News from the Network, Vol. 2, No. 37

The Big News of the week is, of course, Mr. Obama's health care speech, and (especially) his promise not to increase the deficit "by one dime" to fund it. Two possible objections come to mind immediately. One, Mr. Obama is not addressing the fact that, whether funded out of current tax revenues or deficits backed by future tax revenues, many people are concerned with what seems to be an absolute insistence on continued government funding of abortion.

Using tax dollars to fund abortion directly or promote it in any way forces people who are opposed to abortion to "materially participate" in the procurement of abortion. This is an act that a significant number of people view as morally repugnant and contrary to the natural moral law. If the justification for legal abortion is based on a woman's presumed right to choose, the legal justification for government funding or support of abortion in any form is obviated.

This is because taxpayers have no choice whether or not they pay taxes. By using "government money" (i.e., taxpayer money) to fund or support abortion, people are forced to pay for something they may regard as criminal, or at least morally wrong. The only way to justify abortion on the grounds of a "right to choose" is to extend that right to everyone. To ensure that abortion is truly a free choice on the part of everyone affected — including those who are currently forced to pay for it — all government support and funding must be halted. It makes no sense to take away the free choice of some people to support that of others, and thereby create a privileged class in what is presumably a legally classless society.

Two, Mr. Obama is not being realistic about funding. The only viable plan to fund health care reform (and all other government programs and operations) is to jettison the dogmatic belief in the absolute necessity of existing accumulations of savings to finance capital formation, and the seemingly inevitable corollary that everything must, ultimately, come from the State. This would allow a complete and long overdue overhaul of the tax system with the goal of leaving people with more of their own income to meet expenses such as food, clothing, shelter, education . . . and health care . . . without relying on charity or government redistribution.

Projections suggest that it would be possible to fund all government programs, including Social Security and Medicare, as well as a universal health care program out of current tax revenues, eliminate the deficit, reduce the debt, exempt $100,000 for a family of four from all taxation, and still keep a single tax rate under 50% for all income over the exemption. With the increase in the tax base as a result of Capital Homesteading and the consequent reduction in the debt and government entitlements to redistribute existing wealth to make up for inadequate income (often caused by excessive taxation and deficit spending that increases inflation to fund government entitlements to address inadequate income), projections suggest that the tax rate could be cut in half within a generation.

If anyone knows a way to get this information to Mr. Obama, he or she would be doing everybody a favor. Other "favors for everybody" are reflected in this week's happenings:

• On Monday, CESJ participation in a seminar at Harvard Divinity School in Rockefeller Hall, in the lounge adjacent to the Cafeteria, from 12:00 to 2:00 p.m. was discussed. The event, to take place September 24, is in honor of Dr. Martin Luther King, Jr., a "teachable moment" to discuss the integration of the principles of the beloved community into a sound and holistic approach to the economy. Dr. Harvey Cox and Dr. Virgil A. Wood, both long-time associates of Dr. Martin Luther King, Jr., and Sr., will lead a discussion on the spiritual and economic dimensions of the King Jubilee Dream.

• On Tuesday, members of the Equity Expansion International, Inc. team participated in a two-hour internet discussion with two entrepreneurs in New Delhi, India, to discuss implementation of a program of worker ownership and Justice-Based Management at their company. From the perspective of the Just Third Way, this represents a potential opportunity to develop a new paradigm of economic development for the world that avoids the wealth- and power-concentrating models of the past in one of the fastest developing economies in the world.

• Work continues to progress on the publishing projects. In the course of the research for the books, it is becoming increasingly clear that many of the economic problems being experienced today may result from a misunderstanding of money, credit, banking, and finance. This appears to have developed out of a rejection of the tenets of the Banking School and unquestioned acceptance of those of the Currency School (described in previous postings), resulting in a virtual divorce between production of marketable goods and services and the creation of money. One result has been diversionary discussion over the definition of inflation, with the various sub-schools of thought seemingly more concerned with proving everybody else wrong instead of figuring out who is right and what to do about it.

• The "Truth Be Told" newsletter, a publication of the "Lay Dominicans — Western Province," has republished Michael D. Greaney's original article on universal health care in its September 2009 issue. The article first appeared in Social Justice Review, and contains many of the features that were later more fully developed in the "Doctors' Plan," especially with regard to the question as to how health care reform can be financed. This is particularly appropriate in light of Mr. Obama's pledge to fund health care reform without increasing the deficit "by one dime." Truth Be Told can be downloaded free from the website of the Western Province.

• As of this morning, we have had visitors from 36 different countries and 41 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Brunei, the UK, Venezuela, and Canada. People in Aruba, Israel, Indonesia, the Netherlands, and Brazil spent the most average time on the blog. The most popular posting continues to be "What Caused the Economic Crisis," followed by the Keynesian "paradox of thrift," what you can do to end the economic crisis, and the news items. With respect to the amount of time spent reading, the postings on the "thoughts on money," usury, the paradox of thrift, the reign of the British Currency School, and William Cobbett appear to be the most popular.

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.

#30#

Ireland: Business Requires Sacrifice, Part II of III

According to the Wall Street Journal of 09/08/09, businesses are putting pressure on the Irish government to accept the Lisbon Treaty, including its pro-abortion provisions, in the name of economic growth and development. That is a very bad argument, and here's why.

The problem with virtually all economic policy today is that it is stuck in the Malthusian framework — and "business" seems intent on forcing the consequences of this flawed paradigm on Ireland in the quest for profit that never seems to materialize . . . at least for those who would be most affected by the provisions of the treaty: the people of Ireland. It comes as no surprise to learn that Malthus published the first edition of his Essay on Population (1798) at almost the same time that the great controversy broke out between the Currency School and the Banking School with the suspension of gold payments by the Bank of England in 1797 — a "temporary" measure that lasted until 1821. The Currency School bought into Malthus' limited wealth assumption, and asserted an absolute reliance on existing accumulations of savings to finance capital formation. The Banking School rejected Malthusian assumptions, and asserted that existing accumulations of savings were not necessary to finance capital formation (the real bills doctrine).

There are, of course, gray areas in the controversy. John Maynard Keynes, for example, claimed to reject Malthus, but relied absolutely on existing accumulations of savings to finance capital formation (General Theory, II.7.v), while Adam Smith, one of the premier adherents of the real bills doctrine, inserted some proto-Malthusian doctrine into The Wealth of Nations (1776) by implicitly limiting ownership of the means of production to the rich and restricting "labor" to gaining income only through wages ("The Wages of Labour," I.viii). Despite the proven falsity of Malthusian doctrine, however, it had joined with the tenets of the Currency School to present a seemingly unshakeable and monolithic battlefront to common sense and empirical observation. As the economist Joseph Schumpeter noted,

The teaching of Malthus' Essay became firmly entrenched in the system of the economic orthodoxy of the time in spite of the fact that it should have been, and in a sense was, recognized as fundamentally untenable or worthless by 1803 and that further reasons for so considering it were speedily forthcoming. It became the "right" view on population, just as free trade had become the "right" policy, which only ignorance or obliquity could possibly fail to accept — part and parcel of the set of eternal truth that had been observed once for all. Objectors might be lectured, if they were worthy of the effort, but they could not be taken seriously. No wonder that some people, utterly disgusted at this intolerable presumption which had so little to back it began to loathe this "science of economics" quite independently of class or party considerations — a feeling that has been an important factor in that science's fate ever after. (Joseph Schumpeter, History of Economic Analysis. New York: Oxford University Press, 1950, 581-582.)

