners of newly issued shares.

#30#

"Of Wealth and Incomes"

You know that response we've been yakking about for the past month to someone who had promised to review one of our books and then backed out? Well, we sent it off this morning to our expert in moral philosophy to review and, when we hear back about how great it is, we'll fire it off to the non-reviewer. Who knows? The fact that it is 32,000 words long (longer than the original book . . .) might stun the non-reviewer to the point where the book might actually get reviewed. Or burned in effigy.

Anyway, that's not what we're posting on today. That's right. You're not in for a 32,000-word posting on esoteric subjects that you could care less about. We're not even sure that Blogger could handle something of that length, or if it would cause the program to go insane.

No, what you're getting today is a copy of one of the letters we sent to the Wall Street Journal . . . you know, gassing on about esoteric subjects that they could care less about, which adequately explains why these letters don't get published. Anyway, here it is:

Dear Sir(s):

In "Of Wealth and Incomes" (Wall Street Journal, 06/24/11, A12), you state, "The problem is that monetary policy is not a laser-guided missile. The Fed can create new dollars, but it can't determine where those dollars will flow," etc. Correction: the Federal Reserve cannot determine where those dollars will go — under prevailing "Currency Principle" assumptions.

The Federal Reserve was established in 1913 under the Banking Principle to "provide for the establishment of federal reserve banks, to furnish an elastic currency, [and] to afford means of rediscounting commercial paper." The "Banking Principle" is based on the "real bills doctrine," an application of "Say's Law of Markets."

The Federal Reserve has the power under § 13(2) to provide liquidity directly for financially feasible new capital investment by rediscounting eligible private sector paper. Dr. Harold Moulton, then president of the Brookings Institution, explained this in his alternative to New Deal monetary and fiscal policy, The Formation of Capital (1935). Louis Kelso and Mortimer Adler advocated broadened capital ownership financed by this method in The Capitalist Manifesto (1958) and The New Capitalists (1961).

From a Currency Principle perspective, the real bills doctrine is nonsense, and Say's Law is either rejected or redefined. Using a tool such as the Federal Reserve, designed to operate in accordance with one principle, to operate in conformity with an opposed principle explains much of the confusion we see today in both monetary and fiscal policy.


Yours,

Blah, blah.

#30#

How Low Cost Labor Threatens America

There was an embarrassment of riches in today's Wall Street Journal — and one of which we could take full advantage.  Usually there's just too much to address, but today our job was easier than usual . . . although, as you might expect from the shape of the world today, never actually easy.  (If you feel like making our lives a tad easier, many volunteer positions are available in the Just Third Way, especially for writers and artists of all types who want some crazy ideas to set them off from the other crazy ideas.



The prize today was a labor lawyer who wrote an op-ed complaining that Boeing's move to a lower-wage area below Mason-Dixon was a virtual death-blow to the economic health of the United States.  In a surprising statement for a labor lawyer, he claimed that the cost of labor is negligible in American-made marketable goods and services . . . suggesting that he's never looked at an income statement.  The big thing, though, was that all those stupid people who work for less than $28/hour are undermining the economy and causing the trade deficit.  We'll cover that claim and others like it when we get around to discussing Harold Moulton's Income and Economic Progress (1935).  Until then, however, you might regale yourself with this letter that we sent off to the Wall Street Journal today:

In "Boeing's Threat to American Enterprise" (Wall Street Journal, 06/20/11, A15), Thomas Geoghegan makes some astonishing claims — not the least of which is that foreign creditors have not used low labor costs to their advantage. Has he ever heard of China?

The real problem, however, is that Mr. Geoghegan assumes that wages alone will deliver justice to America's workers. On the contrary, as the late labor statesman Walter Reuther pointed out in his testimony before the Joint Economic Committee of Congress on the President's Economic Report, February 20, 1967,

"If workers had definite assurance of equitable shares in the profits of the corporations that employ them, they would see less need to seek an equitable balance between their gains and soaring profits through augmented increases in basic wage rates. This would be a desirable result from the standpoint of stabilization policy because profit sharing does not increase costs. Since profits are a residual, after all costs have been met, and since their size is not determinable until after customers have paid the prices charged for the firm's products, profit sharing as such cannot be said to have any inflationary impact upon costs and prices."

