Easter, 1916

Early this morning we received an e-mail from Mr. Tom Laney, a retired UAW worker involved in the American Auto Worker Ownership Committee effort to organize autoworkers to purchase the Big Three automakers on their own behalf instead of working for the exclusive benefit of others. The e-mail contained a link to a video of the song "James Connolly," performed by "Charlie and the Bhoys," accompanying footage of a reenactment of the Easter Rising of 1916 at the General Post Office in Dublin.

We were already familiar with the song, and more familiar with the history. Connolly, head of the socialist Irish Citizen Army, had achieved a tentative alliance with the Irish Volunteers. Michael Collins, comparing Connolly to Patrick Pearse (first provisional president of the Irish Republic), said that Connolly was a realist while Pearse was the idealist. This was perhaps due to the fact that Pearse had a vision of an Irish Republic born out of the willing sacrifice of the Volunteers, symbolically choosing Easter as the date of the Rising for that reason, while Connolly sought the destruction of the capitalist system and the establishment of a socialist republic, preferably without having to die himself.

Pearse framed the struggle as Irish nationalism against British oppression, while Connolly characterized it as labor v. capital. Unfortunately, the leaders listened to Connolly when developing their strategy for taking over Dublin, and Connolly was convinced that the capitalists would never use artillery in putting down a rebellion, thereby running the risk of damaging or destroying their own property. This led him into the belief that simply holding out as long as possible would give the combined IRC and the IV a victory.

Consequently, the rebels concentrated their forces at the General Post Office, a militarily insignificant target in the center of town on the main street (Sackville Street, later renamed O'Connell Street, after the Great Emancipator, Dan O'Connell), leaving Dublin Castle and the various communication companies and utilities either abandoned or in the hands of the RIC (Royal Irish Constabulary) or the army. A key point in the Irish strategy was reliance on the assumption that the British were tied down in France and couldn't spare troops to put down a rebellion in Ireland. By concentrating their forces and assuming incorrectly that artillery would not be used, however, the rebels made it relatively easy for the British to win with much fewer troops than otherwise.

The rebels were rounded up and taken off to prison through the streets of Dublin, during which the people cursed them, even threw garbage at them. One of the men recalled years later asking the man marching beside him if he thought the British would let them go. The other man replied, "God, I hope not." What changed the opinion of most of the Irish (and even many English) were the secret executions of the leaders, including Connolly, who was already dying. The executions were carried out over the personal protests of King George V, as well as many members of parliament and leading public figures, and announced afterwards.

This outraged the public that, up to then, had been almost uniformly condemning the rebels. The executions were immediately construed as revenge rather than justice, and even today's modern English commentators say it would have been much better to let the leaders lie forgotten in jail, letting what little public support they enjoyed die away over time.

The only leader not executed was an obscure professor of mathematics named Edward (later Eamon) de Valera, an American with an Irish mother and a Spanish father who had failed to formally renounce his American citizenship before joining the rebellion. The British were at this time desperate for American aid for the war in Europe, and didn't execute de Valera. This gave the rebels a single leader to rally around instead of sixteen, ensuring unity at a critical time.

Our recent proposals to the Dáil and Seanad of Ireland, found under the heading "Irish Economics," offer an economically and financially — and peaceful — way to achieve the major goals of the Easter Rising of 1916, with the exception of the establishment of a socialist (or, for that matter, capitalist) republic. Capital Homesteading and the Abraham Federation offer a framework for lasting peace that transcends the usual demands for people to give up everything and gain nothing.

Regulation, Part I: Two Views of Regulation

There are two ways to look at regulation. One, you can set up a system to police itself, so that the institutions of the system operate in a way that optimizes the chance of the desired objective(s) coming to pass. Two, you can hand over the policing of the system (as opposed to the policing of the abuses of the system) to something external — in today's world, usually the State — hoping that the threat of coercion from the outside will force people to act in what are considered appropriate ways, whether or not the system allows people to act in the "appropriate ways."

Any accountant can tell you (or should be able to tell you) that it is far more effective to set up a system that embodies regulation, that is, a system with its own internal checks and balances, than to try and impose them from the outside by increasing the burden of regulation designed and intended to coerce desired results. External regulation may or may not even make sense when considering an organization's mission, the existing institutional environment, or, especially, the dignity of the human persons involved.

For example, it is much better to separate "Payables" and "Receivables" both physically and administratively, making it difficult or impossible for a single individual or group to have control over incompatible functions. This systemic regulation is much more efficient and cost-effective than simply forbidding individuals or groups having control over incompatible functions to do anything wrong. Separation of function makes it more difficult either for honest mistakes to be made, or for actual wrongdoing to take place. Simply forbidding certain acts cannot prevent honest mistakes, and, worse, imposes no structural check or balance to make the forbidden act difficult or impossible without a great deal of effort.

All of this has to do with a fundamental change in how we view regulation. Consistent with the dignity of the human person, regulation should be designed to reinforce the system itself and encourage desired results, not run counter to the whole idea of a system itself and try to force desired results, whether or not the capacity exists to achieve the desired goal. The system itself must be designed to be self-regulating, not have control imposed from the outside. Unfortunately, what we've seen develop in government as well as law and economics is the belief that people must be forced to do whatever people in power want them to do, thereby attaining some bureaucrat's or academic's idea of utopia.

Thanks to the current financial crisis, we see the results of attempting to force people to act in what politicians and academics believe to be desirable ways instead of setting up and maintaining the system so as to allow people to act in desirable ways. The repeal of Glass-Steagall and other regulations in the early 1980s affecting financial institutions removed structural, internal regulation that relied on people acting in most cases to their own advantage, and replaced it with coercive, external regulation that tries to force people to act contrary to their own advantage.

What naturally resulted seems to have surprised virtually everyone: people acted to their own advantage within a system where it was very easy, simply by ignoring external regulations, to gamble and speculate with other people's money, even steal it with impunity, as long as nobody thought to ask the wrong questions. The system, gutted of internal, self-regulation, couldn't — and didn't — send up any signals that would cause people to ask such questions.

News from the Network, Vol. 2, No. 11

As of this morning, the financial world is still riding the wave of what they should realize by this time is yet another artificial burst of euphoria over the prospect of the U.S. government printing more money to bail out an ever-widening circle of clients and dependents. Depending on how long it takes the gamblers and speculators to catch on to the fact that printing money unlinked to production can only make things worse, the stock market will again go into a precipitous decline, and probably sharper than before as reality once again catches up with unfounded optimism. It all comes down to how long people allow themselves to be led by the empty rhetoric of politicians who, to use the old joke, fill the air with speeches, and their speeches with air, refusing to link creation of money to new production of marketable goods and services.

Nevertheless, there is some genuine progress to report.

• On Monday and Wednesday of this week, Norman Kurland and Dawn Brohawn had a series of meetings with Antonio Betancourt and former Congressman Walter Fauntroy of the Summit Council for World Peace. All participants in the meetings agreed that, in view of the worsening economic crisis, now was the time to move forward with the Just Third Way, especially in organizing to present the principles underlying Capital Homesteading and the Abraham Federation, targeting the annual demonstration outside the Federal Reserve Building in Washington, DC on April 17, 2009. A special emphasis needs to be put on opening doors for Norman Kurland to make presentations to prime movers throughout the world. If you have highly-placed connections you believe might be open to hearing about the Just Third Way, refer them first to the CESJ web site, www.cesj.org, and suggest that a meeting be arranged with Norman Kurland.

• Although Mr. Obama seems intent on turning the American automobile industry over to Wall Street (which has done such a smashing job with the rest of the economy), the "American Auto Employee Ownership Committee" has been working very hard over the past several weeks to put together a proposal that would give America's auto workers the power to save their own jobs by opening up the opportunity to purchase the "Big Three" and make them profitable again rather than continue to shovel taxpayer money into the furnace to give Wall Street bankers and brokers a nice warm feeling. The Committee recently carried out a survey to determine attitudes among their fellow UAW members, and reported that of the 1,500 respondents, 95% were in favor of ownership by the workers as a way to revitalize the industry, with 1% opposed. Norman Kurland has been active in offering free consulting services to the Committee.

• On Thursday we received a telephone call from an estate planner in Indiana who got in touch with us because of the description of the Justice-Based Management ("JBM") services offered by Equity Expansion International, Inc., a company founded to put Just Third Way principles into practice within today's legal and business environment as far as the law, conditions, and opportunities allow. With competition for scarce resources such as financing becoming increasingly severe as the economic crisis worsens, a Justice-Based Management culture in a company may give the enterprise the edge necessary not only to survive, but to thrive in difficult times.

• Recently we heard from an entrepreneur in Canada, who is investigating the possibility of installing advanced, "green" energy systems and Justice-Based Employee Stock Ownership Plans "north of the border." At present he is working to surface expert Canadian legal counsel to determine whether existing Canadian law allows for the same or similar arrangements that are possible under U.S. law, or whether existing institutions can be adapted to JBM within the current legal framework.

