Own the Fed — the Program, Part IV: Similarities

Just prior to the Crisis of 1937, when the Federal Reserve shattered the fragile recovery by raising interest rates, Dr. Harold Moulton published The Recovery Problem in the United States (Washington, DC: The Brookings Institution, 1936). The purpose of the book (at a little over 700 pages, perhaps Moulton's longest and most intensely researched work) was to provide "a general analysis focused strictly upon the problems of recovery in the United States at the present juncture." (Ibid., vii.) Early in the book, Moulton observed that there appeared to be a number of "interesting features" that made recovery from the Great Depression apparently unique in the annals of economic and financial history.

These six "interesting features" are even more "interesting" today. This is especially so in that there appears to be a definite congruence between the condition of the United States in 1931-1936, and the prevailing economic, financial, and political environment today, albeit with some significant differences. In 1936 these "features" seemed to presage the sudden downturn in the economy that occurred a year later. The much greater degree to which a number of these factors influence conditions today can reasonably be taken as heralding something similar in our day, only with a much greater impact.

In the order in which Moulton presented them (though not necessarily their order of importance) the features are,

1. The extraordinary slowness of the recovery,

2. Recovery of international trade lagged behind the expansion of world production,

3. Continuance of unstable international monetary relations,

4. Failure of commodity prices to rise appreciably,

5. A lag in the recovery of durable goods industries, and

6. An extraordinary increase in public indebtedness.

Perhaps most "interesting" of all, however, is something that Moulton did not specifically mention. That is, there was and remains a stubborn refusal on the part of the Federal Reserve authorities and the federal government — to say nothing of the financial community — to recognize and act in accordance with financial and economic reality.

In the previous posting in this series we discovered that even a rough calculation using data from 2008 suggests that the Federal Reserve — and thus government monetary policy — does not take into account more than 60% of total economic activity. Worse, the Federal Reserve (and thus the federal government) does not appear even to recognize the existence of an estimated $10 trillion in what we have for convenience termed "private sector money." That being so, the fixed belief that government and Federal Reserve fiscal and monetary policy can somehow either control the economy or provide the basis for developing a workable solution to economic crises sounds more than a little hollow. Approaching a problem by taking less than half of reality into account would seem to be a virtual guarantee of failure.

Nevertheless, this was the case in 1936 and continues to be the case today. This is so whether we are discussing the causes and cure of the Great Depression, or today's Great Recession. Only by taking into account an effort to describe reality in its fullness — as in the Just Third Way based on the binary economics of Louis Kelso and Mortimer Adler — can we hope to develop a workable and just solution to our economic and, increasingly, political problems. For this reason we need to take a closer look at the similarities between today's Great Recession and the Great Depression of the 1930s. It was during the 1930s that the monetary policy of the Federal Reserve (and thus of the federal government) abandoned the last vestiges of a rational system based on the principles of the British Banking School, especially Say's Law of Markets and the real bills doctrine, and shifted over completely to a system based on the misleading tenets of the British Currency School.

Seeking for the ultimate cause from a Just Third Way perspective, it appears that the Great Depression may have been the natural result of two coincident developments that, taken alone were bad enough, but together fed on each other like mutual parasites, bleeding the economy dry between them. They served only to increase the power of the political and financial elite at the expense of ordinary people, even though — ironically — frequently carried out with the enthusiastic approbation of the citizens. These two developments were 1) the prevalence of the erroneous understanding of money and credit on which the tenets of the Currency School are based, and 2) the fixed idea that necessarily developed out of any economic approach based on the Currency School that a wage system job is the only viable means whereby the great mass of people can gain an adequate and secure income.

The first of these we have already covered. Again, the Federal Reserve — the central bank of the United States — was designed to run in accordance with the principles of the Banking School, but was and is being run as if the tenets of the Currency School are valid. The financial chaos that has come about was the inevitable result of attempting to use a tool designed to operate on the basis of one set of principles, as if it were intended for a different system entirely.

The second of these also relates to reliance on the principles of the Currency School, but less directly than the virtual hijacking of the Federal Reserve. That is, the virtual disappearance of ownership income as a primary source of consumption power for the greater number of people. As Judge Peter S. Grosscup had noted in the generation prior to the Great Depression, ownership of farms and small shops was disappearing rapidly, being replaced by more and more people totally dependent on a wage system job for the totality of their subsistence.

The disappearance of ownership among the greater part of the population was and remains a cause for concern not only economically and politically, but morally as well. Forcing people to subsist exclusively on wages is a violation not only of the natural right of liberty — free association — (reliance on wages alone being the foundation stone of the Servile State), but also undermines the natural right of everyone to be an owner. This is due in large measure to the tendency of many people to make great leaps in what they believe to be logic. Seeing no other way under the tenets of the Currency School for most people to gain a living income than through the mechanism of wages, they conclude that everyone must be paid a wage. That being the case, the level of wages must be sufficient to provide a decent life for the worker and his or her dependents. Only wages are presumed to deliver justice to the worker.

Such authorities and commentators therefore conclude — based on what they believe to be a fundamental and Divine law of nature, but what is in reality a delusion based on false economic premises — that the right to a wage (and thus a wage in an amount sufficient to provide a decent life consistent with the demands of human dignity for the worker and his or her dependents) is a primary right. On the contrary, as John Ryan explained in his 1906 work, A Living Wage, the right to a wage of any kind is a secondary or derived right. Ironically, Ryan's book is often cited to support wages as the only source of income, and is frequently treated as virtual holy writ by moral authorities anxious to maintain ordinary people in a condition of utter dependency — and therefore subject to the complete control of the State. The suspicion grows, however, that many of the authorities and commentators citing Ryan's work have not actually read it, especially in light of his admonition that,

[The Living Wage] is not an original and universal right; for the receiving of wages supposes that form of industrial organization known as the wage system, which has not always existed and is not essential to human welfare. Even to-day there are millions of men who get their living otherwise than by wages, and who, therefore, have no juridical title to wages of any kind or amount. The right to a Living Wage is evidently a derived right which is measured and determined by existing social and industrial institutions. (John A. Ryan, S.T.D., A Living Wage: Its Ethical and Economic Aspects. New York: Grosset & Dunlap, Publishers, 1906, 68.)

It comes as an extremely unwelcome surprise to a number of modern commentators that Ryan, presumed to be the high priest of the wage system, could affirm the absolute and sacred nature of private property. Nevertheless, that is the case:

Man's natural rights are absolute, not in the sense that they are subject to no limitations — which would be absurd — but in the sense that their validity is not dependent on the will of anyone except the person in whom they inhere. They are absolute in existence but not in extent. Within reasonable limits their sacredness and binding force can never cease. Outside of these limits, they may in certain contingencies disappear. If they were not absolute to this extent, if there were no circumstances in which they were secure against all attacks, they would not deserve the name of rights. . . . The most important of these are the rights to life, to liberty, to property, to a livelihood, to marriage, to religious worship, to intellectual and moral education. (Ibid., 45-47.)

Both wages and the wage system itself are determined not by nature or the inscrutable workings of the laws of economics, but by the structuring of the institutions of the common good — which, as Ferree explained, are under our direct control. The wage system is not a law of nature or of nature's God, but the result of human beliefs and decisions that can be modified and corrected in order to arrive at a more just arrangement of society. This is especially true with financial institutions such as money, credit, and banking that give form to the economy. Under the tenets of the Currency School, the abolition of private property for the great mass of people and their eternal dependency on the wage system seems inevitable, even natural. Under the principles of the Banking School, however, the concentration of ownership and the enforcement of the wage system is clearly the result of raising and maintaining artificial barriers to full participation in the economic common good.

Obviously, the question becomes how dependency on the wage system — effective slavery — was forced on a presumably free people. Briefly (for we intend to relate the story at some length in a future series of postings), with the federal government operating under the assumptions of the Currency School and with the institution of the system of national banks following the American Civil War, monetary and fiscal policies were implemented that assumed as a given that capital formation could only be financed out of existing accumulations of savings. This necessarily led to the imposition of the wage system on the great mass of people. This is because accumulating sufficient savings to finance new capital formation requires that the earnings of capital flow to people who will not use the earnings for consumption, but reinvest them. Most people, therefore, must gain a living income only by selling their labor, for most people need to spend their income on consumption, not reinvestment.

That the system does not really work this way is irrelevant. (See The Formation of Capital, 1935.) People, especially policymakers and academics, believe that it operates in this way. That belief is sufficient to ensure that the institutions of the economic common good under their control will be structured or rebuilt to conform to these assumptions, right or wrong. Consequently, as the industrialization of the United States advanced and its commercial power grew at a tremendous rate in the latter half of the 19th century, the loss of private property in the means of production for the great mass of people proceeded apace. As Grosscup noted, people in the early 20th century were rapidly losing ownership of the means of production, especially small shops and farms, and were being forced to subsist exclusively on wages.

Paradoxically, the number of farms increased during the Great Depression. As Moulton pointed out, however, this was a temporary phenomenon. The increase in farms was in response to much worse conditions in urban areas as wage system jobs disappeared. (The Recovery Problem in the United States, op. cit., 146-147). This was driven by the fact that even on a marginal farm producing at a bare subsistence level an individual had a better chance of survival than in the city where nothing could be produced.

Moulton noted an even greater paradox with respect to wage/salary workers employed in industry, an inconsistency that contradicts more than a century of socialist and union propaganda. That is, the number of workers engaged in direct production in manufacturing was in decline long before the Crash of 1929 — yet during the same period production of manufactured goods increased at an astounding rate. As Moulton related,

Since the World War there has been a marked tendency toward contraction in the volume of employment furnished by manufacturing. Despite the increase in population, the number of wage earners in 1929 was lower than in 1919. The decrease cannot be explained by cyclical differences in economic activity between the two years for in 1929 manufacturing production was the highest ever attained and was, in fact, almost 50 per cent higher than in 1919. (Ibid., 153-154.)