The Malthusian idea that there could be such a thing as excess people is, even from the crudest and most materialistic approach, utter nonsense. Even a rational materialist would say that unemployed people are a wasted resource, not a drain on society, regardless of their value as human beings. Nevertheless, Malthus' theories allowed the rich to assume that the misery and degradation of the working classes was their own fault for refusing to limit their numbers. Malthusian theory gave the rich a necessary salve to their consciences, and helped justify concentrated ownership of the means of production. People continued to believe — falsely — that if people were poor, it was because 1) they lacked the discipline to save and thereby accumulate the necessary financial capital to purchase productive assets, and 2) they were incapable of restraining themselves from breeding up to and beyond their own ability to support themselves.

There was, however, a slight problem with these assumptions. The predicted shortages didn't seem to be making their scheduled appearance. The new technologies that came in with the Industrial Revolution were producing marketable goods and services in such huge quantities that the problem was finding enough buyers with disposable income to purchase the tremendous amount of output, not a surplus of demand emanating from Malthus' Imaginary Multitudes. Supply and demand were becoming increasingly out of balance, but not because there was not enough to go around. On the contrary, the world was facing the paradox of people starving in the midst of plenty, even superabundance. What was going on?

#30#

Ireland: Business Requires Sacrifice, Part I of III

We interrupt our series on thoughts on money to bring you another important news bulletin. It's not too great a stretch, for if businessmen, economists, and politicians understood money, credit, and banking, the world wouldn't be in the mess it's in. Yesterday's Wall Street Journal carried an article, "Businesses Ask Ireland to Quit Blocking EU Treaty" (09/08/09, A12). The gist of the article seemed to be that the Irish government is going to have to face economic reality and accept the Lisbon treaty and its ultra-Keynesian framework, along with its pro-abortion provisions and other measures unacceptable to the majority of the Irish people, if Ireland wants to prosper materially.

The bottom line is, does "business" have the right to dictate matters not just of national political policy, but of individual and social morality for the sake of economic expedience? Or does business, in common with every other person, natural or artificial, have the obligation to conform itself to essential principles of the natural law within the framework of the common good of all humanity? Is it even possible to be moral within the Keynesian economic paradigm that seems to demand great sacrifices in order to obtain benefits that never seem to materialize?

Even Keynesians are beginning to admit that the "New Deal" that allegedly brought the United States out of the Great Depression didn't really "kick in" until 1939 (Robert Skidelsky, John Maynard Keynes: 1883-1946: Economist, Philosopher, Statesman. London: Penguin, 2005, 494-500, 504, 509-510). Keynes himself admitted that something was wrong in the "mini-depression" of 1937-38, but blamed everything on Roosevelt's failure to go the whole way and let Keynes govern the United States, at least economically (William E. Leuchtenburg, Franklin D. Roosevelt and the New Deal, 1932-1940. New York: Harper Perennial, 2009, 242-243). What pro-New Dealers fail to realize even to this day, however, is that the New Deal didn't bring the prosperity of 1939, it was something called World War Two. It was in all the papers, but economists seem to have missed it.

The question becomes, "Is there another way?" Does a people have to accept the imposition of laws alien to their customs, traditions, and beliefs to achieve prosperity? Or can a modern economy be fitted into traditional morality and ethics without violating the essentials of the natural law? Does Ireland have to accept human sacrifice in the form of abortion and all the other currently-popular (and disproved) measures to spur economic development in order to grow economically?

Not according to such diverse thinkers as Jane Jacobs and R. Buckminster Fuller. As Dr. Jacobs pointed out in her book, The Economy of Cities,

It is becoming conventional (especially among the very well-off) to assume that poor and unproductive people cause their own poverty by multiplying — that is, by their very numbers. But if it is true that poverty is indeed caused by overpopulation, then it follows that poor people ought to prosper wherever populations decline appreciably. Things do not work out that way in the real world. (Jane Jacobs, The Economy of Cities. New York: Vintage Books, 1970, 118-119.)

How do things "work out" in the real world? Fuller pointed out some rather obvious facts in his book, Utopia or Oblivion:

While all the metabolic gains are taking place [i.e., as economic and social development takes place], favorable changes in population trends will be realized. Biological population is apparently operative on a quantum basis. Nature increases the seed and fertilization starts in inverse proportion to the probability of successful growth and survival of each of the ecologically complementary species — of all of life on earth. As the chances for maple trees to survive decrease, nature starts more maple-tree seeds whirling off in their rotorships to find plantable sites. . . .

In the same way, the human population's starts, gains, and recessions are geared directly to changing survival and birthrate probabilities. The first 17th-century European colonists in America had an average of 13 children per family. As the first waterworks and sewer systems came into use, improving the sanitary conditions and survival probability, the numbers of children per family swiftly decreased (only reversing momentarily in meager degree to rectify the abnormal deathrates of warfaring) until with full industrialization attained in America, the birthrate is now 1.9 children per family. (R. Buckminster Fuller, Utopia or Oblivion: The Prospects for Humanity. New York: Bantam Books, 1969, 200-201.)

In other words, the more advanced a society becomes, the lower its reproductive rate; lowering the rate of reproduction does not advance a society: "population has a natural tendency to keep within the powers of the soil to afford it subsistence in every gradation through which society passes." (John Weyland, The Principles of Population and Production as They are Affected by the Progress of Society; with a View to Moral and Political Consequences. London: Baldwin, Cradoc, and Joy, 1816, 107.)

#30#

Health Care in Japan

Yesterday's Washington Post had an interesting article about how the United States could make affordable health care available to everyone simply by following the Japanese model. Unfortunately, the article seemed somewhat dismissive of the free market. We sent a letter to the editor briefly stating what appeared to be wrong with the Japanese approach, which, much to our surprise, received no response.

Dear Sir(s):

Blaine Harden's article on the Japanese health care system ("Health Care in Japan: Low-Cost, for Now," Washington Post, 09/07/09, A1, A4), while provocative, does not give adequate coverage to the possibility that the free market, albeit regulated when necessary by the State to ensure strict compliance with standards and fair competition, has the potential to deal more effectively with the situation than what is now currently in place in the Empire of Japan. Harden cites three aspects of the Japanese system that seem to be responsible for controlling cost: 1) banning insurance company profits, 2) limiting doctor fees, and 3) accepting limitations on health care.

All three could be handled better by the free market and avoid the dangers cited: 1) Reorganizing insurance companies on a mutual basis with the policyholders as shareholders with the full rights of private property would return profits to the insured. 2) Doctor fees would be lowered in response to free competition and patient access to information. 3) The profit motive has been proved to motivate the search for lower-cost and more effective alternatives, whether for manufacturing widgets or providing health care.

#30#

Some Thoughts on Money, Part VI: The Currency School

As we have seen in previous postings, the principles of the Currency School were embodied in the provisions of the British Bank Charter Act of 1844 and the United States National Bank Act of 1864. Both were attempts to restore stability to the monetary system after a period of monetary chaos. In this, both succeeded — to a degree, and then only by sacrificing a currency that could expand and contract in response to the needs of the economy.