• As of this morning, we have had visitors from 47 different countries and 52 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, with Canada, the UK, Finland, and the Philippines rounding out our "top five" countries where we're read the most. The top spots for the average time spent on the blog, however, go to Venezuela, Brazil, New Zealand, Mexico, and Poland, in that order. In a surprise move, our most popular posting is the one on Abraham Lincoln's 1862 Homestead Act, which entered that expanded ownership initiative into the sixteenth president's "greatest achievements" contest. While a posting on the stimulus package is trying harder at number 2, general comments on the flaws in Keynesian economics are still the most popular (4 postings). Of the remaining "top ten," 1 is on Capital Homesteading, and 2 are the weekly news updates. Most readers (70% of the "top ten" keyword searches) are using words indicating they want to learn about the serious flaws in Keynesian economics.

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

Democratize the Fed, Part II, William Greider's Response: "Terrific"

On Tuesday of this week I posted a relatively short commentary on Federal Reserve Chairman Benjamin Bernanke's proposal to impose regulatory reform on the nation's commercial banks, using the power of the Federal Reserve, the central bank of the United States, to carry out the reform. Our recommendation, as you can see in the posting, was to start with the Federal Reserve itself, and stop circumventing the spirit and clear intent of the Federal Reserve Act of 1913.

As has become my habit, I sent out links to the posting to the Kelso Binary Economics Discussion Group, some members of which forward the link to their networks, and their networks to their networks, and so on, just as we encourage them to do. To lure people into reading the posting, I added a short introductory blurb to the e-mail:

Some years ago William Greider wrote a best-selling book, Secrets of the Temple: How the Federal Reserve Runs the Country. It might have been better to subtitle the book, "How a Small Group of Politicians and Wall Street Brokers Run the Federal Reserve." Mr. Bernanke's call for "regulatory reform" of the financial system is more than a little shy of addressing this particular aspect of our current problems. It doesn't need to be that way, of course. There are a number of things that could be done from the perspective of the Just Third Way to refound our financial, economic, and, yes, political system on justice, rather than on the advantage of special interest groups. Today's posting addresses this concern.

Norman Kurland, whose many valuable suggestions have resulted in some of our more thought-provoking postings, happens to be acquainted with Mr. Greider, which (to tell the truth) I did not recall while struggling to write something that would inspire people to click on the link. I referenced Mr. Greider only because I am familiar with his book, and the subtitle gave me a good segue into my posting. I did not know until yesterday morning that Norman Kurland forwarded the link to Mr. Greider, with the note, "Bill, I think you'll like this and the blog article. Warm regards, Norm." You can therefore imagine my surprise when I opened my e-mail yesterday and found a cc. from Mr. Greider in my inbox that (to save myself the trouble of composing a posting for today) I will quote in full:

Dear Norm — Thanks for forwarding Michael Greaney's blog — it's terrific. We need to establish (or revive) our dialogue on this subject because it is now ripening quickly. Events have swiftly educated the general public (if not the political establishment) on the deformed nature of the governing system. That is an opportunity for unsanctioned ideas that have long been ignored or suppressed. We should plunge into the vacuum and clear away confusion.

I will send you tomorrow my new piece in the Nation that goes right at the Fed and describes its failure as a central source of this catastrophe. Next I intend a similar piece that addresses how to democratize the central bank (or start over with a clean slate). Kelso provides a highly relevant solution. There are other approaches, as you know, and my views are more eclectic than yours. But let's collaborate on waking up folks to the larger possibilities of this historic moment.

For starters, can you send me a refresher on the original Kelso proposal and how exactly "pure credit" can be used to democratize ownership? I am reminded that it was Kelso who ignited my initial interest in the Federal Reserve in the late 1970s which led me to decide a few years later to do a book on the Fed after I left the Washington Post. Do you remember? You brought Kelso around to the Post and he tried valiantly to educate me. I was clueless and only grasped fragments of what he explained. I recall one or two subsequent sessions with Kelso but of course you were personally pounding on my brain continuously in those days. It's not over, Norm. You are still teaching and I am still trying to understand.

Warm regards, Bill Greider

This could be the (re)starting of serious dialogue on the role of the central bank and of money, credit, and banking in our society.

Stereotyping in the Washington Post

Two days ago the Washington Post published a letter from Italy's ambassador to the United States. The Post had previously published an article filled with ethnic stereotypes and playing to American prejudices, intimating that Italy was overrun by Mafia thugs terrorizing the population and that the country was in a state of chaos almost approaching that prevalent in the United States. Knowing full well that any letter to the Post would be ignored, we sent one instead to the Ambassador.

March 9, 2009

The Hon. Giovanni Castellaneta
Ambassador of Italy
Embassy of Italy
3000 Whitehaven Street, N.W.
Washington, DC 20008

Dear Dr. Castellaneta:

Congratulations on your letter to the Washington Post of March 9, 2009. It is heartening to see that at least one country is working hard not to let financial and economic hysteria seize control of the situation, and that those who spread damaging (and erroneous) ethnic stereotypes that flood the American media are called to account.

However, I must be frank and say that I doubt that your pointed letter will have the effect that it should have. Stereotypes are embedded more deeply into the American psyche than even the seriously flawed Keynesian economic theories about banking that have caused the current economic situation. This is ironic because much of modern banking theory was worked out in Italy, which presumably knows how to run banks.

That being the case, I think it would be to your advantage to have a talk with Dr. Norman G. Kurland, president of the non-profit Center for Economic and Social Justice ("CESJ"), a think tank headquartered in Arlington, Virginia. Dr. Kurland may be able to help you develop a strategy to capitalize on Italy's banking strength and provide an exemplar to the rest of the world, instead of a thinly-veiled excuse to indulge in envy.

A program we've developed called "Capital Homesteading for Every Citizen" should be of particular interest to you. Properly implemented, Capital Homesteading has the potential not only to provide the means whereby every citizen in a country could gain an adequate and secure income, but also undermine the justification of and support for terrorism and organized crime.

I invite you to visit our web site, www.cesj.org, and review the materials on Capital Homesteading. After you've visited the web site, you might want to give Dr. Kurland a telephone call to discuss ways in which CESJ's programs and proposals could be of assistance to Italy. I have enclosed some information on Dr. Kurland, CESJ, and Capital Homesteading.

Democratize the Fed

If Mr. Bernanke is serious about overhauling the Federal Reserve regulatory system ("Bernanke Says Regulatory Overhaul Needed," Associated Press, 03/10/09) he might want to start with the Federal Reserve itself, and start adhering to the spirit as well as the strict letter of the law of the Federal Reserve Act of 1913. Many people evidently don't realize it, but the Federal Reserve Act, in an effort to prevent the government from being able to monetize its deficits, forbids the Federal Reserve from dealing in primary government securities, that is, securities purchased directly from the federal government.

Unfortunately, there is a loophole in the law. By law, bank reserves must be only in the form of cash or federal government securities. Cash, in this instance, is defined as "vault cash," that is, cash on hand at a commercial bank, and the commercial bank's own demand deposits at the local Federal Reserve Bank. Under fractional reserve banking, the Federal Reserve must have the power to regulate reserve requirements, and in order to do that, it must have the power to buy and sell secondary government securities, that is, securities purchased from a holder in due course other than the original issuer, the federal government.

The fiction that the federal government and the Federal Reserve maintain is that the vast amounts of federal government securities that pass briefly through the hands of a small but select group of special bond brokers are secondary government securities. They can thus be freely bought and sold by the Federal Reserve in their "open market operations." "Open market operations" is something of a euphemism, for they are effectively closed to everyone except the Federal Reserve and the select group of bond brokers who are, to all intents and purposes, agents of the federal government. In consequence, the letter of the law is adhered to, while the spirit is flouted continually.

Four necessary steps suggest themselves — if Mr. Bernanke is serious about genuine reform.

One, reinstitute the separation of function imposed on financial institutions by Glass-Steagal and similar legislation. Avoiding incompatible functions and relying on systemic checks and balances is critical when attempting to regulate a system. The repeal of Glass-Steagal in the early 1980s set the stage for both the Savings and Loan debacle and the current financial meltdown.

Two, institute an immediate 100% reserve requirement for commercial banks, to consist exclusively of vault cash and commercial bank deposits at the local Federal Reserve Bank. This will remove the justification for the Federal Reserve to deal in either primary or secondary government securities. The Open Market Committee can be shut down, and the Federal Reserve can gradually divest itself of its holdings of government securities as the national debt is paid down. The Federal Reserve will itself provide the reserves to commercial banks by discounting qualified industrial, commercial, and agricultural private sector loans, not government securities, resulting in a currency backed by hard assets, not government debt.