There is probably no better proof of the binary concept of relative productiveness of labor and capital as opposed to productivity of labor alone. The latter half of the 20th century saw a great decline in union membership, only being reversed to a degree by a tremendous drive to include occupations not traditionally associated with participation in the organized labor movement, such as teachers and government workers.

The decline, of course, was not related to disinterest or replacement of the principal role of unions by the State. Union support was and remains an important political force in the United States. It makes no sense for the State to replace unions and thereby undermine its own political support. The fact is that the decline in union membership and the replacement of lost membership by people in new occupations was clearly due to the decline in the number of people directly involved in manufacturing. This explains the necessity the "labor" movement sees in increasing its membership among bureaucrats and administrative personnel, to say nothing of professionals and semi-professionals instead of its traditional base among laborers who produce directly. Direct labor is simply not as productive, relatively speaking, as formerly, and the bulk of income is distributed through indirect labor wage system jobs.

What all this means is that the productive sector — that is, the sector that directly produces marketable goods and services — has increasingly been "subsidizing" massive employment that does not engage directly in production of marketable goods and services. This was true in the 1930s and is true today. It was also true in the late 1950s and early 1960s when Kelso and Adler did their work. The fact is that "job creation" is essential under the assumptions of the Currency School, and has become increasingly critical as technology advances and replaces direct human labor as a primary input to the production process. Indirect administrative labor — managerial and technical labor — has rapidly been replacing direct human labor as a factor of production. As Kelso and Adler explain,

In the industrial production of wealth, i.e., in machine production, there are, as we have seen, three main types of human workers: (1) mechanical workers; (2) technical workers; and (3) managerial workers. Of these three, the first perform purely mechanical tasks. The last two perform tasks most of which are not mechanical and cannot be mechanized.

Just as the individual productive contribution of mechanical workers accounts for less of the total wealth produced in a highly industrialized economy than it does in a nonindustrialized economy or in one which represents a primitive stage of industrialization, so the individual productive contribution of technical and managerial workers accounts for more of the total wealth produced in a highly industrialized society than it does under primitive industrial conditions. Proportionately more technical and managerial man-hours are required, and more highly-developed managerial and technical skills are called for, as industrialization becomes technologically more advanced. The available evidence further indicates that the economic productivity of managerial and technical workers — at least under conditions of relatively full employment — is higher today than at any previous time in our economic history.

The primary reason for the latter fact is undoubtedly that technical and managerial skills are responsible for the invention, improvement, and efficient operation of the machinery which, relative to other factors, has become more and more productive with progressive industrialization.

It follows, therefore, that with progressive industrialization and with the increasing productiveness of the economy as a whole, the relative productiveness of technical and managerial work increases, as measured by the contribution each makes to the total wealth produced. (Louis O. Kelso and Mortimer J. Adler, The Capitalist Manifesto. New York: Random House, 1958, 39-40.)

As Kelso and Adler conclude, "It is clear that the actual physical contribution of labor to the production of wealth is now extremely small as compared with that of capital instruments. It is, if anything, an underestimation rather than an exaggeration to say that the aggregate physical contribution to the production of wealth by workers in the United States today accounts for less than 10 percent of the wealth produced, and that the contribution by the owners of capital instruments, through their capital instruments, accounts in physical terms for more than 90 percent of the wealth produced." (Ibid., 41.)

Direct labor jobs are usually classified as variable costs and more subject to cutting. Indirect labor jobs, on the other hand, are usually considered fixed costs, and not subject to cutting, at least in the short run. A single direct labor job typically supports several indirect labor jobs. When faced with an economic downturn, however, companies generally first cut direct labor jobs. This makes it more difficult to subsidize the indirect labor jobs, which are harder to reduce, even though the indirect labor jobs depend on the direct labor jobs to justify even a marginal existence. This paradox increases the magnitude of the economic "hit" suffered when companies cut jobs and thus reduce production. The labor that actually produces marketable goods and services is reduced, while the labor that is not directly engaged in producing marketable goods and services is retained. (This assumes a constant level of technology. As technology advances, or direct labor jobs can be shifted to lower cost wage areas, a company can subsidize more indirect labor jobs at the expense of domestic direct labor jobs as well as GDP.)

Obviously, the main problem when addressing the recovery problem in the 1930s is the same as the main problem today: employment and production. Where the authorities in the 1930s were concerned with employment and hardly at all with production, however, the authorities today are more concerned with supporting the price level on the secondary market for debt and equity — "Wall Street" — than with the real (as opposed to "official") unemployment rate or production.

All of this leads inevitably to the conclusion that the present so-called recovery is nothing more than the calm before a very violent storm. This is consistent with the conclusion by Harold G. Moulton. As he wrote in 1936,

It is apparent from this analysis of the extent and character of the recovery movement that, great and widespread as the improvement has been, the economic condition of the world is still far from stable. The problem of unemployment with its social and political implications remains everywhere grave. The position of agricultural populations has been somewhat improved as a result of more favorable price ratios, but farm incomes still remain well below the levels of 1929. The problem of maintaining fiscal and monetary stability has been seriously complicated by the universal expansion of public indebtedness; and heavier tax burdens are in store for the future. World trade and financial relations are still profoundly abnormal, and, although the surge of economic nationalism appears definitely on the wane, extraordinary barriers to international commerce remain. We are still endeavoring in substantial measure to operate an international economic system on principles of national independence.

Moreover, a new development — arising largely from disturbances incident to the depression itself — has come to menace the resumption of international trade, the stability of public finance, and the whole process of economic recovery. Vast military programs threaten the peace of the world. While currently contributing to the expansion of industrial activity and employment, military outlays make no permanent contribution to recovery. They do, however, imperil the foundations of the economic system. (The Recovery Problem in the United States, op. cit., 90-91.)

With minor changes in specific details, Moulton's analysis very closely resembles the global situation today. The bottom line, of course, is that no more than the State controls the whole of society does the central bank control the whole of the economy. Each fills a specific and necessarily limited role in its proper sphere. When either — or both together — strays outside its legitimate sphere, the situation progresses by degrees from incompetence, to overweening arrogance, to functional overload and, finally, to chaos as the social and economic order implode.

Still, the authorities today are correct in at least one respect. The situation today, while it strongly resembles the predicament of the United States during the Great Depression, is different — and not just because they insist on manipulating statistics and terminology to confuse matters. This, of course, begs the question as to why the authorities insist on applying the same failed remedies as led to the series of economic downturns that constituted the Great Depression. It only remains to examine in what specific ways the situation today differs from that of eighty years ago, and how we may use this knowledge to develop a viable solution not only to the present crisis, but to the task of restructuring and rebuilding the social order in a manner that respects the dignity of each human being.

#30#

News from the Network, Vol. 3, No. 15

We read in a Yahoo! news story that America is Back!! Aside from the fact that we were not aware that America had ever left, the article was filled with what can only be described (trying to be as polite and as charitable as possible) as mindless drivel. The article, "America's Back! Let's Just Hope Newsweek Doesn't Jinx the Recovery" (the magazine Newsweek's cover story was rhapsodizing on how great everything has been since it predicted the end of the recession last July) ignored all the critical aspects of a true economic recovery — production and employment — and focused on superficial "indicators" that give no real indication of the health of the economy:

One, the economy was "growing" at the astonishing rate of 5.9%!! This is almost enough to make up for the 6.4% "shrinkage" at the beginning of the year. Of course, much of the "growth" has been in the form of increased government spending and bloated profits of the financial services industry, but, hey, growth is growth . . . isn't it?

Two, the stock market is doing great!! It has passed 11,000 (!!!). This ignores the fact that 1) the stock market is not a good indicator as to the health of the underlying economy, and 2) the gains have a high probability of reflecting the enormous amounts of new money created by the Federal Reserve and plowed into the secondary market by its purchase of $1.2 trillion of questionable "mortgage-backed securities." Massive money creation by the Federal Reserve for speculative purposes and bailouts also serves to inflate so-called "growth" of the economy. The bottom line is that the Dow is now a commodity enjoying government price supports paid out under the delusion that the secondary market is actually the primary market. The rise in the Dow reflects gamblers' confidence that the government will continue to make good any losses they might incur.

Three, 162 thousand jobs were created in March!! These appear to have been government jobs for the Census. The unemployment rate (unofficial, of course) for March reached 17.5%. In percentage terms, this is more than in September 1932, considered to be one of the worst months of the Great Depression. There was even a moderate recovery going on in 1931-32 . . . until the financial system blew out in 1933 because the banks were holding too much in the way of questionable mortgage-backed securities.

Four, productivity is up!! "Productivity" is defined as output per labor hour. All it means is that featherbedding appears to have been reduced in response to the greatly diminished number of jobs. What is really happening is that people are being laid off, and the company is still managing to produce at the same or even lower level than before. It's just that output is divided by fewer labor hours. All things considered, this is actually a bad sign. Workers are being eliminated or replaced with more efficient technology. This decreases effective demand. Within the Keynesian framework, higher "productivity" means that workers are getting less and giving more — and are able to purchase less.

Nevertheless, we continue to work to restore some semblance of sanity to the economy. This week has been pretty full, even considering the fact that at least two-thirds of the most important events haven't even happened yet. We expect to have more in-depth reports written up and appearing on this blog in the near future . . . depending on how well we are able to allocate our scarce "human resources" — a terrible term for people, by the way — to all the tasks that keep cropping us.