The Bank Charter Act of 1844 did this by imposing a strict limit on the amount of currency that could be backed by government debt (£14 million, adjusted at various times), and mandated that the rest of the currency must be backed by gold or be gold, that is, the currency was either paper banknotes representing gold bullion in the Bank of England, or gold coin itself.

In this, the Currency School made two fatal errors. The first is obvious: "money" consists of much more than gold coin and banknotes. As John Fullarton pointed out in 1845 (and other economists before and since), "money" is anything that can be used in settlement of a debt. The "circulation" of a country therefore is not restricted to gold coin and paper banknotes backed by State claims on somebody else's gold, but of demand deposits ("checking accounts"), bills of exchange, commercial paper, bills of lading — anything, in short, that is accepted in the channels of commerce in settlement of a debt.

The second fatal error of the Currency School is less obvious, but still serious. That is, a fixed or inflexible currency is hardly adequate to the needs of a modern or developing industrial or commercial economy. Consequently, the British government went through periodic "currency crises" even after the passage of the Bank Charter Act of 1844. They finally gave up after 1914, going off the gold standard domestically, and backing the currency completely with government debt.

This leads us into a third error, and one that the Currency School tried to avoid by mandating a legal limit to the amount of currency that could be backed by government debt. That is the fact that governments are rarely able to keep their hands off the printing presses, and will, if given the opportunity, create more money than can be backed by the present value of future tax collections. This is because the State spends money to achieve political, not economic ends — and the art of politics often involves garnering as much of the public revenue for your own constituents as possible, while letting someone else's constituents pay for it.

Various expedients have been tried to inhibit or prevent the State from inflating the currency in this manner. The problem is that if there is a loophole, however small, the politicians will find a way through it, as they did in the United States in 1917 when a way was found to circumvent the prohibition against monetizing government deficits found in the Federal Reserve Act of 1913. This was the origin of the so-called "open market operations."

Thus, almost a century after the Federal Reserve Act of 1913 was enacted to break up concentrated control over money and credit and provide a flexible currency backed by hard assets to meet the needs of industry, commerce, and agriculture, the U. S. currency is backed almost entirely by government debt, with a small amount of legally-mandated gold to back the United States Notes that nobody ever sees anymore.

The problem with backing the currency with government debt is two-fold. One, as we already noted, the State can rarely resist the temptation to monetize deficits. Going into debt is much easier and certainly more politically expedient than raising taxes. Taxes are immediately unpopular, while debt only becomes unpopular when it has to be repaid, or when the effects of unrestrained government spending begin to be felt throughout the economy.

Two, again as we have noted, when the currency is backed by government debt, the money supply is determined by political considerations, not the needs of industry, commerce, and agriculture. Any politician that can come up with a "good" reason for printing more money can, with relative ease, obtain funding in that manner rather than through the accountable method of raising taxes.

#30#

News from the Network, Vol. 2, No. 36

Since we've gone on record saying it's impossible to predict what the stock market is going to do, we can claim a perfect record in our predictions. The crap shooters on Wall Street and the bull shooters on Capitol Hill haven't yet realized that you can't disjoin money from production — or share values from the present value of the future stream of income a company is expected to generate — and expect to have a stable currency, any more than you can separate the great mass of people from ownership of the means of production and expect to have a stable economy.

We think of it as "job security." As long as there are such serious flaws in our institutions, we have our work cut out for us. Further, as Father Ferree pointed out, "the work of social justice is never done." Flaws that need correcting will always be popping up, if only because (as Pope Pius XI pointed out) society is "radically unstable," and continually in need of repair by the human beings who put society together in conformity — more or less — with our nature. It's that "more or less" that ensures we will always have work to do in the areas of economic and social justice, for, humanity being imperfect, we will never achieve perfection in our creations.

The following items, then, are evidence of every human being's tenured position as a material cause of economic and social justice:

• Earlier this week we sent "feelers" out to a number of individuals, one of which has sparked an interesting discussion on the validity of the real bills doctrine and its application in an advanced modern economy. So far the discussions have involved clarifying language and concepts, but it appears that validity or non-validity of the real bills doctrine may be a critical factor in advancing the Just Third Way, especially when the all-important question of where the financing is to come from for new capital investment.

• Another feeler went out to columnist Michael Gerson of the Washington Post regarding a piece he wrote on health care reform. We found we agreed with his points. The problem was that he left something out: where the money comes from to pay for it, whether health care reform is a private or public sector initiative. From the standpoint of the Just Third Way, the money will come from full individual participation in the economic process, thereby generating an adequate and secure income sufficient to meet ordinary needs, whether by sale of labor, ownership of capital, or (preferably) both.

• The letter sent to the Irish Independent on the real bills doctrine and copied to a number of parties involved in trying to find solutions to the economic crisis has not received any replies to date. It may be that the real bills doctrine is simply too far outside the frame of reference being used by most people to be grasped when presented within the confines of even a lengthy letter to the editor.

• Work is progressing on a number of publishing projects, including Dr. Alamgir's book, Notes from a Prison: Bangladesh, Dr. Harold G. Moulton's The Formation of Capital, a compendium containing Father William Ferree's Introduction to Social Justice and Discourses on Social Charity, and a volume looking at money, credit, and banking from the perspective of the Just Third Way.

• As of this morning, we have had visitors from 36 different countries and 43 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Brunei, Canada and Venezuela. People in Aruba, Israel, the Netherlands, Indonesia and Venezuela spent the most average time on the blog. The most popular posting by far continues to be "What Caused the Economic Crisis," followed by the response to Dr. Michael Novak, "What You Can Do to Address the Economic Crisis," the news briefs, and William Cobbett. With respect to the amount of time spent reading, the postings on the Keynesian liquidity trap, usury, the paradox of thrift, and William Cobbett appear to be the most popular.

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.

#30#

Some Thoughts on Money, Part V: The Great Gold Gabfest

The suspension of specie payments by the Bank of England in 1797 not unnaturally sparked a gigantic controversy. People split into one of two parties, the "Bullionists" and the "Anti-Bullionists." Because it seemed logical and was based on a simple, easy-to-understand fallacy, the Bullionist position eventually carried the day — even though many people had no real grasp of the situation. This lack of understanding is prevalent even today, being manifested chiefly in the fixed belief that only existing accumulations of savings can be used to finance capital formation.

The belief that capital formation can only be financed out of existing accumulations of savings means there has to be a class of people who, owning capital that generates far more income than they can possibly consume, are forced to reinvest the surplus to form capital. This, in turn, provides jobs for the great mass of people. The greater accumulations of the wealthy (and the less wealth held by ordinary people) the better off the economy will be. Harold G. Moulton, the author of The Formation of Capital, responded to this claim a little over a century after the British Bullionist debate in the following manner:

In view of this basic assumption that the fundamental requirement for progress was the restriction of consumption as a prerequisite to the formation of capital, it is not surprising that the doctrine of economic salvation through individual thrift should have been so strongly emphasized. The restriction of consumption and the setting aside of funds for investment purposes were regarded not only as the means by which the individual obtained security and got ahead in the world, but also as the road to social progress.

In line with this reasoning, institutional devices which promoted inequality in national wealth and income were held to be not necessarily disadvantageous — from the long-run point of view. Economists have been wont to point out that the growth of economic inequality might even turn out to be a blessing in disguise.