The answer to America's decline in competitiveness is not to undermine industry further, but, as Louis Kelso and Mortimer Adler explained in The Capitalist Manifesto (1958), to spread out the benefits of capital ownership to everyone through access to the means of acquiring and possessing private property. As Pope Leo XIII declared in 1891, "We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." (Rerum Novarum, § 46.) This was why Ronald Reagan called for "an Industrial Homestead Act" in 1974 — and why today's labor unions should transform themselves into ownership unions.


Yours,

Blah, blah.

#30#

"I Didn't Raise Taxes Once"

Yesterday's Wall Street Journal carried a short piece about President Obama's declaration that (so far) he has not raised taxes. This might be a bit disingenuous, but evidently the president believed it when he said it. The problem was that he was probably thinking of the personal income tax, not the wide array of other taxes that pervade society.

Naturally, the Wall Street Journal didn't cut the president any slack. Why should they? Doubtless Mr. Obama was sincere, but grossly inaccurate. Like Horton, he really should have said what he meant. He would then not be in the embarrassing position of looking as if he didn't mean what he said, and of coming across as less than 100% faithful to the trust with which he is vested.

The problem was that the Wall Street Journal was itself a trifle off the mark. Possibly because they stand to benefit more than anyone else from inflation and the transfers of purchasing power that results from manipulation of the currency by the State, they forgot about the dangers (both political and economic) that result from the hidden tax of inflation.

Naturally, we weren't going to let that lie, so we fired off yet another letter to the Wall Street Journal which, since it was written from outside their past-savings paradigm, probably went right over their heads. Nevertheless, if only to ensure that it gets published somewhere, we present it here for your edification and enlightenment.

Dear Sir(s):

You could have strengthened your case greatly in "'I Didn't Raise Taxes Once'" (WSJ, 02/08/11, A14). Contrary to his assertions, President Obama has eroded private property and the soundness of the currency through the "hidden tax" of inflation. Government borrowing and the consequent inflation is more devastating than any form of direct taxation — to say nothing of being based on an unsound understanding of money, credit, banking and finance.

President Obama could do much better by reforming the financial system to rebuild the tax base rather than inflict hidden taxes on an increasingly burdened productive sector. Dr. Harold G. Moulton in his contra-New Deal treatise The Formation of Capital (1935) recommended financing new capital by discounting and rediscounting bills of exchange instead of existing accumulations of savings.

To this should be added promoting wealth creation in which all citizens participate through direct ownership instead of redistributing existing wealth through artificial job creation and inflationary stimulus packages. This was suggested by Louis O. Kelso and Mortimer J. Adler in their two collaborations, The Capitalist Manifesto (1958) and The New Capitalists (1961), the latter with the provocative, yet insightful subtitle, "A Proposal to Free Economic Growth from the Slavery of Savings."

#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.

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Stimulating Unemployment

An editorial in today's Wall Street Journal makes the obvious point that if you pay people not to work, they won't work — big surprise. Alexis de Tocqueville made the same observation in the 1840s with his Memoir on Pauperism . . . as have countless other people with a modicum of common sense. The bottom line is that we felt compelled to point out to the Journal that it isn't enough just to say "don't do that" when it comes to stupid government programs. In social justice, the proper course of action is to organize with others and come up with something better. Simple gainsaying is rarely effective.

Dear Sir(s):

"Stimulating Unemployment" (Wall Street Journal, 07/20/10, A16) raises serious questions about how unemployment benefits and similar payments are administered. As implemented, unemployment benefits and welfare create a powerful disincentive for people to become productive, whether through wage system jobs or entrepreneurial endeavor. There is no incentive to take a job that offers a wage less than or equal to the benefits received, or to try and exercise creativity and inventiveness to generate a more risky and, potentially, more socially and personally lucrative return.

A possible solution would be to phase out the practice of terminating benefits once the recipient has secured employment or is engaged in some form of productive work. To stimulate production and employment, the current all-or-nothing system should be replaced with a sliding scale. When a welfare or unemployment recipient secures gainful employment or otherwise engages in productive activity, benefits should be reduced, not eliminated. To ensure that the system encourages productive activity, it should not be a dollar-for-dollar reduction, but, e.g., 50¢ for every dollar earned.