That, of course, is a less-than-subtle plug for volunteer help. Objectively speaking, the "core group" of CESJ and the Just Third Way is accomplishing near-miracles, considering the lack of resources. The chief resource, of course, is people, especially door openers and those of us who serve. Consider volunteering your efforts, especially if you can open a door for a member of the core group to meet with a prime mover.

In the meantime, even given our relatively scarce resources, here is what we have been doing over the past week:

• The big news this week (as least as far as the Just Third Way is concerned) was the astonishingly successful series of events planned for yesterday, today, and tomorrow. Yesterday's peaceful rally at the Federal Reserve went very well, and today's Second Social Justice Collaborative is shaping up well. Tomorrow's Annual Celebration looks to be very successful.

• The general consensus was that yesterday's rally at the Federal Reserve was the most successful to date. A great deal of the credit for the greater public interest exhibited should probably go to Rowland Brohawn, who thought up "The Abe Brigade," a number of people wearing Abraham Lincoln's trademark stovepipe hat (and a few with beards) that caught people's eyes. Once their attention was caught, however, quite a number of people seemed quite inspired by Rev. Robert Brantley's remarks as Master of Ceremonies, as well as Keynote Speaker Dr. Norman Kurland's talk that focused on the need to abandon today's outdated economic paradigm and adopt the Just Third Way.

• Earlier in the day, a member of the "Abe Brigade" was almost "busted" for participating in a "man in the street" type interview due to an over-zealous officer who was unaware of an official change in the time for the taping. As soon as we can think up a sufficiently provocative title for the clip, we will post it on YouTube; "Abe Lincoln Busted," while an arresting title, is neither descriptive nor completely accurate.

• A gentleman from Africa has requested a meeting with CESJ to discuss possible application of Just Third Way programs in his country.

• Mr. Chris O'Connor of the Colonel John Fitzgerald Division, Arlington, Virginia, of the Ancient Order of Hibernians in America, sent us an article on Thursday concerning the housing/mortgage crisis in Ireland that appeared in the Irish Independent. A non-for-profit housing authority, Respond!, is protesting a government plan to demolish housing in order to support the price. We sent a brief e-mail suggesting that Respond! might find the proposed Homeowners Equity Corporation ("HEC") and the Citizens Land Cooperative ("CLC") extremely useful in presenting a viable alternative to destroying badly needed housing.

• After a short delay, the CESJ publications program may be shifting into high gear. We expect to be reviewing a number of manuscripts for publication within the next month and a half, especially Dr. Harold G. Moulton's classic The Formation of Capital from 1935.

• Dr. Norman Kurland and Mr. Guy Stevenson of Iowa visited a number of offices on Capitol Hill, later being joined by Mr. Russell Williams of Connecticut as well as other concerned individuals. Remarkably, a number of Congressional and Senatorial aides appeared to be quite impressed with the information, especially Capital Homesteading — which appears to have resonated well with both conservatives and liberals, given that many of them seemed to be expecting a high level of vituperation from members of the TEA Party movement.

• With respect to the TEA Party movement, the rally outside the Federal Reserve on Thursday attracted a number of people whose attention was first drawn to the event by their assumption that it was related to the TEA Party effort. Some left when they found that neither CESJ nor the Global Justice Movement is affiliated with the TEA Party movement, but others were intrigued at the thought that a positive solution is possible.

• At least two "media figures" expressed interest in finding out more about the Just Third Way, especially Capital Homesteading. Dr. Ahmed Mansour, head of the International Quranic Center in Northern Virginia, in addition to giving an inspiring talk at the rally, introduced a media figure to Dr. Kurland and others in the CESJ core group. A representative of a conservative talk radio station just happened to stop by at the beginning of the event, and was sufficiently intrigued to stay for the whole thing. She distributed copies of the Declaration of Independence and the Constitution (both of which fit well into the Capital Homesteading message) and took several photographs, mentioning that she would suggest follow-up interviews with Dr. Kurland and others to emphasize the positive possibilities of a solution instead of simple protest.

• As of this morning, we have had visitors from 46 different countries and 49 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, Australia, and Brazil. People in Venezuela, Guatemala, Maldives, Pakistan and Rwanda spent the most average time on the blog. The most popular posting continues to be "Thomas Hobbes on Private Property," followed by "Kemp Harshman, Soldier of Justice," Guy Stevenson's "Expanded Capital Ownership Now," "The Crash of 1929" in the "Own the Fed" series, and "Full Employment," also in the "Own the Fed" series.

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#

Own the Fed — the Program, Part III: Functional Overload and the Illusion of Control

There is a story, possibly apocryphal, of King Canute the Great (c. 990-1035) becoming so tired of his courtiers' flattery that he decided to teach them a lesson about the real power of kings and, by extension, all temporal power. Having been subjected to such statements that he was the greatest of men, that nothing in the world dared disobey him, that he could command even the elements, Canute is reputed to have arranged a graphic demonstration of what a king or anyone else could really do. As William J. Bennett relates the story,

"So you say I am the greatest man in the world?" he asked them.

"O king," they cried, "there never has been anyone as mighty as you, and there never will be anyone so great, ever again!"

"And you say all things obey me?" Canute asked.

"Absolutely!" they said. "The world bows before you, and gives you honor."

"I see," the king answered. "In that case, bring me my chair, and we will go down to the water."

"At once, your majesty!" They scrambled to carry his royal chair over the sands.

"Bring it closer to the sea," Canute called. "Put it right here, right at the water's edge." He sat down and surveyed the ocean before him. "I notice the tide is coming in. Do you think it will stop if I give the command?"

His officers were puzzled, but they did not dare say no. "Give the order, O great king, and it will obey," one of then assured him.

"Very well. Sea," cried Canute, "I command you to come no further! Waves, stop your rolling! Surf, stop your pounding! Do not dare touch my feet!"

He waited a moment, quietly, and a tiny wave rushed up the sand and lapped at his feet.

"How dare you!" Canute shouted. "Ocean, turn back now! I have ordered you to retreat before me, and now you must obey! Go back!"

And in answer another wave swept forward and curled around the king's feet. The tide came in, just as it always did. The water rose higher and higher. It came up around the king's chair, and wet not only his feet, but also his robe. His officers stood before him, alarmed, and wondering whether he was not mad.

"Well, my friends," Canute said, "it seems I do not have quite so much power as you would have me believe. Perhaps you have learned something today. Perhaps now you will remember there is only one King who is all-powerful, and it is he who rules the sea, and holds the ocean in the hollow of his hand. I suggest you reserve your praises for him." (William J. Bennett, "King Canute at the Seashore," The Book of Virtues. New York: Simon and Schuster, 1996.)

In the previous posting we noted that there are two logical developments that result from the assumption that only existing accumulations of savings can be used to finance capital formation. We covered the first development, the creation and maintenance by an all-powerful State of a public or private elite in order to ensure that there are sufficient savings in the system to finance capital formation. This is a violation of individual justice, that is, a denial of each individual person's inherent (natural) right of access to the means of acquiring and possessing private property in the means of production.

The other logical development from the assumption that only existing accumulations of savings can be used to finance capital formation is a violation of social justice. Briefly, social justice is the virtue directed to the common good. The common good is not a vague concept. The common good is precisely defined as the network of institutions constituting the social order within which human beings as persons develop their humanity to the fullest degree possible. William J. Ferree stresses the fact that the common good is not under the control of an authoritarian ruler or State, and that we are not helpless in the face of seemingly overwhelming social problems. On the contrary,

When it is realized that the Common Good consists of that whole vast complex of institutions, from the simplest "natural medium" of a child's life, to the United Nations itself, then a very comforting fact emerges: Each of these institutions from the lowest and most fleeting "natural medium" to the highest and most enduring organization of nations is the Common Good at that particular level. Therefore everyone, from the smallest and weakest child to the most powerful ruler in the world, can have direct care of the Common Good at his level. (Rev. William J. Ferree, S.M., Ph.D., Introduction to Social Justice (St. Louis, Missouri: Social Justice Review, 1997, 30.)

When the social structures — institutions — of the common good prevent or inhibit people from exercising their natural rights, it is a sign that serious flaws exist in the social order, and a restructuring or reform is in order. Social justice through its "act" is the virtue that "commands" us to organize and carry out that restructuring so that our institutions can function properly to assist each person's full human development. Social justice is thus not directly concerned with the results that follow if our institutions are functioning properly. Instead, social justice concerns correcting institutions so that the institutions can function properly as intended, and thereby provide equality of opportunity, not results. Social justice does not make up for any lack or failure of individual justice, but makes individual justice possible.

Within the context of this discussion, the chief way in which both the State and the Federal Reserve System violate social justice is to assume more and more functions in an effort to guarantee results. This violates the principle of subsidiarity — that all tasks are ordinarily to be performed by those closest to the situation. A "higher" level of an organization should never take over what properly belongs to a "lower" level, and vice versa. It is not a question of the higher or lower level always being "right," but of those individuals and groups most closely concerned with a matter having control over it.

Only when those closest to the matter are unable to bring about necessary reform are the higher levels to act — and then only when those in the lower levels are truly unable to help themselves, individually or in free association with others at that level. Any assistance by the higher levels, however, must be temporary, and directed not at permanently providing what the institutions of the lower level are unable to provide temporarily, but at providing any immediate needs on an emergency (and temporary) basis. The far more important part of the help must be directed towards assisting the lower levels to reform the institutions so that the lower level is once more able to take care of itself without assistance. For a higher level to take over a lower level on a permanent basis is to impose a condition of dependency inconsistent with the demands of human dignity. This condition of dependency is called slavery.