Unfortunately for the Bullionists, however, the idea that you cannot engage in productive activity — invest — before you save falls apart when we ask where the original savings came from to finance the productive activity that generated the savings to invest. If we stop to reflect on this for a moment, it means that production can only take place after production has taken place. This is an obvious contradiction and a logical fallacy.

The Bullionists only recognized as "real money" existing accumulations of gold, and claims by the State on those accumulations: government debt backed by the State's power to tax away the citizens' gold. That is, the State's power to redistribute existing wealth through inflation. The Bullionists therefore made the argument that if banks were not required to exchange their banknotes into gold, the banks would issue banknotes without regard to the supply of "real money" available. This would lead automatically to inflation, so that to maintain a stable currency, it was necessary to restore convertibility to the currency, that is, require that banknotes be exchangeable into gold on demand.

The two most prominent spokesmen for the Bullionist position were John Wheatley and David Ricardo. In a bizarre twist of fate, Henry Thornton, who supported the real bills doctrine and the quantity theory of money that discredited the Bullionist position, is considered one of the Bullionist's strongest supporters, and a leading figure in the Currency School!

#30#

Some Thoughts on Money, Part IV: Background of the Great Gold Gabfest

In Great Britain in the 18th century, there were both banks of issue and banks of deposit. To confuse matters, however, not only did most people then tend to think of all banks as banks of deposit, today's economists and other experts also have a strong tendency to make the same mistaken assumption. In addition, people thought — and still think — that banknotes were supposed to be backed 100% by gold. If not, there was some kind of fraud involved.

What really backed the banknotes, of course, were the loans made by the bank that represented actual assets with a defined value in terms of gold. That is, a bank of issue might make a loan for £1,000, and take a lien on a factory, mine, or a farm worth £2,000. This would give the bank's notes or demand deposits "double" security. It wasn't too unusual for a banknote with a face value of, say, £1, to pass for more than £1 in gold if the public was aware that the bank that issued the note had a reputation for taking only good security for the loans it made. Of course, if a bank had a bad reputation, the banknotes it issued might be worth much less than the face value of the note in gold. (Of course, this example ignores the fact that banknotes with a face value of less than £5 were prohibited in England after 1765.)

Typically, however, banks of issue would not stop at backing their banknotes and demand deposits with liens on items of present value, but also back a portion of each banknote or demand deposit with gold as well as other assets. Thus, a conservative bank of issue's banknotes and demand deposits might be backed 200% with assets other than gold, plus 25% in gold, making each £1 it issued "worth" £2, 5s (a "shilling" was 1/20 of a pound, so 5 shillings or 5s was 25% of £1). Most checks and banknotes, however, were not redeemed in gold, but by settling the debt by means of which the money was created in the first place. Before the first clearinghouse was established in England in 1773, this was done through direct inter-bank transfers, large banks, or a consortium of banks filling the same function that clearinghouses later filled. In the 18th century, this was primarily banknotes as well as the checks that constitute the bulk of the business of today's clearinghouses.

Unfortunately, in the laissez faire atmosphere of the 18th century (that is, laissez faire when it suited the plutocracy to be left alone, i.e., until they needed the State to enforce some demand or other), there seems to have been an underhanded financial trick that large banks used to play on smaller, independent banks. If we understand Adam Smith's analysis in The Wealth of Nations (1776) correctly, larger banks or financial consortiums would sometimes take or create the opportunity to destroy a smaller rival. Large banks would hold back banknotes issued by an independent small bank until they had accumulated more than the independent bank was believed to have in gold reserves.

These banknotes would be presented all at one time and, instead of being used to settle or purchase the independent bank's outstanding loans (the basis on which the banknotes had been issued), would be used to demand gold. The independent bank would thereby be forced into bankruptcy, and the larger bank(s) would pick up the independent bank's outstanding loans for a fraction of their true value. This sort of thing also happened in Europe and, later, in the United States under the state banking system that was in place prior to the National Bank Act of 1864. Even as late as the early 20th century J. P. Morgan used a variation of this "liquidity duel" to cause a run on the Knickerbocker Trust by suspending the Knickerbocker's clearinghouse privileges, thereby precipitating the "Panic of 1907."

In Scotland, under the "free banking system," banks were allowed to suspend convertibility of their banknotes into gold on a temporary basis, in part to prevent this from happening. Naturally, this did not sit well with the financial powers-that-were in London who did not like such interference in "free trade." Therefore, even a temporary suspension of convertibility of banknotes into gold was outlawed in 1765, which also prohibited the issuance of banknotes below £1. In England, this was raised to £5 a few years later, although kept at the lower denomination in Scotland.

Then came the French Revolution. In 1797 a rumor swept through England that the French had landed an invasion force, and people rushed to their banks to withdraw all their funds in gold. Reserves got so low that the government permitted the Bank of England temporarily to suspend payment of its banknotes into gold. The temporary measure lasted for more than two decades, and convertibility was not restored until 1821.

#30#

The Irish "Bad-Bank" Proposal

We interrupt our series on thoughts on money to bring you an important news bulletin. In our anxiety to try and insert a better theory of money and credit into recent discussions, we've been letting our focus on Ireland slide a little. Fortunately, our "news correspondent" in the local Division of the Ancient Order of Hibernians in America (Colonel John Fitzgerald Division, Arlington, Virginia) has kept us up-to-date, and yesterday sent us an article from the Irish Independent covering the proposal to install a temporary fix to restore the State's borrowing capacity. This seemed a little wrong-headed, so we sent the following letter to the Independent, and copied a long list of people and organizations who should be more interested than they appear to be in finding a viable solution to the current economic crisis.

Dear Sirs:

In response to yesterday's article, "Fitzgerald Urges Bad-Bank Support on IMF Concern" (Irish Independent, August 31, 2009), it seems more than a little ironic that any Irish economist or politician would advocate setting up a "bad bank" in order to restore the State's power to monetize its deficits. In 1802 the Anglo-Irish MP, Henry Thornton, the "father of central banking," published his Enquiry into the Nature and Effects of the Paper Credit of Great Britain. In his book, Thornton explained that the real basis for the money supply is the productive capacity of the nation. Only by creating money backed by the present value of existing or future marketable goods and services in the private sector would a country have a sound and adequate supply of money and credit. This is the "real bills doctrine" of Adam Smith, Jean-Baptiste Say, Henry Thornton, and John Fullarton — the basic tenet of the "Banking School" of monetary theory.

There are two dangers in the real bills doctrine. One, bankers will be tempted to create money backed not by the present value of existing or future marketable goods and services, but, in search of greater profit, will back new money with derivatives of marketable goods and services ("fictitious" as opposed to "real" bills), or with non-productive speculative investments, consumer debt, or government securities. Backing the currency with anything other than real bills with adequate security causes inflation and debauches the currency. Two, bankers will, out of an excess of caution, refuse to create money on anything other than the very best security, and sometimes not even then. This leads to deflation of the money supply and a constriction of industry, commerce, and agriculture, and thus unemployment and recession or depression.

The school that grew up in opposition to the Banking School — the "Currency School" — missed the boat on this point, and rejected the real bills doctrine. Because of the perceived danger of inflation and the refusal to accept the possibility that it is perfectly feasible through the application of the real bills doctrine to finance capital formation without the use of existing accumulations of savings, the Currency School declared that all paper money except when backed 100% by gold is inflationary. As embodied in Sir Robert Peel's Bank Charter Act of 1844 (7 & 8 Vict. c. 32), the British government would be limited to a permanent floating debt of £14 million to back banknotes issued by the Bank of England, with any increase in the money supply coming from an increase in the supply of gold. This would presumably prevent the State from creating money indiscriminately to monetize its deficits, thereby causing inflation. This was the same rationale behind the United States National Bank Act of 1864.