Three, enact the Capital Homestead Act. All credit extended through discounting by the Federal Reserve will result in broadened ownership, thereby creating jobs and increasing effective demand for consumer and thus capital goods, as well as rebuilding the tax base.

Four, buy out the current "shareholders" of the Federal Reserve (a term that must be used advisedly, anyway, for the "shares" do not carry dividend or voting rights), and issue every American citizen and permanent legal resident a single lifetime, voting, participating, non-transferable share in this extremely valuable national resource. The shares will cost nothing when issued, but the estate of the holder will also not be compensated at death when the single share is surrendered.

A great deal else needs to be done, of course. These four steps, however, should provide good guidelines as to what sort of thing we should be looking at instead of trying to pass more unworkable laws to police an inherently contradictory system having a serious identity crisis.

Bank Bailout, Part III: What is Money?

The subject of this particular posting in the series was supposed to be on the technical aspects of how a bank ESOP/CSOP might be put together to the advantage of the bank, its customers, and the public at large through increasing the checks and balances in the system, the introduction and maintenance of a sound currency, and taking the State as far as possible out of the actual money creation process. Various discussions over the weekend, however, convinced us that a more fundamental issue needs to be addressed: what is money?

We've already had a number of postings on this subject, but misconceptions about money are so widespread that it bears repeating, albeit in different words. Since we're dealing with a definition, the first place we go is to a dictionary, Webster's Seventh New Collegiate Dictionary, to be precise, which defines "money" as "Something generally accepted as a medium of exchange, a measure of value, or a means of payment."

The first thing we see is that the primary definition doesn't mention currency, whether paper bank notes or coin. That comes later. The primary definition hints at this, of course, by specifying that money is "something generally accepted," but doesn't actually come out and say this. Since most people seem to define "money" solely in terms of currency and demand deposits, we need something more precise. We will therefore go to a law dictionary, Black's Law Dictionary, the 1951 edition, since that is the one we have in the office.

We expect lawyers to hedge a little, and Black's Law Dictionary is no exception. After restating the definition we found in Webster's, the qualifications begin, the most significant of which appears to be, "'Money' has no technical meaning, but is of ambiguous import, and may be interpreted having regard to all surrounding circumstances under which it is used. 'Money' is often and popularly used as equivalent to 'property.' 'Money' means wealth reckoned in terms of money; capital considered as a cash asset: specifically such wealth or capital dealt in as a commodity to be loaned, invested, or the like; wealth considered as a cash asset. . . . In its more comprehensive and general sense, it means wealth, — the representative of commodities of all kinds, of lands, and of everything that can be transferred in commerce. . . . A general, indefinite term for the measure and representative of value."

We're starting to get a good picture here. Obviously, if we restrict the meaning of "money" to coin, currency, and demand deposits, we're going to leave out a significant part of what "money" consists. To put the final pieces of the puzzle together, let's take a look at how Jean-Baptiste Say viewed money. In his Letters to Malthus (1821), Say commented,

All those who, since Adam Smith, have turned their attention to Political Economy, agree that in reality we do not buy articles of consumption with money, the circulating medium with which we pay for them. We must in the first instance have bought this money itself by the sale of our produce.

To a proprietor of a mine, the silver money is a produce with which he buys what he has occasion for. To all those through whose hands this silver afterwards passes, it is only the price of the produce which they themselves have raised by means of their property in land, their capitals, or their industry. In selling them they in the first place exchange them for money, and afterwards they exchange the money for articles of consumption. It is therefore really and absolutely with their produce that they make their purchases: therefore it is impossible for them to purchase any articles whatever, to a greater amount than those they have produced, either by themselves or through the means of their capital or their land.

In light of this, we come to a somewhat startling conclusion. "Money" is not mere currency, or coin, or demand deposits. "Money" is production; it is anything of value, all wealth that has been produced, anything that can be used in exchange. The fears so often expressed about there not being enough money, or the banks being able to control the entire money supply, and so on, are groundless when we realize what money really is: production. The solution to a mismanaged money supply, then, is not to mismanage it further, but to open up democratic access to the means of acquiring and possessing private, productive property, so that everyone — with or without the help of a bank — can make his or her own money.

News from the Network, Vol. 2, No. 10

The stock market appears to have settled into a pattern: a sharp drop followed by a pep talk from the administration, a brief rally, and then a sharper drop in share values. This possibly reflects the lag in perception as people react positively to Mr. Obama's optimism and shifts in emphasis before realizing that he hasn't effectively addressed yesterday's problem before leaping to the next one. Each crisis seems to be treated as an island, entire of itself, and not a part of the main problem. The principles of the Just Third Way, that we have demonstrated can be applied in a holistic fashion to address not just the series of seemingly new crises, but the structural flaws in our institutions causing the crises, continue to receive short shrift from the powers-that-be. Nevertheless, we are making slow but steady progress in presenting these ideas into circles where they might start receiving serious consideration.

• Early this week, following a minor flood of e-mails consisting mostly of forwards of a brief article by Dr. Robert Moynihan, editor of Inside the Vatican, on an upcoming encyclical on justice, we sent a note to Dr. Moynihan. We briefly explained the basic principles of the Just Third Way and how we think it fits into the framework of Catholic social teaching based on the natural law. Within an hour, we received a reply from Dr. Moynihan, who said our response was just what he had been hoping to surface, and that he would be looking over the recommended web sites and giving CESJ a call. Dr. Steven White, past president of the Catholic Medical Association, has commended CESJ for its outreach efforts in this area.

• The Reverend Cassian Yuhaus, C.P. ("Congregation of the Passionists," a Catholic religious order), Rector of the Shrine of St. Ann's Basilica in Scranton, Pennsylvania, put us in touch with Father Kevin Dance, head of the Passionist Non-Governmental Organization ("NGO") at the United Nations. Among other matters, Father Dance is concerned with the situation in the Holy Land. Father Yuhaus is setting up a meeting, and Norman Kurland and Michael Greaney will be traveling to New York City later in March to meet with Father Dance to discuss the Abraham Federation as a possible solution to the ongoing conflict in the Middle East, as well as other matters relating to a wider understanding and acceptance of Capital Homesteading and the Just Third Way as a viable answer to the tsunami of economic disasters that have swept the world. A native of Australia, Father Dance is co-editor of Compassion magazine.

• While we received no reaction or response from our e-mailing on Capital Homesteading and the Just Third Way to every member of the Icelandic Althing (the legislature), the blog postings commenting on the situation in Iceland have suddenly surged in our informal ratings (below). Most of the viewings come not from Iceland, however, but from countries that have economic and financial interests in Iceland. This might indicate some serious concerns in the international arena as to the ability of the current Icelandic government to handle the situation, and bafflement as to why they aren't willing even to consider something truly different, rather than a rehash of traditional Keynesian neo-socialism.

• Similarly, while the economic news from Ireland continues to worsen, we haven't heard back from any more members of the Dáil or Seanad (the two houses of the Irish legislature) regarding Capital Homesteading. While postings on "Irish economics" have gone down a little in our "ratings," they are still among our most frequently viewed. It may be that the Irish government is preferring to take the "safe" way of implementing accepted Keynesian solutions that are virtually guaranteed to fail, rather than run the risk of implementing bold new initiatives that run the risk of succeeding.

• As of this morning, we have had visitors from 49 different countries and 50 states and provinces in the United States and Canada to this blog over the past two months. Over the same period we have experienced over 30% increase in total readership, according to the statistics counter of "Google Analytics." (The apparent drop in readership from last week's 80% is deceiving — the 30% is in addition to the 80%, making the increase in the neighborhood of 110% since the beginning of the year.) Most visitors are from the United States, with Canada, the UK, Poland, and Ireland rounding out our "top five" countries where we're read the most. The top spots for the average time spent on the blog, however, go to Venezuela, Croatia, Poland, Austria, and Brazil, in that order. Our general comments on the flaws in Keynesian economics have nudged out related commentary on the stimulus package as our most popular postings, which are now in "second place" — by one "vote." Of the remaining "top ten," 1 is on Abraham Lincoln and the 1862 Homestead Act, 1 is the weekly news roundup, and one is on Iceland. Most readers are using keyword searches indicating they want to learn about the serious flaws in Keynesian economics.

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

Saving Social Security

As everyone knows (or should know, given that the book Capital Homesteading for Every Citizen is available as a free download on the CESJ web site), the Social Security and Medicare systems are headed over an extremely high cliff of bankruptcy in the not-too-distant future, and CESJ developed Capital Homesteading as a way to address this problem. Thus, the subtitle to Capital Homesteading is "A Just Free Market Solution for Saving Social Security," even though the proposals in the book apply to the economy as a whole, not just Social Security and Medicare.