A sliding benefits scale could be combined with a program encouraging widespread direct ownership of the means of production. Asset acquisition could be financed by the expansion of bank credit backed by the present value of existing and future marketable goods and services. Loans could be secured with capital credit insurance and reinsurance instead of traditional forms of collateral. An unemployment and welfare reform package along these lines could provide a solid and financially sound economic stimulus package financed by private sector growth, not increased government spending.

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"Real Government Efficiency"

We haven't been picking on the Wall Street Journal lately. It's not that they don't deserve it, but we've had other things to do, such as trying to finish the series on common currencies (below), and figuring out what to do next (besides actually working for a living or something). Nevertheless, we read both the Journal and the Washington Post (almost) every day. Sometimes the comics are funny, more often not, and sometimes we can even figure out what point the Post's editorial cartoonist is trying to make (oh, Jeff MacNelly, where art thou?).

In any event, yesterday we came across a review of Thomas Hobbes's 1651 classic manual for the totalitarian State, Leviathan, in the pages of the Journal. That was startling enough . . . just how big is their backlog? (And no wonder they never reviewed Capital Homesteading for Every Citizen!) The reviewer, Dr. Jeffrey Collins, is a professor of history at Queen's University in Kingston, Ontario, and is an expert on Thomas Hobbes, having written a book on the subject. (And we are experts on Capital Homesteading, having written the book on the subject.)

The point of the review seemed to be that modern government follows a blueprint laid out by Hobbes. Since we've been ranting and raving about that very thing for months now, what could we do but agree? So we agreed, and sent in the following letter:

Dear Sir(s):

Jeffrey Collins closes his review of Thomas Hobbes's Leviathan ("Real Government Efficiency," 07/14/10, A17) by quoting John Dunn's observation that Hobbes seems to be "our philosophical contemporary." Mr. Collins is right.

Today's "Servile State" finds its philosophical support in the work of Hobbes. By denying the natural right of private property, Hobbes rendered citizens economically powerless and justified socialism. ("A Fifth doctrine, that tendeth to the Dissolution of a Common-wealth, is, That every private man has an absolute Propriety in his Goods; such, as excludeth the Right of the Soveraign." Leviathan, II.xxix.) Denying the right of liberty by declaring all associations illegal other than those directly sanctioned by the State, and those necessarily "Representative of the whole number," he held citizens politically powerless. (Ibid., II.xxii.)

Walter Bagehot commented approvingly on Hobbes in The English Constitution (1867). He also ridiculed Magna Carta, sneered at the United States, and redefined "democracy" to mean rule of the British Empire by the "Upper Ten Thousand" financial elite who controlled parliament through the "rotten borough" system. An adherent of the Currency School, Bagehot accepted that the State should control the quantity of money, describing how he believed the London money market functioned under the Bank Charter Act of 1844 in Lombard Street (1873).

Following Bagehot, John Maynard Keynes denied liberty (freedom of association), claiming the State "decides what it is that must be delivered as a lawful or customary discharge of a contract" (Treatise on Money, Vol. I. New York: Harcourt, Brace and Company, 1930, 4), to say nothing of Keynes's belief that the State can change reality by "re-editing the dictionary." (Ibid.) By asserting that the State should allocate resources and set the return to capital by controlling interest rates, Keynes denied private property as a natural right. (General Theory, V.24.iii.)

Mr. Collins is correct that, "What we make of [Hobbes's] company is its own question." In light of today's economy, the spread of elitism, and State encroachment in virtually every area of life that threatens to reduce each person to the status of "mere creature of the State" (Pierce v. Society of Sisters, 268 U.S. 510 (1925)), the answer is self-evident.

*****

BTW (this wasn't part of the letter), Jeff MacNelly was a syndicated political cartoonist who also drew the comic strip "Shoe." He died of cancer in 2000 in Baltimore. His cartoon, "Jeff MacNelly's Tax Return," if I'm not mistaken, may have won the Pulitzer Prize. Or maybe not. If it didn't, it should have. It's so funny, you'll plotz.