There are three dangers in the approach of the Currency School. One, the "fixed currency" does not allow for economic growth tied to the productive capacity of the nation, but to the supply of gold. This results in deflation when the increase in the supply of gold is less than the increase in productive capacity, and in inflation when the increase in the supply of gold exceeds the increase in productive capacity. Two, eventually someone like David Ricardo realizes that a gold-backed currency can be replaced completely with a currency backed entirely by government debt, with inflation presumably kept in check by mandating legal limits on the amount of money that the government is allowed to create. Three, governments have always been able to circumvent legal prohibitions against creating money to cover their deficits, whether the practice is completely prohibited, as is still technically the case with the United States Federal Reserve Act of 1913, or simply limited, as with the British Bank Charter Act of 1844.

In consequence, the issue for today's monetary policymakers is not how to eliminate inflation or deflation and foster economic growth and a healthy economy, but how best to finance government spending and manage the presumably inevitable inflation by manipulating the money supply and interest rates. They need to step outside the constraints imposed by their adherence to the defective paradigms of both Keynes and the monetary economists in order to find a viable solution.

A much sounder approach unclouded by the flawed theories of either John Maynard Keynes or Milton Friedman would be to study the case made by Louis Kelso and Mortimer Adler in their 1961 book, The New Capitalists, with its all-important subtitle: "A Proposal to Free Economic Growth from the Slavery of Savings." An application of the principles in Kelso and Adler's book can be found in "Capital Homesteading," a comprehensive national economic strategy for empowering every person, including the poorest of the poor, with the means to acquire, control, and enjoy the fruits of productive corporate assets.

Capital Homesteading's long-range agenda involves a major restructuring of the tax system and central bank policies to lift unjust artificial barriers to more equitable distribution of future corporate capital and faster growth rates of private sector investment. It would shift primary national income maintenance policies from inflationary wage and unproductive income redistribution expedients, to market-based ownership sharing and dividend incomes.

Yours, etc.

cc. His Excellency Michael Collins, Ambassador of Ireland

Benjamin Bernanke, Chairman, Federal Reserve Board of Governors

Paul Volcker, Past Chairman, Federal Reserve Board of Governors

United States Council of Economic Advisors

David M. Walker, Peter G. Peterson Foundation

The Economic and Social Research Institute

The Center for the Study of the Great Ideas

The Wall Street Journal

The Washington Post

The Washington Times

The New York Times

The Irish Echo

The National Hibernian Digest

#30#

Some Thoughts on Money, Part III: The Two Kinds of Banks (Again)

In our previous posting in this series, we began our analysis of the three primary schools of money, credit, and banking that started developing in the late 18th century. Before we look at them more closely, however, we need to examine the situation that led up to them. This will help us not only see where they went wrong, but also what they have in common — if anything.

To begin, we start with the realization that there are two kinds of banks. These are the "bank of deposit," and the "bank of issue" (also called the "bank of circulation").

The bank of deposit is pretty much what it sounds like, and what most people tend to think of as a bank . . . whether or not they are looking at an actual bank of deposit. A bank of deposit takes deposits (obviously), then lends out the deposits to borrowers. The bank charges interest on such loans, some of which is passed through to the depositors. The bank of deposit retains the rest of the interest as its revenue, from which it meets its costs and generates profit for the owners.

Assuming that a country is on the gold standard, the bank of deposit can either lend out the gold that was deposited, or it can keep the gold safe in its vaults and issue a banknote to substitute for the gold. These banknotes circulate as currency, or "current money." If a customer presents a banknote to the bank, the bank will either use the banknote to cancel a debt owed by the customer, or exchange the note for gold.

The bank of issue is a different creature altogether. The most common type of bank of issue is the commercial bank, that is, a bank intended to facilitate commerce. A bank of issue converts non-monetary wealth into money. If something has value, it can (in theory, anyway) be converted into money.

A bank of issue (again, in theory) does not need a customer to make a deposit before making a loan. Instead, a borrower comes to the bank and pledges something of value in exchange for a loan. Technically, if the pledge involves real property (i.e., land), the pledge is called a "mortgage." If the pledge involves anything other than land (that is, personal property), it is called a "pawn." The latter term is nowadays usually restricted to small loans made on "portable security," that is, items of relatively high value that can be transported easily.

The bank of issue creates the money, either in the form of a banknote that circulates as currency, or in the form of a demand deposit on which the borrower issues checks. A check, while it is money, does not usually circulate as currency, but is returned immediately (more or less) to the bank of issue for redemption after a single transaction. Usually the recipient of a check does not take it to the bank on which it was drawn and demand cash, but deposits it in his or her own bank, taking the banknotes issued by that bank or issuing checks.

The recipient's bank presents the check to the bank on which it was drawn in order to settle the account and complete the transaction. Since the original bank and the receiving bank often have thousands, if not millions of such transactions back and forth, very little cash changes hands — or needs to, as the accounts eventually "zero out" (again, in theory). This "zeroing out" is usually done through a clearinghouse, a financial institution designed to facilitate transactions between banks and minimize the movement of actual cash, which can be both unwieldy and unsafe.

In practice, however, there is a role for reserves of currency even with a "pure" bank of issue. Assuming a gold standard, a bank of issue may need gold on hand to reassure the public as to the value of its banknotes and demand deposits. A bank of issue does this by converting its banknotes and demand deposits into gold coin on demand (or into banknotes of the central bank that can be converted into gold) instead of using them to settle debts.

A bank of issue thereby assumes the character of a bank of deposit, at least in part. The bank has to maintain deposits — reserves — of whatever serves as the currency in order to insure its banknotes and demand deposits. It thereby backs its banknotes and demand deposits both with the loans it made to create the money (which might go bad), and a percentage of its total loans in gold, which is presumed always to be good, despite what history has shown.

In our next posting we will look at the "Bullion Controversy," which provided the fertile seedbed out of which grew the three schools of money, credit, and banking.

#30#

News from the Network, Vol. 2, No. 35

This week the economists are vaguely predicting the end of the recession, it's just a matter of time, while last week we were informed it was definitely over, it's just a matter of time. The fact that these predictions are based on how much people are borrowing or receiving in government handouts and spending on consumption goods and services, and not on how much they are producing (in accordance with Say's Law of Markets, how much "money" they are making and spending), and how well the speculators and gamblers are making out on Wall Street doesn't seem to faze the experts one bit.

More and more the evidence mounts, not that the recession is ending, but that policymakers and academics have no real understanding of money, credit, and banking. They appear to be adhering irrevocably to the unquestioned dogma that new capital formation cannot be financed except by using existing accumulations of savings. This is an assumption proved absolutely false by Dr. Harold G. Moulton in his 1935 monograph, The Formation of Capital.

Restricting the financing of new capital formation to existing accumulations of savings means that you need a very small, very rich elite. The rich in this scenario are the only ones who can afford to save, then invest their unconsumed income in new capital. This in turn presumably creates jobs for the rest of us . . . those of us who are not replaced by advancing technology or cheaper foreign labor, that is. From the point of view of efficiency (using the word as Walter Bagehot used it in his 1867 apology for plutocracy, The English Constitution), Keynes believed that the State should control the rate of return on investment and the rate of capital formation (i.e., "own").