Unfortunately, one of the more popular (if incorrect) understandings of subsidiarity is that the higher levels are required to step in and take over — assume control — when members of the lower level are unable to help themselves individually. This ignores the "social justice power" of organization. Such action violates the principle of subsidiarity by undermining if not destroying the sovereignty of the individuals on whom a condition of dependency is imposed. Doubly unfortunate, it also gives the higher levels all the justification they need to take over and impose slavery — all in the name of social justice. The State and its ancillary agencies become perceived as all-powerful, with no other entity seen as having the ability to effect necessary changes in the common good.

The truth, however, is just the opposite. The demands of individual sovereignty and respect for human dignity require that people be put in positions to control their own lives. In the civil order, this is usually through access to the means of acquiring and possessing private property in the means of production — capital credit. By organizing with others to remove barriers to access to the means of ordinary people becoming owners, humanity acts in accordance with its own nature. As Alexis de Tocqueville pointed out,

The most natural privilege of man, next to the right of acting for himself, is that of combining his exertions with those of his fellow-creatures, and of acting in common with them. I am therefore led to conclude that the right of association is almost as inalienable as the right of personal liberty. No legislator can attack it without impairing the very foundations of society. (Volume I, Chapter XII, "Political Associations in the United States," Democracy in America, 1835.)

If the State or any other institution usurps this "natural privilege of man," it not only violates a basic human right, but takes far more on to itself than it can handle; it approaches, and unavoidably achieves a condition of functional overload. Nevertheless, given this view of the State, the trend inevitably becomes to assign more and more responsibilities to the State and its ancillary agencies — and the power to match — in an effort to make certain that desired objectives are attained.

As the State and the central bank are extremely specialized tools, however, this has led to functional overload of both institutions. The result has been that even the presumed control that the State and the Federal Reserve exercise in their respective spheres is increasingly ineffectual, even counterproductive and self-defeating. This increasing functional overload leads ultimately not only to loss of individual sovereignty and abuse of human dignity, but to chaos.

This chaos is rooted in the fact that neither the State nor its ancillary agencies are quite as powerful or omnipotent as the academics and policymakers would have us believe. The bare fact is that the presumed control the State and the Federal Reserve presumably exercise within their respective spheres is largely a matter of illusion, depending on the acquiescence of the so-called lower levels . . . until they decide they have had enough, or conditions get so bad that the system implodes on its own. In consequence, the sea is coming in, it is even threatening to drown not only them, but the entire State, and they still cannot ease their grip on the illusion of power or consider alternatives to their failed attempts at control.

As Ferree hints, the prevalence of the illusion of control of the lower levels by the higher levels results from a failure to understand essential human nature. This leads to a fatal misunderstanding of specific institutions and their roles, especially the State and money, to say nothing of confusion over the general role of institutions in providing an organized framework within which we develop more fully as humans.

At the most basic level, humans build institutions, including the State and the central bank. Institutions are made to serve, not control, humanity. As artifacts — human constructs — even such seemingly divine institutions as the State and the Federal Reserve can be remade by humanity when flaws are detected. If this is not possible through individual action, social justice dictates that we organize and work as members of groups to restructure our institutions until they conform to universal precepts of justice and meet our wants and needs adequately.

The most serious flaw today in our financial institutions, especially the Federal Reserve System, is a reliance on discredited theories of money and banking. At the heart of the matter (at least with respect to the financial system) is the fixed belief, rooted in the near-religious dogma that only existing accumulations of savings can be used to finance capital formation, that production (and thus jobs) are a derivative of money. Unless the money exists, so the belief goes (that is, unless consumption has been cut and unconsumed income accumulated), there can be no possibility of new capital being financed.

This belief is completely wrong. The exact opposite is the case. Production is not a derivative of money. On the contrary, money is a derivative of production. As Jean-Baptiste Say pointed out to the Reverend Thomas Malthus nearly two centuries ago, we do not purchase what others produce with "money," but with the marketable goods and services we produce. This thing called "money" is merely the mechanism of exchange, a convenience by means of which people trade private property claims back and forth until redeemed. (Jean-Baptiste Say, Letters to Mr. Malthus on Several Subjects of Political Economy and on the Cause of the Stagnation of Commerce. London: Sherwood, Neely & Jones, 1821, 2.)

Anyone with a defined private property stake in an asset with a present value — whether the asset currently exists or is yet in the form of an unrealized if financially feasible capital project — can create money. In essence, all we need to create money is to convince another individual or group to accept that which we offer in exchange. Banks, whether deposit, commercial, or central, were invented to facilitate the transfer of private property rights among individuals and groups. Banks are institutions designed and intended to organize and systematize money creation and exchange. This allows an economy of whatever size to conform to basic principles of justice much more easily by the setting of standards and providing an objective and regular — regulated — way to measure value.

The economic role of the State is to regulate, not to control, create, or produce. The State's job is to set uniform standards of measurement in order to make certain that trade can be carried on with as little confusion and in as orderly a fashion as possible. An inch or an ounce must be the same for every transaction. In the same way, all cents and dollars must have the same value and the same level of confidence, regardless who creates the money.

This is where things appear to have gone wrong. People, especially policymakers and academics, have managed to confuse regulation with control, creation, and production. Nowhere is this more evident than in Keynesian economics. In his Treatise on Money (1930), Keynes declared that the State has the right not just to regulate the form and value of the currency, but to dictate the terms of contracts and even change reality itself by "re-editing the dictionary." (Page 4.)

In other words, in Keynes's view — shared by a significant number of people today — the State not only sets standards and enforces compliance with the law, it dictates in what manner persons can participate in the economic process, and even whether or not something is a "person." By controlling (as opposed to regulating) the creation of money, the State — whether directly or by delegation to a central bank — controls the production of wealth, especially in an economy in which dependence on existing accumulations of savings is assumed as fixed and as immutable as the belief that the sun orbits the earth.

By this means the State, whether or not that was or is its intention, acts as if it believes it controls every aspect of human life, perhaps even the elements and Nature herself. Every citizen — even the fact of personality — depends on the yea or nay of the State. Everyone and everything becomes a "mere creature of the State." (Pierce v. Society of Sisters of the Holy Names of Jesus and Mary, 268 U.S. 510 (1925).) Universal slavery is imposed and maintained in the belief that this arrangement is the only one possible. As Hilaire Belloc pointed out,

To control the production of wealth is to control human life itself. To refuse man the opportunity for the production of wealth is to refuse him the opportunity for life; and, in general, the way in which the production of wealth is by law permitted is the only way in which the citizens can legally exist. (Hilaire Belloc, The Servile State. Indianapolis, Indiana: Liberty Fund, Inc., 1977, 46.)

Aside from the obvious disregard of individual sovereignty and the abuse of human dignity inherent in such a statist approach, however, there is an extremely serious problem with this understanding of human society. Simply put, it isn't real. The State and its agents can re-edit the dictionary all they like. They can even get everyone to go along with the new definitions. Despite that, the State cannot turn black into white or night into day. Not the Congress, the Supreme Court, President Obama, nor even the Federal Reserve itself can, despite all efforts, hold back the sea.

The fact remains: neither the State nor its agencies truly control human life the way people or the authorities within the institutions themselves think. As the great constitutional scholar Albert Venn Dicey pointed out, "public opinion," that is, people's acceptance of certain principles and the perceived conformity of the law with those principles is what makes human positive law effective, not the presumed authority or power of the State. (A. V. Dicey, Lectures on the Relation Between Law and Public Opinion in England in the Nineteenth Century, 1905.) The State can arrange matters so that there is a guard "stationed in every house" (Patrick Henry, Speech to the Virginia Delegates, March 23, 1775.), but if people do not acquiesce on some level, even the most intrusive control will be ineffectual, even destructive of the end sought. Prohibition didn't halt or slow the use of alcohol, but increased it dramatically, as well as providing a means for organized crime to finance an enormous expansion.

Just as the State does not — and cannot — control people's daily lives, the Federal Reserve does not, indeed cannot, control the economy. Once we understand the correct definition of money, we suddenly realize that the Federal Reserve does not and cannot control the money supply or the financial system, either. Most economic activity lies outside the purview of the Federal Reserve System.

A tremendous amount of private sector money creation occurs over which the Federal Reserve exercises no control. In recent years the Federal Reserve has not even included anything other than M1 (coin, currency, and demand deposits) and M2 (M1 plus household holdings of savings deposits, small time deposits, and retail money market mutual funds) in its definition of the stock of money. (http://www.federalreserve.gov/releases/h6/about.htm) The Federal Reserve attempts to track what Milton Friedman called "endogenous (or "internal") money," that is, money created by commercial banks, but does not recognize the vast amount of private sector money that is created without the intermediation of commercial banks. The Federal Reserve does not even have a term for such private sector money.

Unless sold or "discounted" at a financial institution, much of this "private sector money" — "real bills" — never sees the inside of a bank. Most commonly this paper is issued and redeemed in the ordinary course of trade after limited circulation through the channels of commerce. This is "B2B," "Business to Business," and the government has no control over how much is issued, and only limited external control over its quality. Such private sector money can be transformed into general purchasing power by a holder in due course simply by taking the note to a commercial bank. The bank discounts the note, creating banknotes or (more usually) a demand deposit. This, in effect, exchanges the individual credit of the issuer of the note for the more widely recognized and accepted general credit of the bank.