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The Elite? Who Needs ‘Em?

The reaction of most people to the push to impose greater government regulations and control over derivatives is, "It's about time." What it may be time for, however, is second thoughts. The most common understanding of the role of the State today is that not only is it the institution designed as a very specialized and very powerful tool to safeguard the common good — equality of opportunity to develop as a human being — but that it is also responsible for each person's individual good as well, or what we develop into: equality of results.

In economic terms, safeguarding the common good is necessarily limited to establishing and maintaining the juridical order (i.e., passing and enforcing good laws), policing abuses, and in general providing a "level playing field." Financially this means setting the standards for and regulating the currency. It is not the State's role to create money, but to regulate the creation of money — a different task entirely.

Further, contrary to the claims of John Maynard Keynes, the State does not have the right to change or dictate the terms of contracts between private individuals. The State may be called upon to settle a difference of opinion over the terms of a contract, or to enforce compliance, but it cannot interfere in a contract between two or more people when the matter is not illegal.

The problem is that both our leaders and our fellow citizens have come to accept Keynes's view of private property (and thus money and contracts) without question, and, apparently, without realizing the implications of that acceptance. Consider, for example, Keynes's brief précis of money and contract law:

It is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time — when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of Money has been reached that Knapp's Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realized. (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)

Most people will miss the fact that all contracts involve "money," if we take the proper understanding of "money" as the medium of exchange by means of which debts are settled and the present value of existing and future marketable goods and services is stored. By claiming that the State has the right to set the terms of all contracts involving money, Keynes was effectively claiming a right on the part of the State to control all contracts. This claim — if true — means that two natural rights, liberty (free association) and private property, have been abolished, and all through State control of money and credit. In this we see the logical fulfillment of what Pope Pius XI observed in the 1930s, when he warned in Quadragesimo Anno (“On the Restructuring of the Social Order”), 1931,

105. In the first place, it is obvious that not only is wealth concentrated in our times but an immense power and despotic economic dictatorship is consolidated in the hands of a few, who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure.

106. This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will.

The new derivatives regulations being pushed through the Congress ("Finance Overhaul Casts Long Shadow on the Plains," Wall Street Journal, 07/14/10, A1, A16) is, given a sound understanding of money, credit, and private property, a vast expansion of the role of government into the financial sector. This is not to say that regulations aren't needed. To be both sound and effective, however, the regulations should consist of internal control measures implemented by the design of the financial system — the social order — itself and embody proper separation of function, not be imposed by the proliferation of external controls.

The manner in which the effective systemic, internal controls, such as Glass-Steagall, were repealed and replaced with ineffective external controls is symptomatic of the rapid growth of an unfortunate elitism directly opposed to the Just Third Way. In the same edition of the Wall Street Journal in which the article complaining about State interference in the financial markets appeared, the opposite page carried an adulatory review of Thomas Hobbes's 1651 opus ("Real Government Efficiency," ibid., A17), Leviathan. Leviathan, as we've pointed out a number of times on this blog, is generally considered the philosophical justification for totalitarian socialism. Hobbes described an ideal State in which the sovereign — a divine right ruler — was the effective owner of everything, and all freedom of association was abolished. Centuries later, Walter Bagehot would cite Hobbes approvingly in The English Constitution (1867), a blueprint for how the financial elite should run a country.

Unless the United States (to say nothing of the rest of the world) adopts the Just Third Way to counter the rising tide of elitism in all its forms, social, political, and — above all — economic — at the earliest possible date, the economy will implode as the first step in an overall systemic collapse. The world looked to fascism to restore order in the 1930s after the Great War and the Great Depression. It didn't work then, however, and it won't work now.

Yesterday our comment was a dismissive remark about the rich, and how, although we don't need them, we can all get along together if the rich have no objections to our joining the club. We cannot say the same about elitism. We can't join the club, because the club would then cease to be. We can only say, with much more force than yesterday's casual observation, "The elite? Who needs them? Really."

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The Right Way to Raise Wages (Not)

Today's Wall Street Journal carried an op-ed piece by a professor of economics at UCLA, "The Right Way to Raise Wages" (07/08/10, A17). Unfortunately, it took a while to track down contact information for the author. The Wall Street Journal, ordinarily so careful, gave the professor's name as "O'Hanian," which we naturally read as "O'Hanlon." The gentleman's name is "Ohanian."