This is because the State as the State doesn't consume in the same sense that a human being does. With effective State ownership, all income can be directed to political, instead of economic ends — that is, in meeting the needs of the State, not in satisfying human wants and needs. Everyone becomes a dependent of the government, or, as a 1925 U.S. Supreme Court decision expressed it in Pierce v. Society of Sisters, "mere creatures of the State."

We can see why Kelso and Adler subtitled their second book, "A Proposal to Free Economic Growth from the Slavery of Savings." Nevertheless, the Just Third Way continues to inch forward:

• The big news this week was the 305th consecutive monthly meeting of CESJ. A number of important items were discussed, among them the East St. Louis project, the book by Dr. Muhiuddin Khan Alamgir (Notes from a Prison: Bangladesh), and progress on various other publication projects.

• Dr. Alamgir was released from prison a short while back, where he was held for 22 months on false charges (effectively a political prisoner), and has been elected to the Bangladesh parliament. He will be visiting the United States in September and wants to meet with CESJ and present the situation in Bangladesh. Dr. Alamgir is a good friend of Father William Christensen, S.M., of the Institute for Integrated Rural Development (IIRD) in Bangladesh.

• Due to the economic downturn, the IIRD has experienced a serious drop in contributions, in the neighborhood of 54% from prior years. They report that they are stretched to the limit. Please visit their website and consider what you might be able to do to help.

• At this critical point in history, it is important that people also come together and brainstorm about how to get the ideas of CESJ and the Global Justice Movement out into the public eye. If you have an initiative you'd like to propose and carry through to completion, please go to the CESJ website and let us know what you're doing/want to do. We want to get students involved, especially in East St. Louis. Norman G. Kurland has been particularly effective on radio interviews, especially over the telephone.

• As of this morning, we have had visitors from 34 different countries and 41 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Brunei, Canada and Venezuela. People in Israel, Indonesia, Venezuela, Brazil, Argentina and spent the most average time on the blog. The most popular posting by far continues to be "What Caused the Economic Crisis," followed by the Keynesian paradox of thrift, and the letter to the Wall Street Journal on Caritas in Veritate, the news reports, the response to Dr. Michael Novak, and "What You Can Do to Address the Economic Crisis. With respect to the amount of time spent reading, the postings on the usury series, the "Reign of the British Currency School, and the Cobbett series appear to be the most popular.

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.

#30#

Some Thoughts on Money, Part II: The Different Schools of Thought

Beginning approximately in the late 18th century, three broad schools of thought developed on money, banking, and credit. These have largely disappeared as discrete, identifiable schools in the general confusion that seems to have flooded into all areas of thought with the rise in positivism in all its forms. Many of the elements from these three schools, however — more accurately, two schools and a "sub-school" — have been incorporated (although not in any rational or meaningful way) into the confused mess known today as "monetary and fiscal policy." These three schools were:

• The (British) Currency School,

• The (British) Banking School, and

• The Free Banking School.

Very briefly, the tenets of these schools (and what follows contains some extreme oversimplifications to allow for space and time constraints) were:

The Currency School

As we have seen in previous postings, the Currency School believed that issues of banknotes backed by government debt should be strictly limited to a pre-determined amount, and the rest of the currency should either be gold coin or banknotes backed by gold. The definition of "money" was restricted to gold and banknotes backed either by gold or a limited amount of government debt. The role of the central bank was primarily to finance government operations without recourse to the tax system.

The Banking School

The Banking School believed that real bills, the needs of trade, and the "law of reflux" (that money created for productive purposes — not speculation, derivatives, or government spending, i.e., "fictitious bills" — was self regulating in that the money would return to the issuer when used to repay the loan) should govern bank operations. The definition of money included anything that could be used in settlement of a debt. The role of the central bank was to create money to provide adequate liquidity for industry, commerce, and agriculture and ensure that all currency throughout the region served by the central bank passed at par. The government should raise what money it needed through taxation or borrowing existing accumulations of savings.

The Free Banking School

The Free Banking School believed that competitive private banks would not over-issue banknotes or create too much money in the form of demand deposits or other negotiable instruments through the application of the real bills doctrine, whereas a monopoly issuer — such as a State-controlled central bank or government treasury would do so as a matter of course. Money was defined as anything that could be used in settlement of a debt. There was no recognized legitimate role for a central bank.

If we reflect on the basic tenets of each of these schools, we can see where many of the ideas they embody can be found in the monetary and fiscal policy followed by a number of today's governments. Unfortunately, due to the problem of trying to make incompatible elements work together as a system to achieve political rather than economic ends, especially when critical factors are omitted or ignored, or there is no fundamental agreement on principle, is a recipe for disaster. This is true regardless of the goodwill (or lack thereof) on the part of policymakers or the academics advising them.

In subsequent postings we will examine each of these schools briefly. We might then be able to see if there is a way to take the obvious good from each of them, and synthesize them into a rational whole. In this way we might be able to see if it is possible to discern any underlying principle that joins all of them at some level. We can then, perhaps, develop some principles of a coherent system that works for the betterment of our social institutions in a manner consistent with the demands of individual human dignity and personal sovereignty.

To do this we will look at how each system 1) defines money, 2) understands the role of banks of issue, and 3) assigns what role to a central bank.

#30#

Some Thoughts on Money, Part I: Debt and Asset-Backed Money

Money, being anything that can be used in settlement of a debt, must represent something of value. Many things have been recognized throughout history as having value, often gold and silver or other items valued for their utility or beauty. Primitive economies often use draft animals as a standard of value, as they are usually the most valuable owned items, and money must be backed by something in which the issuer has an ownership interest. In ancient Rome and Ireland, for example, the standard was cattle. Our terms pecuniary and capital come from an obsolete word for cattle (pecus) and head of cattle (caput), respectively. In Ceylon, the standard of value was the elephant.

Of course, the standard of value doesn't have to be a draft animal. It can be anything that people generally recognize as having value, such as lumps of bronze, silver, or gold. Bronze money was even believed to have a sacred character in Rome, the alloy being considered essential to life for its utility in making tools and weapons. In Papua New Guinea, the standard of value was the severed human head.

The key is that, as Irving Fisher noted in The Purchasing Power of Money (1911, revised 1913), whatever is used as a currency must either itself convey something of value, such as gold, silver, livestock, or some other commodity (for example, the bread and other food tokens issued as Notgeld and Kriegsgeld in Germany and Austria-Hungary during the First World War and the subsequent hyperinflation), or represent a property right in something of value, such as inventories of gold, silver, livestock, or other commodities. In a modern banking economy, existing inventories of marketable goods and services, as well as productive assets (capital) serve this purpose, perhaps in the case of capital assets unconsciously echoing the ancient Roman bovine standard of value. When a certificate or some other symbol is issued and used as currency (current money) in place of the actual good or service, the money is said to be "backed" by whatever specific thing of value the symbol represents, whether it is herds of cattle, bars of gold or silver, or inventories of marketable goods and services or capital assets.