Despite the refusal of the Federal Reserve to recognize the existence of private sector money, private sector money exists. A "quick and dirty" calculation gives a good idea of the quantity of such money and its importance to the economy. The Gross Domestic Product ("GDP") for 2008 for the United States was roughly estimated at $14.3 trillion, according to the International Monetary Fund. (International Monetary Fund, World Economic Outlook Database, April 2009: Nominal GDP list of countries. Data for the year 2008.) To GDP we add imports of $2.523 trillion (U.S. Census Bureau/U.S. Bureau of Economic Analysis, "Exhibit 1: U.S. International Trade in Goods and Services, Jan-Dec 2008," News, U.S. International Trade in Goods and Services, Annual Revision for 2008, 1), for imports are not included in the calculation of GDP. The velocity of money appears to be hovering around 4.1. (Frederic S. Mishkin, The Economics of Money, Banking, and Financial Markets. London: Addison-Wesley, 2004, 520.) Finally, according to the Federal Reserve, the amount of coin, currency, and demand deposits in the United States ("M1") is approximately $1.624 trillion. (http://www.federalreserve.gov/releases/h6/current/h6.htm.)

Using the quantity theory of money equation, M x V = P x Q, we can now make an extremely rough determination of the amount of transactions in the United States in 2008 that resulted from the circulation of M1 and M2. Multiplying M1 plus M2 times the velocity of money (M x V) gives us $6.66 trillion. We subtract $6.66 trillion plus total exports from GDP of $16.823 trillion, leaving $10.163 trillion in transactions that cannot be accounted for — if we assume that M1 plus M2 constitutes the whole of the money supply.

On the basis of this admittedly crude calculation we conclude that the Federal Reserve does not account for — it does not even recognize — more than 60% of the money supply. It thus becomes a serious question not only how the Federal Reserve can claim to control the country in light of the act of social justice, but how it can do so when it doesn't even bother to take into account more than half the transactions in the economy. The unwelcome suggestion starts to surface that the powers-that-be don't really know what is going on. That being the case, how can they expect to know how to correct the situation?

#30#

Own the Fed — the Program, Part II: Personal Sovereignty and Economic Progress

Noted author and journalist William Greider subtitled his book about the Federal Reserve "How the Federal Reserve Runs the Country." (Secrets of the Temple. New York: Simon and Schuster, Inc., 1987.) With all due respect to Mr. Greider, it might have been more accurate to say, "How the Federal Reserve Authorities and the Politicians Work Endlessly and Ineffectively Under the Delusion That They Use the Federal Reserve to Control the Country."

True, both the politicians and the Federal Reserve authorities appear to believe that the central bank of the United States runs the economy, and that the economy runs the country. Yes, they act in a manner fully consistent with this belief, whether or not they willingly admit any of this to the public. (As William Greider put it in another book, examining the extent to which the democratic system has been replaced by efforts to bolster speculation and gambling in the secondary markets, Who Will Tell the People: The Betrayal of American Democracy. New York: Simon and Schuster, 1992.) Even discussion in the public arena and in the press and other media over the role of the Federal Reserve and the State itself assumes as a given that 1) the Federal Reserve runs the country in the interests of Wall Street and the financial services industry, and 2) such control is effective and beneficial.

Most discussion and debate on the subject is not concerned with the actual effectiveness or, more critically, the legitimacy of the Federal Reserve's monetary policy. Instead, the debate centers on whether this control is proper on the part of the Federal Reserve, or whether the central bank has effected a usurpation of power(s) that properly belong to the Congress. The basic assumption remains unchanged — that someone (or something) should be in control of the economy, with "control" always defined as imposition or maintenance of desired results. As far as most people are concerned, it's not what the Federal Reserve is doing. The question is whether the Federal Reserve or the State should be the specific institution carrying out the actions intended to impose control on the economy.

Once we understand the proper role of institutions like the State and the Federal Reserve, however, we reach what for many may be a startling conclusion. That is, neither the State nor the Federal Reserve should be doing what they are doing. The whole of today's approach to monetary and fiscal policy is based on an understanding of the human person and the role of the State and its ancillary institutions directly at odds with individual sovereignty and human dignity. This understanding of the State and related institutions is based on a theory of human society peculiar to a profoundly Statist orientation as found in, e.g., Thomas Hobbes's Leviathan. It assumes as a matter of course ultimate State ownership of everything and the effective abolition of private property. ("Propriety Of A Subject Excludes Not The Dominion Of The Soveraign, But Onely Of Another Subject," Leviathan, XXIV.)

This modern concept of the role of the State is irreconcilable with the founding principles espoused by the Founding Fathers of the American Republic, who rejected Hobbes and based their approach to government and the role of the State on Bellarmine, Locke, and Sidney. Understanding this, we can begin to understand the modern financial community's fascination with Walter Bagehot and his analysis of the money markets in Lombard Street (1873) — an analysis based solidly on the tenets of the Currency School, especially as embodied in Sir Robert Peel's Bank Charter Act of 1844. It comes as no surprise to learn that Bagehot thought highly of the totalitarian approach of Hobbes, and detested the United States of America (cf. The English Constitution, 1867).

This situation did not develop overnight. Limiting ourselves to the United States and the Federal Reserve System, the loss of personal liberty and the growth of State power proceeded apace with the economic disenfranchisement of the ordinary citizen. By the beginning of the 20th century, it had become obvious to a significant number of commentators, such as Judge Peter Stenger Grosscup, that the "closing" of the western frontier had also closed off reasonable access to the means of acquiring and possessing private property in the means of production for most people. Since, as Daniel Webster noted, "power naturally and necessarily follows property," most people no longer had the means to acquire power over their own lives, to say nothing of retaining any power they might already have had. Most people were transformed from small owners into wage workers.

Politically and economically, this had been developing since the beginning of the American Civil War. The war itself, while entirely justified, had a number of undesirable, even unintended side effects and consequences. Chief among these was the rapid growth in the power of the federal government over the states. Previously, a commentator such as Alexis de Tocqueville could quite accurately claim that,

In some countries a power exists which, though it is in a degree foreign to the social body, directs it, and forces it to pursue a certain track. In others the ruling force is divided, being partly within and partly without the ranks of the people. But nothing of the kind is to be seen in the United States; there society governs itself for itself. All power centers in its bosom, and scarcely an individual is to be met with who would venture to conceive or, still less, to express the idea of seeking it elsewhere. The nation participates in the making of its laws by the choice of its legislators, and in the execution of them by the choice of the agents of the executive government; it may almost be said to govern itself, so feeble and so restricted is the share left to the administration, so little do the authorities forget their popular origin and the power from which they emanate. The people reign in the American political world as the Deity does in the universe. They are the cause and the aim of all things, everything comes from them, and everything is absorbed in them. ("The Principle of the Sovereignty of the People of America," Democracy in America, Volume I.)

Even though Abraham Lincoln declared that the Civil War was fought to preserve "government of the people, by the people, and for the people," the trend established by the growing power of the central government seemed irreversible. The fact that the semi-industrialized North won the war assured that the model for the new America would, despite the continued lip service paid to Jefferson's ideal of the yeoman farmer and an agricultural economy, be predominantly commercial and industrial.

Lincoln's 1862 Homestead Act held back this trend for a generation. There were, however, a number of factors that prevented the Homestead Act from being an effective or permanent counterbalance to the rapid growth of commerce and industry. For example, relatively few people were able to take advantage of the Homestead Act. Nor was the land particularly suited for the uses to which it was generally put. It is almost a cliché to point out that the land was scarcely "free." Not only was it in large measure expropriated from the native inhabitants (an act not excused by the fact that they had expropriated the land from others, and so on, back to the dawn of time), but the Homesteaders had to work the land for five years and meet other criteria before being granted clear title.

Nevertheless, the Homestead Act had an effect all out of proportion to the number of people who were able to take advantage of it. The Act did not affect a majority, but a determinant number of people, helping to reinforce the mythos of America as the land of opportunity. Further, the new markets that opened up as a result of the settlement of the west allowed American industry to grow and prosper without effective competition from the industrial and commercial giants of Europe. In this, the West was, in a sense, returning the favor to the East. The Eastern industries would not have been able to grow as rapidly or on as solid a foundation had not they had the captive market of the West to soak up the flood of new production, while the West could not have been settled effectively nor as quickly had it not had the industrial base of the East on which to draw.

The East, however, had a significant advantage over the West, one inherent in the type of development in which each region specialized. Land, the principal type of productive asset in the West, is strictly limited. Once the free land was taken, there wasn't any more to go around. Further, land is not completely subject to the techniques of pure credit. You cannot have a plan to develop land unless the land already exists. Technology, however, is eminently financeable using techniques of pure credit. The asset does not have to exist at the time it is financed. It is sufficient that there be a sound plan with a definable present value that can be monetized. As Moulton explained,

Even though the flow of funds from individual savings for investment purposes may, for the moment, be inadequate, it is still possible to procure liquid funds with which to buy essential materials and employ the necessary labor.

Funds with which to finance new capital formation may be procured from the expansion of commercial bank loans and investments. In fact, new flotations of securities are not uncommonly financed — for considerable periods of time, pending their absorption by ultimate investors — by means of an expansion of commercial bank credit. (The Formation of Capital. Washington, DC: The Brookings Institution, 1935, 104.)

Industrial and commercial assets are thus, to all intents and purposes, limitless. Such assets can be as many and varied as human ingenuity and need can devise. R. Buckminster Fuller's concept of "ephemeralization" — doing more with less — is applicable to a somewhat limited extent to agriculture, although recent developments suggest that it is possible to increase agricultural production at a phenomenal rate, given the right techniques and improved technology. Emphemeralization, however, was a term specifically coined to apply to all forms of technological advancement, with emphasis on industry.