Anyway, his proposal is to avoid using the State or the unions to coerce a rise in the wage level. (Agree.) Instead, Dr. Ohanian proposes increases in funding for education and job training to raise worker productivity. (Disagree.) A Kelsonian will instantly see the problem here. Human labor isn't responsible for increases in productivity. Human labor can't do any more than it could 50,000 years ago. Rather, increases in productivity come from advances in technology, not advances in human physiology . . . unless some of those science fiction stories we've been reading or viewing are true. (Well . . . even most of those rely on turning human beings into cyborgs by retrofitting them with advanced technology, e.g., Keith Laumer's A Plague of Demons (1965); any of the Robocop films, the Six Million Dollar Man television series, etc.)

The solution is not to distort distribution patterns even more and undermine the natural right of private property, but to spread out direct ownership of the means of production so that people can gain an adequate and secure income from both labor and capital. So we fired off a letter to Dr. Oharian:

Dear Dr. Ohanian:

After reading your op-ed piece in today's Wall Street Journal ("The Right Way to Raise Wages," WSJ, 07/08/10, A17) and looking up your webpage on the UCLA site, I thought you might be open to hearing about another alternative to union bargaining power as a means of raising wages and increasing effective demand. This can be found in the "Capital Homesteading" proposal by the Arlington, Virginia-based Center for Economic and Social Justice ("CESJ"), an application of the "Just Third Way" of economic and social development.

The Just Third Way is based on the "Binary Economics" of Louis O. Kelso and Mortimer J. Adler, detailed in the two books they co-authored, The Capitalist Manifesto (1958) and The New Capitalists (1961). The Just Third Way embodies the "Three Principles of Economic Justice," 1) Distribution, 2) Participation, and 3) Harmony, as well as the "Four Pillars of an Economically Just Society":

• A limited economic role for the State,

• Free and open markets as the best means for determining just wages, just prices, and just profits,

• Restoration of the rights of private property, especially in corporate equity, and (the "fatal omission" from every economy in the world today)

• Widespread direct ownership of the means of production.

As a means of raising wages naturally, without employing coercion by either the State or unions, this last is consistent with the observation by Alexis de Tocqueville in Democracy in America:

In France most of those who labor for hire in agriculture, are themselves owners of certain plots of ground, which just enable them to subsist without working for anyone else. When these laborers come to offer their services to a neighboring landowner or farmer, if he refuses them a certain rate of wages, they retire to their own small property and await another opportunity. ("Influence of Democracy on Wages," Democracy in America, II.vii.)

In other words, if we want wages to rise naturally, employers who currently have an effective monopoly over workers' incomes need a little free market competition instead of union or State coercive measures. Workers — everyone, in fact — should own a capital stake large enough to generate an adequate and secure income sufficient to meet common domestic needs adequately. Wages could then rise or fall to a level reflecting the true market value of the labor being purchased.

To open up democratic access to the means of acquiring and possessing private property in the means of production to people who lack existing accumulations of savings, Kelso "invented" the Employee Stock Ownership Plan, or "ESOP." The ESOP and similar vehicles, such as the proposed "Capital Homestead Account" (a sort of credit-financed "super" IRA), have the potential (as Kelso and Adler put it in the subtitle of The New Capitalists), to "Free Economic Growth from the Slavery of Savings."

By "slavery of savings," Kelso and Adler do not reject the necessity of savings to finance capital formation. On the contrary, what they reject is the disproved dogma, rooted in the tenets of the British Currency School and finding its fullest development in Georg Knapp's "Chartalism," that "saving" necessarily means cutting consumption.

This blind subservience to past savings, while embodied in U.S. tax law, as well as Federal Reserve and federal government monetary and fiscal policy, was completely disproved by Dr. Harold G. Moulton, president of the Brookings Institution from 1916 to 1952. Among other works, Moulton published The Formation of Capital in 1935, the third volume in a four-part series presenting an alternative to the Keynesian New Deal to provide a framework for formulating an economic recovery program.