When the something of value backing the currency is debt instruments issued by the State (as is the case in most economies today), the currency is said to be backed by the full faith and credit of whatever government issues the currency. If the State is shaky either politically or economically, the currency will either have a low value, or fluctuate wildly in response to economic and political conditions. If the State is sound, and the government keeps its debt within reasonable bounds, the debt-backed currency will be relatively stable.

#30#

Aristotle on Private Property

Throughout history widespread ownership of the means of production has been understood as the foundation of a stable social order. Political scientists from the earliest times have stressed this fact. The moral law, embodied in the codes of ethics of every culture and civilization that has ever existed, without exception proclaims the natural right of every human being to be an owner through the universal prohibition against theft. "Theft" is a violation of private property.

How the rights of private property are exercised necessarily differs from place to place and in different times. Nevertheless, the substance of private property, the right to control and to receive the fruits of ownership, cannot be altered. As Heinrich Rommen, one of Germany's premier jurists before escaping from the Nazis, explained in his book on the natural law,

"Thou shalt not steal" presupposes the institution of private property as pertaining to the natural law; but not, for example, the feudal property arrangements of the Middle Ages or the modern capitalist system. Since the natural law lays down general norms only, it is the function of the positive law to undertake the concrete, detailed regulation of real and personal property and to prescribe the formalities for conveyance of ownership. (Heinrich Rommen, The Natural Law, A Study in Legal and Social History and Philosophy. Indianapolis, Indiana: Liberty Fund, Inc., 1998, 59.)

Aristotle stressed the importance of the institution of private property many times in the Politics. While all the cites are far too numerous to quote, the following should give a good idea of the Philosopher's attitude towards private ownership of the means of production:

It is evident then that it is best to have property private, but to make the use of it common; but how the citizens are to be brought to it is the particular business of the legislator. And also with respect to pleasure, it is unspeakable how advantageous it is, that a man should think he has something which he may call his own; for it is by no means to no purpose, that each person should have an affection for himself, for that is natural, and yet to be a self-lover is justly censured; for we mean by that, not one that simply loves himself, but one that loves himself more than he ought; in like manner we blame a money-lover, and yet both money and self is what all men love. Besides, it is very pleasing to us to oblige and assist our friends and companions, as well as those whom we are connected with by the rights of hospitality; and this cannot be done without the establishment of private property, which cannot take place with those who make a city too much one; besides, they prevent every opportunity of exercising two principal virtues, modesty and liberality. Modesty with respect to the female sex, for this virtue requires you to abstain from her who is another's; liberality, which depends upon private property, for without that no one can appear liberal, or do any generous action; for liberality consists in imparting to others what is our own. (Aristotle, The Politics, II.v.)

One comment: Aristotle's statement that, "it is best to have property private, but to make the use of it common," has sometimes been construed as support for socialism. On the contrary, as we discover from the "laws and characteristics of social justice" discerned by William J. Ferree, S.M., Ph.D., making the use of property common has, in ordinary circumstances, been construed as an admonition not to use what you own to harm yourself, others, or the common good as a whole. You are, when possible, to employ your property and other rights in a way that strengthens the proper use of the institutions of the common good and their compliance with essential human nature. That is, we individually own and exercise control over the goods of the earth, but always with an eye toward the common good of all humanity (solidarity), both at the level closest to the individual (subsidiarity), and all other levels of the common good (social justice).

#30#

Thomas Hobbes on Private Property

Doing a little research on the foundations of Keynesian economics, we discovered that the Great Defunct Economist was in the line of economic thought established by the British Currency School. The tenets of the British Currency School were embedded in the British Bank Charter Act of 1844, in the United States National Bank of 1864 — and in Walter Bagehot's analysis of the London financial market, Lombard Street (1873).

Similar to the way in which one must read Adam Smith's The Theory of Moral Sentiments (1759) in order to understand The Wealth of Nations (1776), you have to read Bagehot's The English Constitution (1867) in order to understand Lombard Street — and Keynes' General Theory of Employment, Interest, and Money (1936). In The English Constitution, Bagehot comments favorably on the political philosophy of Thomas Hobbes, whose 1651 book, Leviathan, provided a blueprint for the totalitarian political State, which complemented Bagehot's blueprint for the totalitarian economic State.

It comes as no surprise, then, that Keynes, who followed Bagehot's analysis, believed that "money" was nothing more than purchase orders issued by the State (A Treatise on Money, Volume I, 1930, p. 1), and backed by the State's authority — the "faith and credit" of the government. This, in effect, made the State the owner of everything in the State. This is nothing more than the claim made by Hobbes in Chapter 29 of Leviathan:

A Fifth doctrine, that tendeth to the Dissolution of a Common-wealth, is, "That every private man has an absolute Propriety in his Goods; such, as excludeth the Right of the Soveraign." Every man has indeed a Propriety that excludes the Right of every other Subject: And he has it onely from the Soveraign Power; without the protection whereof, every other man should have equall Right to the same. But if the Right of the Soveraign also be excluded, he cannot performe the office they have put him into; which is, to defend them both from forraign enemies, and from the injuries of one another; and consequently there is no longer a Common-wealth.

That is, private property (according to Hobbes) is prudential matter. Citizens are only permitted to own so long as the State permits it or finds it useful. The State is the real, ultimate owner of everything in the country, and ordinary people only enjoy ownership so long as the State finds it expedient that they should do so.

#30#

News from the Network, Vol. 2, No. 34

Back in 1945 Christian apologist C. S. Lewis published a book called The Great Divorce. By that Lewis meant that he had undertaken the task of separating the "marriage" of heaven and hell that had taken place in modern society, and the blurring of the whole idea of good and evil, Christianity and non-Christianity, and so on.

We have our own "great divorce" to worry about these days. Of course, the problem of jettisoning the idea of good and evil is still with us, as can be seen in the rejection of the natural moral law that underpins all sound religions and philosophical systems. That may be (and we believe it is) at the root of many of the problems that afflict modern society. Regarding the financial system and the institutions of money and credit, however, we see this "great divorce" manifesting itself in the separation of money and credit from production.

The divorce of money and credit from production, in turn, results in a rejection of Say's Law of Markets, which holds that "production = income." If someone has the means with which to produce — whether labor or capital — then "money" is no problem. This is because in Say's Law, "money" is derived from production, being nothing more than a symbol of something of real value that has been produced, or the present value of something that will be produced. "Money," while it is not in and of itself of value, thereby functions to facilitate exchanges between individuals.

Consequently, "money" is not itself "effective demand" or "purchasing power," as Keynes and many other monetary theorists appear to believe. Money has purchasing power because it represents marketable goods and services, and stands in for the reality of production behind the symbol of money. What money is, is anything that can be used in such an exchange, standing in for the good or service of real value. This gives us the legal definition of money: anything that can be used in settlement of a debt.

Now you know All About Money. Be that as it may, the main events of the week are:

• There was another series of important meetings this week regarding the project in East St. Louis. A great many issues were settled and (of course) many more were raised. Matters appear to be reaching the point where an action plan can be determined.

• We received the second volume of John Maynard Keynes' Treatise on Money (1930). The Treatise on Money was Keynes' first attempt to systematize his thought. After a few years of reflection (and a complete trashing of the book by von Hayek), Keynes started from scratch with his General Theory of Employment, Interest, and Money (1936).

• Work on the draft of our book on ideas of money, credit, and banking through the ages has been progressing well. We finished up through the first third of the 20th century, and are currently in the middle of the Keynesian revolution, as is probably evident from the fact that we have been gathering additional, if somewhat obscure, Keynesian material.