Early this morning we received an e-mail from a student who had read my article on the "Helium" web site on the subject, "Should Social Security Be Reformed to Include Personal Retirement Accounts?" The student's concern was an upcoming presentation on personal retirement accounts and social security for an economics class, and was having trouble with my presentation and the topic in general.

The student asked if I could send my basic talking points on the issue, and why I feel that way. Although the problem with Social Security has not been in the forefront of the news (for some strange reason we're more concerned with the immediate economic disaster than the one projected a few years from now), it is still a critical issue, and must be dealt with. For that reason, we decided to post a slightly revised version of our response to the student.

The best place to go to get the full picture on the proposed reforms of the Social Security system is the web site of the Center for Economic and Social Justice, www.cesj.org, where a free download of the book, Capital Homesteading for Every Citizen, is available, as well as a link to a dedicated web site. The chief talking points are:

• All current promises must be kept. Anyone who paid into the current system is legally entitled to receive the promised benefits.

• All new capital formation (i.e., all new investment in productive assets of all kinds) should be financed not by cutting consumption or out of existing accumulations of savings, but by using the commercial banking system and the central bank (the Federal Reserve System) as designed and intended. That is, per "Say's Law of Markets" and the "Real Bills doctrine," money can be created by the banking system without inflation IF the money created through the extension of bank credit for loans discounted at the central bank is made ONLY to finance capital formation.

• To ensure as far as possible that all new capital formation proves feasible, and that Say's Law and the Real Bills doctrine function properly, the new capital must be broadly — and directly — owned by as many people as possible, so that they will use the income after debt service for consumption, not reinvestment.

• Each citizen will receive — as a right of citizenship — the right to borrow the per capita amount of new capital to be formed during a period. It's important to note that this does not involve printing money and then investing it, but the right to participate in the creation of money via the extension of loans by commercial banks for qualified capital projects. The money is not (and cannot) be created until and unless a financially feasible project is presented to a commercial bank, which then turns around and discounts the loan at the Federal Reserve, which then creates the money. If no feasible investment is found, no money is created.

• Each citizen will be permitted to accumulate up to (we estimate) $1 million of capital assets (i.e., income generating, not speculative) "tax free" by allowing a lifetime total tax deferral of up to $1 million for dividend/investment income used to make payments of principal and interest for assets deposited into a tax sheltered "Capital Homestead Account." Any dividends used for consumption purposes would be taxed as regular income to the recipient, but tax deductible at the corporate level. Any assets removed from the Capital Homestead Account would be taxed as regular income to the account holder, or his or her heirs if distributed due to death of the account holder. (An heir could defer taxes on any such inheritance — or any inheritance, for that matter — by depositing the assets in his or her Capital Homestead Account.) Note that this is a deferral, not an exemption; eventually the accumulations will be taxed. These accumulations will supplement and, eventually, replace Social Security and other entitlements, except in cases where investments fail or there has not been enough accumulated. In that case, the Social Security system can then function as originally intended: as a "safety net" for those who do not have sufficient savings (investments) to generate enough income on which to live in a manner befitting the demands of human dignity. Portfolio insurance would also reduce reliance on Social Security.

• To accelerate these accumulations as fast as possible and pay down the growing deficit, the tax system will be reformed to merge all Social Security and Medicare taxes into the general tax rate. Most deductions would be eliminated, but the personal exemption would be increased to (we estimate) $30,000 for a non-dependent, and $20,000 for a dependent, giving a "typical" family of four a tax-exempt income of $100,000. The tax rate above the increased exemption would be a single rate determined by the size of the budget and whatever was needed to repay a reasonable portion of the deficit. All income would be taxed at this single rate, not excepting inflation-indexed capital gains and dividends. The tax deductibility of dividends at the corporate level added to the ability to finance new capital formation by bank credit collateralized with capital credit insurance would remove the current incentive to retain earnings and withhold dividends from investors.

We believe that these measures (and others) would not only address the coming crisis in Social Security and Medicare, but the current economic meltdown that seems to have baffled politicians and economists from all across the spectrum.

Bank Bailout, Part II: The Root of the Problem

In the previous posting on this subject, we raised the possibility of an ESOP/CSOP combination as an alternative to letting the State throw more money at the problem of bankrupt banks and undertaking a program of nationalization of the country's financial institutions. An ESOP/CSOP for a bank, however, raises some special issues.

Ordinarily, a commercial bank is in the business of monetizing the productive capacity of an enterprise so that the enterprise can purchase what it needs to produce marketable goods and services. A commercial bank does this by creating money backed by the present value of whatever the enterprise is financing, and taking a lien on whatever is financed. As the project generates profits, the enterprise repays the loan, and the lien and the money are both cancelled. (In this, a commercial bank is different from a "bank of deposit," which cannot create money, but only lend out whatever people have deposited.)

The first issue is that today's financial institutions have managed to combine a number of incompatible functions, setting up automatic conflicts of interest. For example, from the early 1930s to the early 1980s under the "Glass-Steagall" Act, "commercial banking," "investment banking" insurance companies, brokerage companies, and bond rating agencies in the United States were carefully separated. Commercial banks are "banks of issue" (also called "banks of circulation"), meaning they can create money. Investment banks are banks of deposit, and can only serve as intermediaries to put people with money together with people who have "investment grade" securities to sell. The separation of independent companies involved in different stages of finance built "checks" into the system. For example, people with money demanded that the investment bank and other types of financial firms investigate all the securities they recommended very carefully, for millions, sometimes billions of dollars were at stake.

With the repeal of Glass-Steagall, however, the financial industry moved from independent competitors to vertical and horizontal monopolies. Commercial banks could buy an investment bank or set up their own investment bank departments, while an investment bank could purchase or set up a commercial bank. Similar things happened with respect to other specialized types of financial institutions, such as savings and loans, which (contrary to their established purpose of financing residential real estate) were allowed to lend for commercial real estate, a role traditionally filled by commercial banks.

This led to the great savings and loan meltdown of the 1980s, just as permitting commercial banks to invest in something other than loans to businesses and government securities set the stage for the home mortgage crisis. Giving investment banks direct access to the "money machine" of commercial banks meant that what are now known as "toxic assets" were not properly vetted or investigated, for the simple reason that it was extremely profitable to make and sell the loan, which overshadowed the possibility that the loan might not be serviceable. These bundled speculative assets were eagerly purchased by other financial institutions anxious to cash in on the rapidly appreciating value of the assets behind the loans.

Adding to the problem was the superabundance of loan money in the hands of predatory lenders and brokers. These were desperately seeking places to put the vast amount of "idle" cash from China and other countries that had piled up dollars resulting from the continuing U.S. trade deficits. The housing market, depending on individual consumers who in general lacked the necessary expertise to determine if the financing package they were offered made sense or was even feasible, was custom-made for making large "investments" in projects that were virtually guaranteed not to be scrutinized adequately or even understood by the people on whom the investment depended.

To this was added the fact that homes (except as rental property) do not generate their own repayment by producing a marketable good or service. That meant that the mortgage was only as good as the ability of the borrower to repay the loan out of other income. Unfortunately, because the ability of the borrower to repay was often the last thing the original lender looked at in order to clinch the sale, many of the loans went south the moment the housing bubble burst and real estate prices started to decline. Homeowners typically had no equity, either because they had borrowed against the appreciated value of the home, or because they had not managed to build up any.

Before we can attempt reorganizing individual financial institutions in trouble, then, even as ESOP/CSOP combinations, we need to undertake the task of reorganizing our financial system along more rational lines, building in natural checks and balances, and taking advantage of humanity's unique ability to specialize as individuals, while remaining generalists as a species. That will be the subject of the next posting on this subject.

Natural Law and the Principles of Economic Justice

While no doubt the world is agog over the celebration of another ever-popular "Square Root Day" (03/03/09), there are more immediate matters on which we need to focus. We received an e-mail yesterday alerting us to an article on "Catholic News" that an expected encyclical on justice has been delayed due to the economic crisis. That being the case, it would probably be useful for the pope to learn about what the Global Justice Movement has been developing to address the problem. To understand the Just Third Way, however, a little background would be useful.

The chief economic feature of the modern age is the virtually complete alienation of ordinary people from ownership of the means of production. In former days, human labor and direct ownership of productive assets and tools were the predominate means of production. The only way to alienate man from his labor or his possessions was to enslave him, something only valid for criminals who remove themselves from society and require rehabilitation before becoming fit to reenter society.

With the Industrial Revolution, the spread of the wage system, and the development of advanced productive technologies funded by outdated, even anachronistic methods of finance, ownership of the new means of production became concentrated in the hands of a few elite owners. The great mass of people were cut off from the means of becoming owners of the new technologies, and limited to ownership of their labor, something that (in objective terms) was falling in value relative to the new productive technologies.