Consequently, in the latter half of the 19th century industry and commerce began to overtake agriculture in importance. Nor was this necessarily a bad thing. The problem was not with technology versus agriculture, per se. This is not changed by the dogmatic belief of the modern "rebel against the future" who fancies him- or herself a "neo-Luddite," and who usually manages to wish-fulfill him- or herself into believing, with varying degrees of paranoia, that he or she does not depend on advancing technology. (See, e.g., Kirkpatrick Sale, Rebels Against the Future, The Luddites and Their War on the Industrial Revolution. Reading, Massachusetts: Addison-Wesley Publishing Company, 1995.) Such people forget that the Luddites were not against technology, whether within or beyond "human scale," whatever that might mean. No, the Luddites were opposed to technology that they did not own, and from which they were shut off from the stream of profits generated by capital and which is due in justice to the owner(s) of the capital.

This was the crux of the matter. It is not technology, but technology that you don't own (and thus do not control) that is "evil." Unfortunately, it seems fixed in the modern human psyche that a single productive asset can only have a single owner. We could demonstrate very easily, although at some length, that this is actually contrary to human nature, but that is not where we are going with this analysis. Suffice it to say that we necessarily agree with Aristotle that, "man is by nature a political animal." (The Politics, I.ii.) It is therefore natural to humanity to organize and work together in free association to achieve both personal and political ends. This is just as de Tocqueville observed as a distinguishing characteristic of American life:

The political associations which exist in the United States are only a single feature in the midst of the immense assemblage of associations in that country. Americans of all ages, all conditions, and all dispositions, constantly form associations. They have not only commercial and manufacturing companies, in which all take part, but associations of a thousand other kinds — religious, moral, serious, futile, extensive, or restricted, enormous or diminutive. The Americans make associations to give entertainments, to found establishments for education, to build inns, to construct churches, to diffuse books, to send missionaries to the antipodes; and in this manner they found hospitals, prisons, and schools. If it be proposed to advance some truth, or to foster some feeling by the encouragement of a great example, they form a society. Wherever, at the head of some new undertaking, you see the government in France, or a man of rank in England, in the United States you will be sure to find an association. I met with several kinds of associations in America, of which I confess I had no previous notion; and I have often admired the extreme skill with which the inhabitants of the United States succeed in proposing a common object to the exertions of a great many men, and in getting them voluntarily to pursue it. I have since traveled over England, whence the Americans have taken some of their laws and many of their customs; and it seemed to me that the principle of association was by no means so constantly or so adroitly used in that country. The English often perform great things singly; whereas the Americans form associations for the smallest undertakings. It is evident that the former people consider association as a powerful means of action, but the latter seem to regard it as the only means they have of acting. (Volume II, Chapter V, "Of The Use Which The Americans Make Of Public Associations In Civil Life," Democracy in America, 1840.)

No, there is nothing in the principle of private ownership that mandates a single owner of a single asset or organized business enterprise. On the contrary, it is consistent with essential human nature that people organize, that is, come together in free association, in order to carry out whatever task they have set themselves. When the State or any other institution interferes with this application of the principle of subsidiarity, it not only violates a basic human right, it goes contrary to its own best interests and engages in self-defeating actions.

Nowhere is this more evident than in the way the institutions of the financial markets have concentrated ownership of the means of production. In light of the natural human proclivity to join together in free association, it is a paradox that financial institutions have evolved in such a way as to inhibit or prevent the application of the right of free association to economic life. This is due principally to the erection and maintenance of barriers that have been raised against the great mass of people gaining access to the means of acquiring and possessing private property in the means of production. As Hilaire Belloc pointed out in his analysis of the loss of individual human sovereignty, his 1912 opus The Servile State,

Had property been well distributed, protected by cooperative guilds, fenced round and supported by custom and by the autonomy of great artisan corporations, those accumulations of wealth, necessary for the launching of each new method of production and for each new perfection of it, would have been discovered in the mass of small owners. Their corporations, their little parcels of wealth combined would have furnished the capitalization required for the new process, and men already owners would, as one invention succeeded another, have increased the total wealth of the community without disturbing the balance of distribution. There is no conceivable link in reason or in experience which binds the capitalization of a new process with the idea of a few employing owners and a mass of employed nonowners working at a wage. Such great discoveries coming in a society like that of the thirteenth century would have blest and enriched mankind. Coming upon the diseased moral conditions of the eighteenth century in this country [England], they proved a curse. (Hilaire Belloc, The Servile State. Indianapolis, Indiana: Liberty Fund, Inc., 1977, 100-101.)

Unfortunately, almost in the same breath in which he eulogizes widespread direct ownership of the means of production, Belloc makes a fatal assumption that virtually guarantees that what he considers the ideal condition of humanity could never occur in his frame of reference. That is, Belloc assumed, in common with the other adherents (conscious and unconscious) of the Currency School that the financing of capital formation is linked inextricably to existing accumulations of savings. As Keynes quite accurately pointed out consistently with this assumption, "The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably." (The Economic Consequences of the Peace, 2.III.)

The assumption that capital formation can only be financed out of existing accumulations of savings has two logical results, either one of them fatal to the dignity of the human person. If we acquiesce in what Louis Kelso and Mortimer Adler called "the slavery of savings (The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings. New York: Random House, 1961), we necessarily acquiesce in a state of society characterized by a wealthy elite, whether private (as in capitalism), public (as in socialism), or, increasingly in our day and age, an unworkable combination of capitalism and socialism that Belloc termed "The Servile State," described in his 1912 book with that title.

Whether you call the arrangement capitalism or socialism, the wealthy elite (or the non-owning elite that controls money and credit, cf. Quadragesimo Anno, §§ 105-106), is, by its very nature, the only group with the capacity to accumulate sufficient savings to finance new capital formation. All others must use the income generated by wages or from capital ownership for consumption. Despite all the best intentions in the world, the assumption that capital formation can only be financed out of existing accumulations of savings keeps the great mass of people locked into the condition of non-ownership of the means of production.

The United States in the 19th century thus experienced to an exaggerated degree a startling paradox, at least for a brief but glorious period, still celebrated in the American mythos of the Winning of the West. A severely limited productive asset — land — was available for the taking, without the necessity of first accumulating sufficient savings to acquire and exploit it. At the same time a virtually unlimited asset — the industrial and commercial expansion of the United States — was only open to ownership by a select few with accumulated savings.

Having a limited asset available free to ordinary people, and an unlimited asset available only to an elite at a high cost made for a growing imbalance in economic growth and development. Naturally, this led to the otherwise inexplicable wealth gap that has increasingly afflicted the world. This has caused greater and greater swings in the business cycle that have only been partially assuaged by granting the State and the financial system ever-increasing power in an effort to stave off what the system is arranged to force on humanity.

Once we study the financial history of the United States, however, we realize something shocking. The fixed idea that capital formation proceeds alternately with changes in consumption, that is, that capital formation cannot be financed except by cutting consumption, saving, then investing, is completely wrong. As Harold Moulton demonstrated in The Formation of Capital after investigating the economic development of the United States from 1830 to 1930,

The traditional theory that an expansion of capital construction and consumptive output occur alternately — that the process of capital formation necessarily involves the curtailment of consumption and the transfer of labor and materials from the production of consumption goods to the creation of capital goods — finds no support whatever in the facts of our industrial history. The process involves rather a larger utilization of our productive energy at certain periods when an expansion occurs in the output of both capital and consumption goods and then a smaller utilization of our productive energy when the construction of both capital and consumption goods is declining.

We find no support whatever for the view that capital expansion and the extension of the roundabout process of production may be carried on for years at a time when consumption is declining. The growth of capital and the expansion of consumption are virtually concurrent phenomena. (The Formation of Capital, op. cit., 47-48.)

Clearly the process of capital formation does not require existing accumulations of savings in order to be effective or even possible. Consequently, laboring under this delusion, the federal government of the United States as well as the Federal Reserve undermine the dignity of the human person by fostering the wealth and power of private and public elites. This is especially reprehensible in that both institutions, within limitations imposed by conditions and certain preconceptions, were established to promote human dignity and individual sovereignty. The end result is a system in which the prevailing belief is that concentrated economic and political power are the only means to ensure that ordinary people can be taken care of, rather than have the capacity, as well as access to the means, to take care of themselves.

#30#

Own the Fed — the Program, Part I: The Crisis

Predicting the future is always a risky business. Cassandras are rarely popular, especially when they are right. On the other hand, being wrong to any significant (or even insignificant) degree is provocative of ridicule. Given that, however, we'll take a chance and make a prediction. If things continue to go as they have gone since the beginning of the "Great Recession" in August of 2007, and policymakers continue to apply discredited Keynesian policies based on outdated and disproved principles of the British Currency School, the United States — the world — will experience a financial meltdown that will make the Crash of 1929, the Great Depression, and the so-called current Great Recession pale to insignificance.

We anticipate that many people will reject this prediction. Economic analysts, Federal Reserve authorities, and politicians without number have been telling the world that the crisis is over, and have to some extent staked their careers on being right. According to conventional wisdom, the long, slow recovery has been in progress since July 2009. (Daniel Gross, "The Recession is . . . Over?" Newsweek, July 14, 2009.) In any event, the general belief is that principles of Keynesian economics, correctly applied, will prevent a recurrence of the economic catastrophe that brought the world economy to its knees from 2007 to 2010.