• We are almost ready to begin with the work of Dr. Harold G. Moulton, president and co-founder of the Brookings Institution, whose 1935 monograph, The Formation of Capital, presents a solid proof of the real bills doctrine and a refutation of Keynesian economics. We also obtained a number of other books by Moulton, including the three other books in the series of which The Formation of Capital is the third volume: America's Capacity to Produce (1934), America's Capacity to Consume (1934), and Income and Economic Progress (1935).

• As of this morning, we have had visitors from 33 different countries and 43 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Brunei, Canada and Venezuela. People in Israel, Indonesia, Venezuela, Argentina, and Brazil spent the most average time on the blog. The most popular posting by far continues to be "What Caused the Economic Crisis," followed by the Keynesian paradox of thrift (which seems to be especially popular in Brunei for some reason), and the letter to the Wall Street Journal on Caritas in Veritate, the news reports, the response to Dr. Michael Novak (which continues to be ignored), and "What You Can Do to Address the Economic Crisis. With respect to the amount of time spent reading, the postings on the usury series, the "Reign of the British Currency School, and the Cobbett series appear to be the most popular.

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.

#30#

The Reign of the British Currency School Over the United States, Part II

The illogic of the British Bank Charter Act of 1844 was ridiculed by John Fullarton in his 1845 book, On the Regulation of Currencies; Being an Examination of the Principles, on Which It is Proposed to Restrict, Within Certain Fixed Limits, the Future Issues on Credit of The Bank of England, and of the Other Banking Establishments Throughout the Country. (London: John Murray, 1845.) Fullarton explained that "money" is anything by means of which, "transactions of purchase and sale may be conveniently and economically adjusted, without any interchange whatever of actual value, whether intrinsic or factitious." (N.B., "factitious" is not a misspelling. It means "artificial or invented," i.e., a "legal fiction.") As Fullarton continued,

"You cannot, therefore, include the bank-note under the generic designation of money, without finding yourself immediately embarrassed by the claims of bills of exchange, bankers' cheques, and a variety of other typifications of the same principle of credit, all of which being more or less competent to perform, and, in point of fact, performing the functions of money, and some of them on a scale of vast extent, have primâ facie just the same pretensions to be rated as money which bank-notes have." (On the Regulation of Currencies, 29)

As reported by Norman Angell in his 1929 book, The Story of Money, the noted American historian Dr. Charles A. Beard declared, "the Federal Reserve Act of 1913 represents the union of 'Jacksonian hopes' with 'financial propriety'." The Federal Reserve Act is fundamentally different from the proposal sponsored by Republican Senator Nelson Aldrich that came out of the 1910 meeting on Jekyll Island.

The Democratic administration of President Woodrow Wilson pushed through the Federal Reserve Act of 1913 as a populist measure, with the support of William Jennings Bryan, "the Great Commoner," at that time Wilson's Secretary of State, with the assistance of Carter Glass, Democratic Congressman from Virginia, whose greatest achievement is considered the 1933 Glass-Steagall Act that, until jettisoned by Congress in the 1980s, restored necessary separation of function to America's financial system. One of the goals of the Federal Reserve Act was to break up the concentrated control over money and credit held primarily by financier J. P. Morgan, and centered in New York City. The "Pujo Committee" (from the fact that Democratic Congressman Arsène Pujo of Louisiana chaired the committee) assigned the major share of blame for the disastrous "Panic of 1907," when the Dow lost 50% of its value, to Morgan.

The Federal Reserve Act of 1913 did, in fact, overthrow the reign of the British Currency School and Wall Street in the United States from 1914 until 1917, when the United States entered World War I. At that time, the Congress decided to finance the war by borrowing rather than raising taxes, and figured out a way ("open market operations") to circumvent the prohibition in the Act against the Federal Reserve dealing in primary government securities.

That is, the Federal Reserve was and remains forbidden to purchase government debt directly from the United States Treasury ("primary securities"), another branch of the government. The idea was to prevent the federal government from being able to monetize its deficits, and to provide the private sector with a "flexible" currency based on the country's industrial, commercial, and agricultural assets instead of a "fixed" currency backed by federal government debt, as was the case under the National Bank Act of 1864. The Federal Reserve is, in theory, only empowered to purchase "secondary" government securities already on the "open market" in order to regulate the reserve requirements of member commercial banks.

Despite appearances, the Federal Reserve System is a sub-branch of the United States federal government. The "shares" held by member banks are, in effect, interest bearing membership deposits that cannot be sold, traded, used as collateral for a loan, or convey any right to vote. The federal government, not the private commercial member banks, owns the Federal Reserve System.

The Reign of the British Currency School Over the United States, Part I

Much of the monetary conspiracy ideas floating around today appear to be garbled versions of the tenets of the "British Currency School" that grew out of the currency crisis of 1797. Due to a sudden drain on the gold reserves of the Bank of England due to the wars with France, the British government forced the Bank to suspend convertibility of its banknotes into gold on February 26, 1797, a ban that lasted until 1821.

Based on a distorted understanding of the work of Henry Thornton (1760-1815), the "father of central banking," a group of British economists in the 1840s and 1850s that came to be known as the British Currency School argued that excessive issues of banknotes is a major cause of inflation. To restrict the circulation of paper money and stop inflation, issuers of new banknotes should be required to have 100% gold reserves, and existing notes could not exceed a fixed amount of government debt (£14 million in the Bank Charter Act of 1844). The "real bills" doctrine so ably defended by Thornton was dismissed out of hand as "discredited." Thus, the three most basic tenets of the British Currency School were:

• The only "real" money is gold, silver, and government-issued or authorized banknotes backed by gold or government debt.

• All issues of paper money (which term is restricted to government-issued or authorized banknotes) are automatically inflationary, regardless of what backs the notes.

• Only existing accumulations of savings can be used to finance capital formation.

Henry Thornton effectively "pre-refuted" the position of the British Currency School in his 1802 book, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. Thornton supported the "real bills" doctrine and the Quantity Theory of Money, demonstrating that all credit instruments are "money," and that banknotes and other forms of paper money are non-inflationary when backed by "real" assets, i.e., constituted "real bills" as opposed to "fictitious bills" representing speculative or non-existent assets, government debt, or consumption. Dr. Harold G. Moulton conclusively proved Thornton's analysis in 1935 in The Formation of Capital, in which he showed that the real bills doctrine had been responsible for financing the tremendous growth of the United States in industry, commerce, and agriculture in the 19th century.

The British Currency School, however, ignored Thornton's actual analysis, rejected the real bills doctrine, and used their theories as the basis for the Bank Charter Act of 1844, which mandated a ceiling for banknotes backed by government debt, with the rest of currency gold sovereigns and token silver coins. They did not include demand deposits or commercial paper in their definition of "money," which permitted the private sector to obtain needed money and credit to finance economic growth and development.

Consequently, Walter Bagehot, in his 1873 book, Lombard Street, took the tenets of the British Currency School for granted, and used it as support for his assertions that the money power must be concentrated in the hands of a financial elite. The Bank Charter Act of 1844 was the basis for the United States National Bank Act of 1864, which led to the Coinage Act of 1873, the so-called "Crime of '73," which adhered strictly to the belief that only gold coin and government debt-backed banknotes constituted "real money."