Industrial capitalism (as opposed to agrarian capitalism or feudalism, which relied on human labor) not only concentrated ownership of the means of production, but power as well. The natural right (that is, absolute, inherent, or inalienable right) that everyone has to be an owner of the means of production was, in capitalism, changed to a limited right that presumably only an elite few possess, while the necessarily limited exercise of private property (that is, what an owner may do with what he possesses) was reinterpreted as absolute for the elite.

Because of the evils of concentrated ownership and the distortion of private property under capitalism, the socialists claimed that private property must be abolished, remaining at best only "prudential matter" for the great mass of people, i.e., not a right at all, but an expedient for the convenience of an all-powerful State. This only succeeded in transforming the superconcentration of ownership of the means of production under capitalism, into the absolute concentration of ownership of the means of production in the hands of an impersonal State. The evils of capitalism are somewhat ameliorated by the fact that capitalism seriously distorts, but does not abolish a natural right.

The abrogation of private property as a natural right under socialism, however, guarantees a non-, even anti-human system, as Pope Pius XI acknowledged in Quadragesimo Anno. This caused the pope to reiterate the Holy See's condemnation of socialism. This condemnation has been largely ignored, primarily as a result of ubiquitous moral relativism, often subtly disguised as concern for humanity, but seemingly inevitably directed at the abolition of private property as a natural right — quickly followed, as we might expect, by abolition of other natural rights, such as life and liberty.

Following the personalism of Pope John Paul II, Pope Benedict XVI has expressed grave concern over this abandonment of the natural law. In response, the "Just Third Way" promoted by CESJ not only counters the trend of modern civilization away from the natural law, but provides a roadmap by means of which society can make its way back and establish a more just and humane future for everyone. The Just Third Way is characterized by reliance on "Four Pillars of an Economically Just Society," which, not coincidentally (due to a common reliance on the natural law), appear to be consistent with Father Heinrich Pesch's "Three Pillars of Economic Society." CESJ's "Four Pillars" are:

1. A limited economic role for the State, securing property and contract rights, but also lifting artificial barriers to ownership of the means of production,

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

3. Restoration of the rights of private property, especially within the modern corporation, and

4. Widespread direct ownership of the means of production.

An important application of these principles consists of reconnecting money and production at the individual, local, national, and global levels, a necessary link noted by Jean-Baptiste Say (1767-1832), a French political economist, in his famous "Law of Markets." "Say's Law," rejected by both Karl Marx and John Maynard Keynes, is best stated by Say himself, in a series of open letters Say wrote to the Reverend Thomas Malthus in refutation of the latter's theories on population:

"All those who, since Adam Smith, have turned their attention to Political Economy, agree that in reality we do not buy articles of consumption with money, the circulating medium with which we pay for them. We must in the first instance have bought this money itself by the sale of our produce.

"To a proprietor of a mine, the silver money is a produce with which he buys what he has occasion for. To all those through whose hands this silver afterwards passes, it is only the price of the produce which they themselves have raised by means of their property in land, their capitals, or their industry. In selling them they in the first place exchange them for money, and afterwards they exchange the money for articles of consumption. It is therefore really and absolutely with their produce that they make their purchases: therefore it is impossible for them to purchase any articles whatever, to a greater amount than those they have produced, either by themselves or through the means of their capital or their land.

"From these premises I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said — As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce." (Letters to Malthus, 1821)

Louis Kelso saw the common sense of Say's Law, but noted that there were barriers in place that inhibited or prevented most people from producing by means of anything other than labor; that "the means of their capital or their land" was simply not an option for most people because they lacked access to the means of acquiring and possessing private property in capital or land, which George Mason of Gunston Hall described as a natural right. (George Mason was an American "Founding Father" who, although an Anglican, seems to have been familiar with the work of St. Robert Bellarmine, a "Doctor" of the Catholic Church.)

Consistent with the social doctrine developed by Pope Pius XI, Kelso advocated that people organize and gain access to the means of acquiring and possessing private property in capital, a category in which Kelso lumped together all "non-human" factors of production, including land (usually separated from capital in classical economics). Applying the principles of economic justice that he and Dr. Adler later formalized, Kelso invented the Employee Stock Ownership Plan, or "ESOP," as one means of lifting the seemingly insurmountable barrier preventing access to capital credit, the chief means by which ownership of the means of production is acquired today.

CESJ has continued the work of Kelso and Adler, developing a program called "Capital Homesteading," which embodies institutional reforms necessary to restructuring the social order to conform more closely to the demands of the natural law and economic personalism, beginning with reforms of our financial system. A primary goal of Capital Homesteading is to restore the original function of the central bank, so that it can once again finance private sector growth to increase personal wealth and people's control over their own lives, instead of funding government deficits and increasing the power of the State. Inasmuch as the misuse of the financial system is the principal cause of today's economic crisis, Capital Homesteading presents a sane — and practicable — alternative to the bizarre programs and proposals that are only getting us ever-deeper into a seemingly hopeless situation.

Partying Like It's 1933

Since last Wednesday, the dollar has gained against the Euro from a low of .745 to today's latest high of .795. This is incomprehensible to many people who see the stock market plunging to further lows on news that the bank bailouts haven't worked. How the dollar can gain when the U.S. economy appears to be on the brink of total collapse doesn't appear to make any sense.

This otherwise confusing scenario becomes understandable, however, when we realize what might be happening. If currency speculators are convinced that the dollar's value is about to plunge, they will borrow as many dollars as they possibly can, then sell them immediately. Once the value of the dollar goes down — as it seemingly must — the speculators will buy back the dollars they sold at a much lower price, pay back the dollars they borrowed, and pocket the difference as a profit.

This is called "short selling." The immediate effect is to drive up the price of the dollar . . . temporarily, due to increased demand. The value starts to plunge, however, once the speculators start selling what they borrowed. The lowering of value accelerates once other people and foreign governments see that the currency is in trouble and try to get rid of their holdings. The result is a precipitous drop in the value of the currency, and an enormous profit for the speculators who got in on the ground floor.

Had anyone guessed in 1933 that Roosevelt was going to devalue the dollar and take the U.S. off the gold standard, he or she could have made an immense fortune by borrowing highly-valued dollars and paying them back with much cheaper dollars. In the 1970s foreign banks bought massive amounts of dollars to try and support the value to prevent such currency speculation and a forcing down of the value of the dollar, until Richard Nixon gave up the fight and took the dollar off the gold standard internationally as Roosevelt had done domestically.

It is thus a distinct possibility that currency speculators see in recent economic proposals in the United States the prospect of further bad news in the financial markets, and are acting in anticipation of it. That fact alone should alert the powers-that-be that there is something fundamentally wrong in what they're proposing, and it's time to look outside the box to Capital Homesteading.

News from the Network, Vol. 2, No. 9

Today's Washington Post gave a frightening outline of Mr. Obama's $3.6 trillion budget. It was only a few days ago that the president pledged to cut the deficit in half, but the current projection is for the worst deficit since World War II. The projected deficit of $1.2 trillion given in the Post article is $100 billion more than total projected individual income tax collections. Mr. Obama proposes to make up the difference by taxing the wealthy, that is, by more than doubling individual income tax collections.

The problem in Keynesian economics, of course, is that by taxing the wealthy you dry up the alleged source of financing for capital replacement and new capital formation, shrinking the corporate as well as individual tax bases and diminishing the number of jobs in the economy to make up the losses. The only way out of the corner that Mr. Obama and his advisors are busily painting themselves into is to print money (i.e., sell massive quantities of government debt to the Federal Reserve), then impose wage and price controls to try and keep the lid on the inflation that necessarily follows, a move that increases the power of the State even more.

Despite all of the apparent economic insanity of the new administration, however, there are a few candles that are managing to stay alight in Mr. Obama's winds of change that point the way to the Just Third Way:

• Reverend William Christensen, S.M., Ph.D., CESJ Counselor and head of the Institute for Integrated Rural Development in Bangladesh, has been asked to write the foreword for Dr. Muhiuddin Khan Alamgir's memoir, Notes From a Prison: Bangladesh, which is under consideration for publication by Economic Justice Media, an imprint of the Center for Economic and Social Justice. Dr. Alamgir, the former Minister of Planning for Bangladesh, was imprisoned on trumped-up charges of corruption and tax evasion, the reading of which brings Franz Kafka's surreal classic Der Process ("The Trial") to mind. Review copies of the unedited manuscript are available on request in "Word" format from CESJ.

• Sales of Economic Justice Media's annotated edition of The Emigrant's Guide by William Cobbett (1763-1835) are catching up to those of Michael D. Greaney's In Defense of Human Dignity, although both books have a long way to go before generating as many sales as Curing World Poverty (1994) or Capital Homesteading for Every Citizen (2004). As befits the "Apostle of Distributism," Cobbett describes life in early 19th century America in terms that complement the work of Alexis de Tocqueville, in that astute commentator's monumental Democracy in America (1835). Combined with Orestes Brownson's The American Republic (1865), the works present an unequalled picture of a way of life that many people still consider an ideal, and which in its essence embodies the principles of the Just Third Way: 1) A limited economic role for the State, 2) Free and open markets as the best means of determining just prices, just wages, and just profits, 3) Restoration of the rights of private property, and 4) Widespread direct ownership of the means of production. The common thread tying together all three authors is respect for the dignity of the human person at the most basic level.