Such baseless optimism is not new. Similar statements regarding recovery in the United States were made in the early 1930s before the application of Keynesian principles. Matters did, in fact, improve slowly in some sectors between 1930 and 1933, but then catastrophe struck again. As Dr. Harold Moulton related,

The situation was relieved somewhat by the moderate recovery which occurred both in business activity and security prices in the second half of 1932. But in the winter of 1933 the business situation again became worse, and the collapse of the banking structure ensued. (Harold G. Moulton, The Recovery Problem in the United States. Washington, DC: The Brookings Institution, 1936, 53-54.)

Contributing to the problem is the vague impression on the part of many people — academics and policymakers especially — that the progress of depression (or recession, if the word makes you feel better) and recovery is somehow "uniform" in some fashion. That is, our understanding of history, grossly oversimplified, is that a rapid downturn occurs. After this, the government implements programs that foster economic recovery at a more or less steady and regular pace. Government programs are necessarily effective and will always bring the anticipated result. Any improvement in any sector of the economy is taken as a "sign" that the recovery has begun, and may even be well under way.

Having committed themselves to the position that recovery is in progress, politicians cannot easily change course. In 1932 Herbert Hoover declared, "Prosperity is just around the corner." The moderate gains experienced in some sectors during his administration appeared to bear this out. Unfortunately for Hoover, however, the sector that most influenced the ordinary voter — employment in wage system jobs — continued to suffer. Neither was the overall productive sector experiencing anything but the most ephemeral gains. This ensured the election of Franklin Delano Roosevelt later that same year. As Moulton pointed out,

Production and employment are basic and ultimate points of reference in modern industrial life. Depression, like prosperity, is a phenomenon which is significant primarily in these terms, and no understanding of the factors of recovery may be gained without a thorough consideration of these two elements of economic activity. (Ibid., 114.)

Hoover learned the importance of employment and sustainable production too late and to his cost. This is a lesson that the present generation of policymakers with their obsession with Wall Street and maintaining the inflated price level of secondary debt and equity issues would do well to heed. Unfortunately, the signs are that the current "unofficial" 17.5% unemployment rate as of March 2010 is not being given the importance it deserves.

At the same time, the productive sector is also receiving short shrift. This is misguided from any orientation, whether you believe that 1) production should be fostered because "jobs" are an economic output of production, 2) increased production will create jobs that, combined with higher wages or lower prices, will redistribute the necessary purchasing power, or 3) direct ownership of the means of production should supplement and, eventually, replace wage system jobs as the predominant means by which people gain income, with the increased demand resulting from consuming rather than reinvesting capital income supporting sustainable production and creating jobs naturally.

Part of the problem is that, just as there is no single cause of a depression, neither is there a single cure, or a single sector of the economy on which efforts should be focused — regardless of its political power, wealth, or influence. Evidence suggests that the Great Depression was not a monolithic single catastrophe. Instead, it appears to have been a series of profoundly disruptive economic earthquakes, each one hitting the world before the global economy had recovered from the previous disaster, and each one feeding on — or being fed by — the previous disaster.

There was, of course, the Crash of 1929. This appears to have been largely the result of massive creation of money for pure speculation. (This was obscured to a significant degree by the fact that money creation for productive purposes proceeded apace, serving to mask the huge amount of non-productive money creation.) When the inevitable adjustment came, the market value of business assets fell far below not just the grossly inflated speculative price that had been bid up, but in reaction fell below the real value as well. Collateral for business credit either disappeared entirely, or was of such uncertain or reduced value that lending institutions were unable to extend credit. The Crash itself was not a cause of the decline in production, but a symptom of the inflation of the value of collateral assets, both sound and, especially, speculative.

The reduction in the value or even existence of collateral for business credit was followed by reductions in employment as businesses either went bankrupt or cut back on production. Again, this was not a direct result of the stock market decline. It was due in large measure to two factors: 1) the failure of the banking system to discover an alternative to traditional collateral, and 2) the fixed idea that production (and thus productive credit for business) is a derivative of the supply of existing savings accumulated in the system, and, consequently the equally fixed belief that no new investment can take place unless consumption is first curtailed.

Because savings equals investment, acceptance of the tenets of the Currency School necessarily meant that a decline in the value of investments was presumed to dry up the supply of money for new capital investment. Those in charge of setting economic and monetary policy in the 1930s were as unable as the powers-that-be of today to grasp the fact that financing for capital formation is not — and never has been — dependent on the amount of quality of existing accumulations of savings.

Adding to the decay or virtual disappearance of collateral was the fact that the burden of debt assumed by government, businesses, and private individuals quickly assumed crisis proportions. While popularly blamed on the decline in share values and the subsequent drying up of credit, the facts of the matter were otherwise. As Moulton pointed out, even had the stock market not crashed, and even had the commercial banks not stopped extending credit for productive purposes, many businesses and individuals would have been unable to meet existing debt service payments. Both the sheer quantity of debt as well as the disadvantageous terms on which it had been assumed ensured that serious problems were rapidly surfacing. As Moulton explained, highlighting the incipient disaster inherent in relying on consumer credit and government spending instead of production to keep the economy going,

Meanwhile the debt situation was also becoming increasingly serious elsewhere. State, city, and local government units, which had for years been borrowing for various and sundry purposes, were finding it increasingly difficult to meet interest obligations. In the field of urban mortgages, large numbers of individuals whose incomes were steadily shrinking were unable to continue meeting interest and mortgage installments. Urban real estate mortgage companies and their bond issues, which were inadequately secured even on the basis of pre-depression values, were falling into default. The railroads seemed threatened with bankruptcy, while many public utility and industrial corporations were also in serious condition. The stability of insurance companies and other financial institutions, of trust and endowment funds, was directly dependent upon the continuance of the flow of interest and mortgage payments. Involved in the whole network of relationships was the safety of the deposits and investments of all classes of people. (Ibid., 52.)

The surge of bank failures in 1933 was caused primarily by the drastic fall in value of the asset portfolios of commercial banks and the general inability to replace such toxic assets with new, sound assets backed by the present value of existing or future marketable goods and services. That is, the commercial banking system was, by and large, saddled with enormous amounts of bad assets that they had to write down, but were unable to replace with new loans made for financially feasible productive projects instead of speculative securities purchased on the secondary market. This virtually ensured that production would remain low, and unemployment high. As Moulton described the progress of events,

The final stage in the process of financial disintegration was the collapse of the American banking system. Small-town and country banking was, of course, dependent upon the prosperity of agriculture. During the first stage of the depression the mortality rate was greatly increased, and in the second stage the whole rural credit structure was undermined. . . .

Meanwhile, also, the decline in the value of securities was adding to banking difficulties; and a race for liquidity began. As margins on collateral loans became inadequate, payment was demanded and often the collateral had to be taken over by the bank and sold at a loss. The shrinkage in the value and the income of bonds directly owned by banks also presented a serious problem. Fearful of still further shrinkage in value, and often in need of cash, the banks attempted to sell their holdings of second-grade bonds. The combined result of the liquidation of the collateral of distressed borrowers and of their own investments was to demoralize still further the security markets. The greater the efforts of the banks to save themselves by the liquidation of securities, the greater became the demoralization of security values. (Ibid., 52-53.)

It should not be necessary to remind the reader that the circumstances and events related above are purely historical. Any similarities between the events contributing to the severity of the Great Depression and those of today, however, are certainly more than coincidental. They are a direct result of the insistence of the powers-that-be on applying the same tried-and-failed solutions as before. The slavish devotion of mainstream economics, whether Keynesian, Monetarist, or Austrian, to the tenets of the Currency School has all but guaranteed that no solution can be developed that takes reality into account and would therefore be effective.

In the 1930s this led to the insanity of the Federal Reserve policy that set off the near-fatal blow to the economy known as the "Crisis of 1937." In their anxiety to prevent another speculative bubble — and failing to differentiate between "good" credit for productive purposes and "bad" credit for speculation, consumption, and government spending — Federal Reserve authorities increased the discount rate. This artificially forced up the costs of doing business by making capital credit more expensive, thereby cutting off the life's blood of the economy. The Federal Reserve's bad monetary theory and practice thereby stifled the still-tenuous recovery, sending the economy into a precipitous downturn. (Harold Moulton, Financial Organization and the Economic System. New York: McGraw-Hill Book Company, Inc., 1938, 411-417.)

Moulton's conclusion is significant and bears repeating, especially in light of today's strong, nearly invincible belief that the Federal Reserve controls the economy the way the State is presumed to control the entire social order: "The inability of the Board of Governors of the Federal Reserve system to control the business situation is simply evidence that many of the forces, which account for business fluctuations, lie beyond the control of monetary policy." (Ibid., 416.) In other words, despite the adamantine faith in the power of the central bank and the State to reconstruct reality, even the strongest faith, when misplaced, crumbles when faced with empirical reality.

An understanding of the act of social justice and humanity's political nature would have gone a long way toward assisting the powers-that-were in the 1930s to develop a more rational approach to the recovery problem. That was not to be, however. Instead, what they got was Keynesian economics, a rehash of the tenets of the British Currency School that, perhaps not surprisingly, provide the basis for virtually all mainstream schools of economic thought, including the Monetarist and Austrian, to say nothing of the minor schools as well.

Still, it was not until after Franklin Delano Roosevelt was elected and inaugurated in 1933 that Keynesian principles were applied in an attempt to stimulate economic recovery. Even then, however, it seems a reasonable position to take that employing Keynesian economics may have slowed recovery dramatically. (Burton Folsom, Jr. and Anita Folsom, "Did FDR End the Depression?" The Wall Street Journal, 04/12/10, A17.) Using Keynes's recommendations as the basis for the New Deal programs may even have been a significant contributing factor to the "Crisis of 1937" when the economy once again plunged into depression before full recovery.