Before the end of next week we expect to have our new edition of The Formation of Capital (republished with the generous permission of the Brookings Institution) ready for submission to the printer. This edition features a new foreword by Dr. Norman G. Kurland, president of CESJ, explaining the importance of Moulton's work, both in countering today's unquestioned Keynesian policy assumptions, and — more importantly in the long-run — in demonstrating that ordinary people can (and should) become owners of significant capital stakes by using future rather than past savings.

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Why the Credit Crunch Won't Go Away

In today's Wall Street Journal, we found a very interesting analysis of the "credit crunch" afflicting small businesses — you know, the largest part of the economy. While interesting, however, and very insightful, there was no real solution suggested. The implication seemed to be that things aren't going to change until and unless people begin acting contrary to their own nature. On the contrary, the solution has been staring us in the face for almost a full century — half a century if you want to add the necessary refinements of Kelso and Adler.

Emily Maltby
Staff Reporter
Wall Street Journal
200 Liberty Street
New York, NY 10281
emily.maltby@wsj.com

Dear Ms. Maltby:

Your article in today's Wall Street Journal, "The Credit Crunch That Won't Go Away" (R1, R3), addressed the most critical problem in an economic recovery: adequate liquidity to provide financing for private sector, not government growth. Ironically, the problem was solved once, with the passage of the Federal Reserve Act of 1913.

The Regional Federal Reserves had (and technically still retain) the power to rediscount qualified industrial, commercial, and agricultural paper issued by member banks, and to engage in open market operations in qualified paper issued by non-member banks and private businesses as a supplement to rediscounting. An application of the real bills doctrine, the Federal Reserve was established to provide the economy with an "elastic currency" that would be asset-backed, and avoid both inflation and deflation. Discounting of primary government securities was not permitted in order to avoid monetizing government deficits, but dealing in secondary government securities was allowed because government securities — the only legal backing for national banknotes under the National Bank Act of 1864 — were included in the definition of "reserves."

As a result of the liquidity problems associated with the Panic of 1893 and the Panic of 1907, the idea was that the Federal Reserve would serve as a lender of last resort for the private sector. Because policymakers decided to finance America's entry into the First World War by borrowing rather than taxing, however, the Federal Reserve gradually became the lender of first resort to the federal government. Tantamount to chartalism, this is in accordance not only with Keynesian economics, but (oddly) also with Monetarist and Austrian economics, all of which take for granted the disproved assertion that capital formation can only be financed out of existing accumulations of savings.

On the contrary, as Dr. Harold G. Moulton demonstrated in his 1935 classic, The Formation of Capital. Moulton, first president of the Brookings Institution (1916-1952), presented an alternative to the Keynesian New Deal in a series of four volumes of which The Formation of Capital is the most important. Moulton's contention was that in periods of intense capital formation, financing for new capital does not come out of existing accumulations of savings. Rather, the financing comes from the extension of bank credit for productive purposes, accompanied by a simultaneous expansion of consumption, from which the demand for new capital derives.

To Moulton's findings, Louis O. Kelso and Mortimer J. Adler added that, for consumption to expand simultaneously with production, the new capital must be broadly owned by people who will use the income from capital first to generate the future savings to service the acquisition debt, and then for consumption, not reinvestment. Kelso and Adler presented their case in their second collaboration, The New Capitalists (1961), a deceptively small book with a very big idea, summarized in the subtitle: "A Proposal to Free Economic Growth from the Slavery of Savings."

A critical feature of Kelso and Adler's proposal is to replace usual forms of collateral with capital credit insurance and reinsurance. As you suggest, banks are reluctant to lend without some reassurance that they will be repaid. With the volatility of the stock market, the value of the usual collateral has become uncertain — as was the case in the 1930s. Instead of relying on government and the Federal Reserve artificially bolstering share values on Wall Street and calling it a recovery, it would make more sense to go with a private sector solution in the form of broadly owned private capital credit insurance and reinsurance companies. This has the potential to foster genuine growth instead of ephemeral gains on the stock market.

If any of this interests you, you might find the "Capital Homesteading" proposal of the Center for Economic and Social Justice ("CESJ") in Arlington, Virginia, something worth investigating.

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