• Earlier this week, the CESJ core group had a teleconference with members of the "American Auto Employee Ownership Committee," a group that (consistent with the principle of free association found in de Tocqueville's work) is organizing an effort to assist autoworkers purchase the troubled American automobile industry. The Committee objects to the waste, inefficiency, loss of jobs and, of course, the transfer of concentrated power from a small private elite to State bureaucrats. As an alternative, the Committee proposes breaking up the current massive concentrations of economic power by vesting each worker with an equitable ownership stake in the company for which he or she works. This can be accomplished under current law most easily by using the Justice-Based ESOP model developed by Equity Expansion International, Inc., www.eei-consultants.com, although other approaches are also being studied.

• We received an acknowledgement of the receipt of Capital Homesteading for Every Citizen from the Hon. Brian Lenihan, Finance Minister of the Republic of Ireland. The letter indicated that the minister would turn over the book and other materials to his staff for study.

• As a reminder, all Economic Justice Media titles are available in bulk (i.e., 10 or more books in a single order) for 20% off the cover price plus $1.50 per copy shipping. The same terms apply to all titles issued by Universal Values Media, Inc., a for-profit publisher that has implemented a "Justice-Based Management" system. UVM titles can be found at www.benson-unabridged.com. For more information, send an e-mail to onceandfuturebooks@yahoo.com, or thirdway@cesj.org. When used for fundraising, the discount is increased to 25% off the cover price — something to keep in mind for your school, church, or civic organization.

• As of this morning, we have had visitors from 44 different countries and 49 states and provinces in the United States and Canada to this blog over the past two months. Over the same period we have experienced over 80% increase in total readership, according to the statistics counter of "Google Analytics." Most visitors are from the United States, with Canada, the UK, Ireland, and Poland rounding out our "top five" countries where we're read the most. The top spots for the average time spent on the blog, however, go to Venezuela, Croatia, Poland, Mexico, and Brazil, in that order. Our most popular posting continues to be the first in the ongoing series explaining why Mr. Obama's stimulus package is a disaster. Of the remaining "top ten," 1 is a "News from the Network" posting, 8 examine Keynesian economics, 3 are from the stimulus series, 1 addresses the financial crisis in Ireland, and 1 is on Abraham Lincoln and the 1862 Homestead Act (obviously there is some overlap, e.g., the financial crisis in Ireland traces the problem to its Keynesian roots). Most readers are using keyword searches indicating they want to learn about the serious flaws in Keynesian economics.

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

Bank Bailout, Part I: An Alternative to State Control of Money and Credit

As Marx and Lenin predicted, State control of money and credit is the fastest way to undermine the capitalist — or any — system, and establish socialism. If the Keynesians currently in control of the economy and who are acting as Mr. Obama's advisors would ever read The Communist Manifesto (especially number five on the list of actions to take to destroy private property . . . "Centralization of credit in the hands of the State."), they might realize why State ownership or control of the financial system is not so fine a thing as they appear to believe, and why the principles of the Just Third Way above and beyond both capitalism and socialism offers a much more rational and financially sound way of getting out of the current crisis when applied in a Capital Homesteading program.

Money and credit are again at the center of the current economic crisis. As an Associated Press report stated yesterday, the U.S. Treasury will be allowing "big banks" — those whose lending practices got them (and us) into the current mess — "more bailout funds." The debate on Wall Street seems more concerned with what form that ownership should take than with the obvious implications. No one seems to be raising the question as to whether the State should own anything, or posing alternatives to State socialism imposed through a program of nationalization of the most critical factor in any economy: money and credit.

A working knowledge of basic banking theory and a modicum of common sense, however, immediately raises questions about 1) the justification for State ownership of major (or any) banks, and 2) the necessity for a government bailout. First, of course, no one has ever adequately explained why it is necessary for the State to take control (and thus ownership) in a nationalization program that dare not speak its name. The bailout money is (presumably) taxpayer money, which suggests that taxpayers, not the State in the name of the taxpayers, should be the new owners. There are ways to do this that already exist in the law and, with a few modifications, could quickly be implemented.

Second, why a bailout, anyway? There are other remedies available, remedies that respect not only private property and contracts, but don't cost the taxpayer any money and are sound financially.

For example, most (if not all) the large banks that are in trouble are corporations. If a corporation goes bankrupt, the remedy in law (and in justice) is usually some form of reorganization. The purposes of bankruptcy are not to destroy the debtor or enrich the State at the expense of the creditors or taxpayers, but 1) to give an honest debtor a "fresh start" in life by relieving the debtor of most debts, and 2) repay creditors to the extent that the debtor has the means available for payment.

They lent money or provided goods and services in some form in good faith, and are entitled in justice to a return of their capital or other assets, all of it, if possible, a pro rata portion if not. In those instances where a creditor did not operate in good faith, the courts can come to an equitable arrangement that strives to be fair to all parties. So-called "toxic" assets can be written down or written off, as appropriate, and current shareholders (who bear responsibility for electing the boards of directors that hired the management teams who carried out bad lending practices) can have their shares cancelled or reduced in value after settling all legitimate creditor claims.

Reorganizing the bankrupt banks along the lines of an Employee Stock Ownership Plan ("ESOP")/Customer Stock Ownership Plan ("CSOP") combination is a possibility that should be considered before the State throws any more money at the problem. The ESOP already exists in law, and the CSOP could be enacted very easily, especially as a special emergency measure, simply by adding some features to existing ESOP law to extend "participation" in the ESOP to stakeholders besides employees, and calling the arrangement a CSOP. In our next posting on this subject, we'll look at how the powers-that-be might start the ball rolling on this much more rational alternative to a government bailout.

We Have Seen the Future . . . And It Doesn't Work

Listening to President Obama's speech last night, it becomes increasingly obvious that, despite his very evident good intentions, he is headed off in the wrong direction. He has managed to surround himself with a group of Ivy League elitists who still believe that the State can do anything, as long as you throw enough money at the problem.

Much of what the president says we can take as enthusiastic, if misdirected cheerleading. Unfortunately, the situation does not call for mindless optimism or money-tossing, but a genuine solution. The stock market is continuing to bounce up and down as speculators try and figure out whether the president's confidence will do the trick, or if something more substantive is needed. Meanwhile, there seems to be an adamantine belief among the powers-that-be that gritting our teeth, and reminding ourselves that, "we are not quitters" is enough to turn things around.

That, and a few more billions for the banking industry so that the State can nationalize the banks and establish a monopoly over access to the means of acquiring and possessing private property.

The main problem is that nothing the president and his advisors propose or even say does anything to diminish State power, break up the power of concentrated ownership, or, worse, increase production or broaden ownership of the means of production by ordinary people. There is no appreciation or even recognition of the four essential elements of an economically (and thus politically) just society:

• Limited economic role for the State,

• Free and open markets as the most just way to determine just prices, just wages, and just profits,

• Restoration of the rights of private property, and

• Widespread direct ownership of the means of production.

Clearly, both the president and his advisors are still enamored of the Keynesian delusion that money and production need not be linked directly (or at all), and that the State can run up deficits forever with no ill effects, to say nothing of being convinced that the non-productive State can run things better than a productive private sector. This is the only way to rationalize Mr. Obama's increasing the federal budget by nearly $1 trillion in "stimulus" spending, claiming he will not increase taxes for anyone making less than $250 thousand a year, and (instead of balancing the federal budget) cut the deficit in half.

Logically, the only way to make up a tax cut on one group without increasing the deficit is to tax other groups more. Thus, Mr. Obama necessarily proposes (even if he doesn't say so) to engage in the ever-popular "soak the rich" technique, which somehow never seems to have the intended results.

It's been made clear in many postings on this blog that we consider the rich part of the problem. Their monopoly over access to the means of acquiring and possessing private property (i.e., "capital credit") means that the vast majority of humanity is condemned to perpetual servitude in the form of wage slavery, debt slavery, welfare slavery . . . and whatever else you can come up with to ensure a condition of dependency for most of the rest of us.

Unfortunately (and this is one of the reasons we regard Keynesian economics as certifiably insane), the rich are absolutely necessary within the Keynesian paradigm. To understand this, let's look at the Keynesian paradox into which the president has locked himself.

"Soaking the rich" sounds well and good . . . in theory. A State should never run up a deficit, but should tax at a level sufficient to meet current expenditures. Further, sticking it to the rich and powerful is always a popular move in a presumably egalitarian society, where unrecognized barriers to full participation in the economy foster resentment and envy instead of the more rational response of organizing to eliminate such institutional obstructions in a just and sane manner through acts of social justice. Refusing to increase taxes on the poor and middle class and promising to cut the federal deficit in half, however, leaves "the rich" as the only source of funding for the stimulus and the decrease in the deficit.

No one, not even the State, can create new money to increase demand for more than there is production to buy. Nor can taxes be more than the aggregate amount of current income (current production) and savings (unconsumed past production) that exist in the country. Even a State that indulges in levying the "hidden tax" of inflation by printing money to cover its deficits can't tax more than a country produces. All the State can do is redistribute purchasing power by stealing the value of older currency and transferring it to recipients of the State's largesse by printing additional debt-backed money. Prices rise in response to the greater amount of currency in circulation, fostering the illusion that wealth is increasing when, in fact, inflation doesn't produce wealth at all.

The biggest danger in Mr. Obama's admittedly attractive enthusiasm and conviction is that hope and change will, in and of themselves (with the addition of a few billion more dollars) solve all our current problems. On the contrary, his reliance on Keynesian advisors puts him into an untenable, even paradoxical position. Keynesian economics, which depends on protecting the rich as absolutely necessary for the wellbeing of the poor, does not allow him to do what he wants to do.

Mr. Obama wants to focus on creating jobs as a means of getting the economy moving again. "Creating jobs" is directly opposed to the natural job creation that comes in response to the increase in demand that could result by investing in new productive assets in ways that make people who formerly owned no capital into capital owners. The future consumption incomes of former non-owners would result from new job and ownership incomes from the private sector, not State largesse. The rich would be encouraged to use their investment income for consumption instead of more investment.

A State program of "job creation" almost inevitably means "boondoggling," or "make-work" jobs outside the market system. These kinds of jobs are intended only to provide people with income, not vest them with ownership of new production. Boondoggling and featherbedding do nothing to increase production of marketable goods and services, but are purely inflationary. Boondoggling only serves to increase the waste and inefficiency that Mr. Obama says he wants to eliminate.

To make this clear, in the "Bizarro World" of Keynesian economics there is a necessary — repeat, necessary — tradeoff between employment and inflation. If you want full employment, you must endure inflation caused by government deficits. If you want low inflation, you must put up with high unemployment. Any other arrangement is impossible . . . in Keynesian economics.

This is because (in Keynes' upside-down universe) there are only two ways to create jobs. The first is to get the rich to invest in new capital formation. As we learn in college macroeconomics courses, the State increases consumer spending either by cutting taxes or handing out money. The increase in "effective demand" lures businesses to use their savings to invest in new capital, which creates jobs, and increases effective demand even more. If the State either cuts taxes or hands out more money, it has to engage in inflationary money creation (borrowing from the central bank) in order to make up the loss in tax revenues or finance the handouts. This is because if the State taxes the rich in order to make up for lost tax revenues or fund the handouts, it decreases the amount the rich can use to finance capital formation and create jobs.

The second means of job creation is for the State to subsidize jobs directly by paying businesses to hire people for whom the business would otherwise have no use. The funds for a direct State subsidy can only come from increasing taxes on the rich (in which case you take money away from the rich to hand back to the rich so they can afford to hire people they don't need to hire), or by increasing the deficit.

Thus, in the Weird World of Keynes, unless you want to stifle job creation by taking away the money the rich have to invest, increased government spending can only come by increasing the deficit. Why? Keynes believed that it is impossible to finance capital formation out of "future" or "forced" savings, that is, by extending capital credit to be repaid out of the future profits of the new capital itself.

According to Keynes, then, money to stimulate demand, subsidize jobs, or decrease the deficit cannot come from the rich, because in the Keynesian universe the savings and income of the rich are the only source of financing for new capital. If the government taxes away the wealth of the rich to decrease the deficit, the rich can't invest their savings in new capital formation, and no new jobs will be created. If the government taxes away the wealth of the rich in order to subsidize job creation, all that is accomplished is that the State takes money away just to hand it back — the situation remains the same, and no new jobs will be created, because the State simply restores the status quo: businesses reduce jobs to meet their tax bills, and then hire the people back to fill subsidized positions.

No, the only way to create jobs in Keynesian economics is by increasing the deficit . . . and Mr. Obama has just pledged to cut the deficit in half at the same time he has promised to create jobs. The president, despite his welcome optimism and conviction that things do not need to be the way they are, has by his reliance on Keynesian economic advisors trapped himself in an impossible situation. Within the Keynesian framework, Mr. Obama can only keep his promise to create jobs by breaking his promise to cut the deficit in half, and he can only keep his promise to cut the deficit by doing what Keynesian dogma tells us will destroy the economy forever.

Of course, if you admit the validity of Say's Law of Markets and the "Real Bills" doctrine, and combine them with the expanded ownership proposals supported by the binary economics of Louis Kelso and Mortimer Adler, you don't need the rich. You can tax away the gargantuan mountains of wealth by means of which the rich, supported by the Keynesian dogma that the rich, and only the rich, can finance and own the new capital that presumably creates jobs for the rest of us, hold the world hostage. It doesn't seem to occur to anyone in power that if everyone owned an adequate stake of capital, we wouldn't need artificial job creation, inflation, State control over virtually every aspect of our lives — or the rich.

There is a way out of the dead end street that Mr. Obama has managed to get himself into by following the dictates of Keynesian economics. That would be to implement Capital Homesteading at the earliest possible date, not after he and his advisors have gotten us into a worse mess than we are already in. It will not be an immediate "quick fix," and there will be shrieks of pain . . . but the loudest shrieks by far will come from Keynesians who see their religion discredited, their idols thrown down, and the State moneylenders driven from the temple.

Stimulus, Part IX: What's Wrong with Worker Ownership?

As we learned in the previous posting in this series, socialism — State ownership or control of the means of production — is not the answer to economic, social, or political problems. At best a stopgap, if implemented as a solution, socialism only ends by making matters infinitely worse. As the English economist Charles Morrison pointed out in 1855 in his Essay on the Relations Between Labour and Capital, the only way to ameliorate the injustice of having only a few owners of capital as the value of labor falls in competition with advancing technology is to make ordinary workers owners of the means of production.

Unfortunately, the economic and legal institutions of the Great Britain of Morrison's day were not conducive to allowing workers to be owners. For example, limited liability for corporations could only be obtained on a case-by-case basis by special act of parliament, and then only rarely. This meant that any worker deemed to be an "owner" under law was personally liable for the debts of the corporation . . . and "ownership" included profit sharing in any amount, any input to management decisions, and participation in anything else traditionally understood as the "fruits of ownership." The worker didn't need legal title; even a farthing in "profit sharing" made him or her an "owner" in the eyes of the law, and liable for the debts of the corporation.

Consequently, no owner with a social conscience could possibly allow his or her employees to be put in that position. In a bankruptcy, employees generally are first in line right after any obligations owed to the State. Owners, however, are last in line, and without corporate limited liability could end up in prison if their personal assets were not sufficient to cover the debts. In such a legal environment, people like Karl Marx decided that since ownership could be so disastrous for the worker, and concentrated ownership was so obviously bad, the only solution was to abolish private property altogether, and give the State all ownership.

While socialists thought of this as benefiting humanity, they failed to realize that they were, in effect, advocating that human beings change from being human. Private property is a "natural right." Maintaining that private property (along with other natural rights such as life and liberty) is not absolute in the human person is to say in effect that people are no longer human. True, the exercise of property must be limited by the demands of the common good, the needs of the owner, and concern for other people, but we cannot say that these limitations negate private property as a natural right, any more than laws against murder or involuntary servitude negate our natural rights to life and liberty.

Stimulus, Part VIII: Is Socialism the Answer?

As we saw in the previous posting in this series, the downside of the tremendous industrial, commercial, and agricultural expansion in the United States during the 19th century — falling prices that caused hardship in the agricultural and labor sector as industry and commerce became more productive — could have been avoided had ownership of the new industries and commercial enterprises been democratically and directly owned.

Lack of widespread ownership led to the disruption of Say's Law of Markets, for Say's Law presumes that there are no barriers or obstacles to anyone who wishes to do so employing his or her labor, capital, or both in producing goods and services to generate income and enter into exchanges with other producers.

This in turn led to the rejection of the "Real Bills" doctrine and the massive monetary confusion that developed during the 19th century. Say's Law assumes that people realize we don't really purchase what others produce with "money," but with what we ourselves produce. The Real Bills doctrine maintains that "money" represents goods and services that have been produced, or the present value of future production.

All that is necessary for a free and just market to operate is for people to have the ability to turn their current or future production into "money" (promises to deliver wealth on demand) so that they can carry out exchange easier. This also allows new capital to be financed by trading the present value of a project for a promise to repay the "money" out of future profits instead of by cutting consumption, saving, then investing, as Keynes assumed must be done.

If, however, people are prevented from turning their current or future production into "money," especially through the extension of bank credit, a serious problem results. As we saw in the 19th century, as technology became more productive than human labor, it became increasingly difficult for workers who had only their labor to sell to make ends meet. They simply could not compete with the ability of capital to produce more goods and services at a lower cost than was possible with human labor — nor did they have democratic access to the financial system that would allow them to finance the acquisition and formation of new capital so that they, too, could become owners instead of being limited to suppliers of labor.

To some commentators, the solution was obvious. Because of the natural right of private property, the owner of capital has the right to receive the income generated by what he or she owns. That being the case, so certain reasoning went, property itself must be evil, because it prevents the worker from gaining a fair share of production. Since having a few owners of the means of production is clearly bad, there should be no owners of the means of production. Private property must be abolished, and control vested in a presumably benevolent and (because power naturally and necessarily follows property) all-powerful State.

Unfortunately, as Lord Acton observed, power corrupts, and absolute power corrupts absolutely. The State may start out as benevolent, but once it becomes the sole owner of the means of production (and, because "control" is property in all codes of law, the State doesn't even have to take actual title, just force nominal "owners" to obey the State's orders), it necessarily becomes absolutely corrupt. Having the State own or control the means of production is called "socialism" or "communism," the differences between the two being merely semantic and political. Socialism, however, in addition to fostering absolute State corruption, is contrary to human nature, as it abolishes the natural right of every human being to own the means of production.

News from the Network, Vol. 2, No. 8

While most of the world is properly worried about the economic crisis, and the financial markets continue to drop on the expectation that the stimulus — even if it works — will take a long time to kick in, some people are beginning to realize the potential of the Just Third Way for a just and workable solution to the problem. Several encouraging events have taken place this week, giving definite signs that progress, despite the best efforts of academia and the media, is being made.

• The manuscript of Dr. Alamgir's book, Prison Notes from Bangladesh, has been received, and is being reviewed for possible publication either by CESJ's imprint, "Economic Justice Media," or by Universal Values Media, Inc., a for-profit publisher specializing in fiction with a natural law orientation. We expect to have a response ready for Dr. Alamgir within a few weeks. So far the book looks very good. It is a graphic reminder that, despite all the headlines being seized by "fundamentalists" who have managed to stray far from the fundamentals of any religion, there are devout and sincere people out there willing to work with others of all faiths to advance the common good of all, rather than attack and destroy those with whom they disagree.

 

• Over the last five years CESJ's publishing program has been steadily expanding, with our editors targeting high quality books that explain and reinforce the Just Third Way, particularly difficult concepts like private property, social justice, and (most mystifying to many people) money, credit, and banking. We now have more books "in the pipeline" than we have in print, but hope to speed up the process, especially in light of the obvious and critical need for materials that prove something besides stale and unworkable Keynesian solutions is possible.

 

• Last month The Wanderer, a national Catholic weekly newspaper, published an article in support of "social credit," a proposal from the 1920s by Major C. H. Douglas to redistribute surplus production in the form of fixed prices and a national dividend. The article began by citing Michael D. Greaney's book, In Defense of Human Dignity, in which the article on social credit concluded that social credit, because it seems to undermine or abolish the natural right to private property, does not appear to be consistent with Catholic social teaching. Unfortunately, the article in the Wanderer gave no reasons or arguments for or against the claim that social credit is not consistent with Catholic social teaching, merely stringing together a long series of quotes from individuals in support of social credit. We sent a letter to the Wanderer, which included a list of eight critical questions for the social credit movement, pointing out the flaws in criticizing without offering a critique, but have not yet received a reply. We followed up early this week with a proposal to rewrite the letter as an article presenting the arguments against social credit as a valid expression of the natural law (and thus Catholic social teaching), so that people can judge for themselves on the merits of the case.

 

• We received an inquiry from a parochial school in St. Louis asking about using CESJ's and UVM's ("Universal Values Media," www.benson-unabridged.com) books as texts. We let them know that educators and schools are entitled to the 20% wholesale discount on any books from either CESJ or UVM, and what the shipping costs would be within the 48 contiguous states. We also let them know that, if used as fundraising items, the discount is increased to 25%, giving the parish, school, or other organization, for example, $5 for every $20 book sold. A thousand books sold for the benefit of a school, parish, or other organization would thus generate approximately $5,000.00, a significant amount in these times, when the regular flow of donations and contributions has diminished considerably for many organizations. Books also confer significant benefits of their own, that items such as chocolate, cookie dough and wrapping paper — innocuous enough in themselves — do not. With Lent coming on, Christian groups might be particularly interested in natural law approaches to solving social problems found in CESJ's books, while the values-oriented approach in UVM's fiction would provide a more beneficial form of entertainment than can usually be found in the major media. If you or your organization would like to find out more about using CESJ's and UVM's publications as texts or fundraising items, send an inquiry to onceandfuturebooks@yahoo.com.

 

• As noted in a previous blog posting, we received a very encouraging thank-you note from the Hon. Enda Kenny, leader of the Fine Gael party in Ireland for sending him and other party leaders copies of Capital Homesteading for Every Citizen. Fine Gael is Ireland's second largest political party, and its platform appears to have many similarities with the Just Third Way. We look forward to hearing more from Mr. Kenny and Fine Gael, as well as the other parties in Ireland, all of which are gravely concerned with the present crisis, for which Capital Homesteading might offer a viable solution.

 

• On Thursday, Norman Kurland received a telephone call from a journalist in Warsaw, Poland, who wants to write one of his opinion columns on the Just Third Way for Warsaw's largest daily newspaper. The journalist was referred to Norman Kurland by Dr. Norman Bailey, former chief economic advisor to the National Security Council under President Reagan. As Dr. Kurland noted in his e-mail follow-up, "I look forward to seeing your opinion column. I hope that it will inspire the Polish people and Polish political, moral, and academic leaders to study and implement a Just Market Economy based on the principles of Personalism of the late Great Pope John Paul II and the binary economics of my mentor Louis O. Kelso. As I mentioned, . . . writings from the home page of our Center for Economic and Social Justice website at http://www.cesj.org may be useful to provide you and your readers with the policy and legislative changes that are needed to lift the artificial barriers to universal access by every citizen to the ownership of productive capital assets when they are newly-created or existing assets change hands."

 

• We received an interesting telephone call this week from Mr. Tom Laney, a member of the United Auto Workers ("UAW") who is involved with an effort to have the workers purchase Chrysler. Mr. Laney earlier sent an e-mail to Norman Kurland and purchased a copy of In Defense of Human Dignity. Mr. Laney then contacted Michele Mauder and Santino Scalici and mentioned CESJ. Norman Kurland sent Mr. Laney a note with links to material on the CESJ web site he could look at. Norman Kurland later received a note from Ms. Mauder, who said she was intrigued with CESJ's approach, which embodies Justice-Based Management as an integral part of any worker-owned company. Ms. Mauder is organizing the Chrysler Employee Buyout Committee. They have a web site, www.employeeownedauto.org, which may be worth a visit to see an alternative to what is otherwise being proposed to "save" the American auto industry. It is noteworthy that the late labor statesman Walter Reuther, a champion of ownership rights for workers, was head of the UAW. The union he headed could find no better way to honor his memory.

 

• Mr. Christian Miller, an engineer on the west coast whose son is in the military in Iraq, has been proposing an Iraq oil share proposal similar to that of the Just Third Way. He has a web site, www.iraqoilshares.org. Mr. Miller called and looked at our web site, we looked at his, and Norman Kurland has had a number of exchanges with Mr. Miller.

 

• As of this morning, we have had visitors from 43 different countries and 48 states and provinces in the United States and Canada to this blog over the past two months. Over the same period we have experienced over 150% increase in total readership, according to the statistics counter of "Google Analytics." Most visitors are from the United States, with Canada, the UK, Ireland, and Brazil rounding out our "top five" countries where we're read the most. Due possibly to Norman Kurland's interview with a Polish journalist, there was a sudden leap in inquiries from Warsaw, all on the same day. The top spots for the average time spent on the blog, however, go to Venezuela, Croatia, Poland, Mexico, and Jordan, in that order. Our most popular posting continues to be the first in the ongoing series explaining why Mr. Obama's stimulus package is a disaster. Of the remaining "top ten," 1 is a "News from the Network" posting, 8 examine Keynesian economics, 2 are from the stimulus series, and 1 addresses the financial crisis in Ireland (obviously there is some overlap, e.g., the financial crisis in Ireland traces the problem to its Keynesian roots). The bottom line, of course, is that the slavish adherence to Keynes is wrecking the world's economies, and the sooner people begin to look at the situation in terms of Kelso and Adler's binary economics, the better off everyone will be.

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.