Ironically, Amity Shlaes makes a good case that the New Deal was, in large measure, FDR's implementation of policies and programs initiated or developed by Hoover. (The Forgotten Man: A New History of the Great Depression. New York: Harper Perennial, 2008.) For all the vituperation heaped upon Keynes's theories, Keynesian economics, far from providing a framework for recovery, may simply have been "plugged in" as the most plausible justification for what was already being done. Keynesian economics didn't have to make sense, it just had to sound as if it did.

In any event, recovery was not stimulated by artificial demand created by the State as fast as it could create debt-backed money. Instead, recovery was fueled by the very real growth in demand caused by the desperate need for material to carry on the Second World War. It might not be too much of an exaggeration to suggest that Adolph Hitler saved FDR from being labeled one of the worst presidents in American history.

There are thus significant questions in many people's minds — especially those who are out of work or whose employers are in danger of bankruptcy — as to the reality of the presumed recovery the United States economy has presumably experienced since July 2009. Added to this are the reports of the mavens of the media, who have managed to contradict themselves on a daily, sometimes hourly basis. No one seems able to say when — or if — the recession has ended.

The experts — as well as the ordinary people who have a vested interest in whether or not they can make a living — are clearly confused. No one has any clear idea as to what state the economy is in, much less what should be done about it, to say nothing about having any cogent or even comprehensible vision as to where we should be going.

To take merely one example, interpretation of the unemployment figures — considered a "leading economic indicator" — fluctuated wildly in the first quarter of 2010, at a time when the economic recovery was presumably well under way. To give a little context to the reports, the "official" unemployment figure has been holding steady at around 9.7% for some time. The real unemployment rate supplied by the Bureau of Labor Statistics of the Department of Labor, however, was 17.5% for March 2010. (http://www.bls.gov/news.release/empsit.t12.htm) The real unemployment rate is uncomfortably close to the figures from the worst years of the Great Depression — 17.4% in September of 1932. It is therefore not all that surprising that statistics would be manipulated or "adjusted" to avoid spreading panic. There has also been a studied avoidance of the word "depression," possibly for the same reason.

To consider the possibility that the powers-that-be have been redefining essential statistics in an effort to change reality is not really all that outrageous. After all, the premier defunct economist of the modern age, John Maynard Keynes, openly admitted in his 1930 A Treatise on Money that the State has the power to change reality by re-editing the dictionary. If, therefore, the State declares that the recession is over, it must be over. If the State declares that a depression is actually a recession, that must also be the case. If the State says that only 9.7% of the workforce is unemployed instead of the more realistic 17.5%, then only 9.7% of the workforce is out of work.

Of course, all of this fits in perfectly with the fact that the central bank of the United States — the Federal Reserve System — and, consequently, the entire commercial banking system over which the Federal Reserve has oversight — has been run in a manner directly contrary to its own founding principles. These are clearly expressed in the Federal Reserve Act of 1913.

Briefly, the Federal Reserve System was founded on the assumption that the principles of the British Banking School are valid. That is, the real bills doctrine and Say's Law of Markets accurately describe economic and financial reality. At the heart of the British Banking School is the definition of money as anything that can be used in settlement of a debt. This means that not only coin, currency, and demand deposits of "depository institutions" are "money," but also the enormously greater amount of promissory notes and bills issued by or drawn on individuals and businesses. The amount of what we might call "private sector money" (that is, money that is not issued by the State or by a commercial bank tied in to the central bank) dwarfs M1, that which most economists, analysts, and policymakers consider the "real" money supply, and which is limited to coin, currency, and demand deposits.

Unfortunately, while the Federal Reserve System was designed to run in accordance with the principles of the British Banking School — the real bills doctrine and Say's Law of Markets — it is actually run as if the tenets of the British Currency School are valid — and as if State absolutism were the foundation of a sound and stable social order instead of the most immediate and direct cause of its dissolution. The unconscious contempt for ordinary people built into the principles of the Currency School — and thus into public policy, especially as it relates to capital ownership and finance — blinds the powers-that-be to any solution founded on essential human dignity and individual sovereignty just as surely as it did during the Great Depression.

Blindness to the importance of ordinary people (and thus to the importance of the average citizen sharing in ownership of the means of production as well as or instead of limiting the great mass of people to a wage system job as their sole source of income) also prevents correctly identifying the causes of both the Great Depression and the current economic downturn, to say nothing of inhibiting the development of a viable solution. This makes sense, for unless we know what the problem is, we are not going to be able to develop a solution that has any real hope of being effective.

Obviously it was not the New Deal or any other action by the federal government or the Federal Reserve that brought an end to the Great Depression, any more than we can expect any action by either institution today to do anything other than make a bad situation worse. Only the immense increases in spending for war material brought an end to the Great Depression. Massive government intervention has attempted ever since to keep the economy on an even keel. The not unexpected result has been the creation of the illusion that the federal government and the Federal Reserve between them can somehow control the economy without reference to sound monetary or economic practice and theory.

This rejection of economic and financial reality has, in turn, resulted in a condition of functional overload for the State and, increasingly, the central bank. The Federal Reserve is attempting to control the economy instead of concentrating on its extremely limited and specialized role of providing a stable currency and adequate liquidity for the private sector on an as-needed basis. Both the State and the central bank are trying to do far more than they were ever intended or designed to do, with chaos and dissolution of the social order being the only possible outcome.

#30#

Kemp Harshman, Soldier of Justice, 11/20/1948-04/11/2010, R.I.P.

Yesterday CESJ and the Just Third Way movement learned of the death of our friend and fellow Second American revolutionary Kemp Harshman, Esq. Kemp died of cancer at his mother's home in Indianapolis, Indiana at 7:30 am EST.

We first met with Kemp on April 28, 1992. He quickly became one of our most valuable CESJ members, serving on the executive committee of CESJ's board of directors, and as pro bono CESJ General Counsel.

Mr. Harshman, a lawyer and entrepreneur, was a CESJ volunteer and member of the executive committee. He was President of the Clarendon Foundation, a non-profit educational organization based in Arlington, Virginia. Its current projects include assisting schools and colleges in obtaining instructional television broadcast licenses, broadcasting educational programming on wireless cable systems, organizing a communications cooperative for educational institutions and nonprofit organizations, creating closed captioned databases on the Internet of Congressional floor debates and hearings for the public, producing an educational television program for the George Bush Presidential Library and Museum, and rewiring low and moderate income housing for the information highway. Mr. Harshman, who conceived the "History Channel" later sold to Arts and Entertainment (A&E) TV, was Project Manager of CESJ's "Wireless Cable TV" project which provides justice-based educational television programming and advanced telecommunications technology to schools and other consumers in remote areas.

Kemp worked in the capacities of executive officer, legal counsel and analyst for organizations including the President's Council on Environmental Quality, the Reagan-Bush Committee National Headquarters, the Lugar for Senate Committee, the American Management Association, and management consulting firms involved with technology transfer and technical-legal aspects of new product development. Mr. Harshman was a member of the Bar of the U.S. Supreme Court. He served from 1986-92 as legal counsel for the Commission on the Bicentennial of the U.S. Constitution. Mr. Harshman received his law degree (J.D.) from the University of Michigan Law School and his Masters of Public Policy degree from the University of Michigan. He was a recipient of CESJ's Soldier of Justice Award.

Kemp's many contributions to the mission of CESJ and his always positive advice are permanently etched into the history of CESJ and in all our hearts. There will never be another Kemp. We lost a brother.

#30#

News from the Network, Vol. 3, No. 14

It's unofficial: the unemployment rate in March 2010 at 17.5% was higher than the unemployment rate in September 1932 at 17.4%. Of course, the official figure still hovers around 9.7%, so the alleged recovery from the Great Recession is still going strong. It's just that a lot of people don't know it yet. They don't have jobs, and they're not reading the good news: they need that newspaper to keep off the rain because they lost their homes to foreclosure.

The problem, of course, is that the powers-that-be insist on applying Keynesian solutions when Keynesian economics does not describe reality. A much better framework, and one that actually makes sense without a lot of confusing graphs and econometric doubletalk, is binary economics, also called (as we might expect) "the economics of reality."

That being said, there hasn't been much going on this week that is reportable, but this is what we've been doing:

• Our research into the work of Harold Moulton reveals what can only be described as frightening parallels between the situation in the early 1930s and today. Just as then, there was a moderate recovery from 1931 to 1932. Just as then, the economy was suffering from 17.5% real unemployment. The financial system outside of Wall Street (i.e., the real economy) was flooded with "toxic assets" that had lost a great deal of value, so that businesses lacked adequate collateral, and commercial banks had seen their asset portfolios shrink rapidly. Consequently, what should have been only a slight dip in the recovery — inability to meet debt service payments throughout the productive sector — caused widespread failure throughout the banking system. Lack of collateral prevented widespread rescheduling to bring the interest rates down to more reasonable levels, while the failure to meet the payments meant that the banks themselves went into insolvency. The situation is little different today.

• One of the problems noted by Moulton that both contributed to the Great Depression and made recovery slower was the "capital flight" from many countries seen to be in trouble . . . just as is the case in Greece (and Spain, Portugal, Ireland, and Italy) today. Investors are pulling money out of Greece, just as they pulled money out of the shaky economies in the early 1930s, and hoarding it rather than trying to find replacement investments.

• One mistake that was not made in the 1930s was to jettison systemic internal controls on the financial system and then attempt to try and fix things by State mandate. Glass-Steagall helped stabilize the financial system in 1933, just as its repeal in 1999 helped set the stage for the current economic crisis..

• Plans are proceeding apace for the peaceful demonstration outside the Federal Reserve on Thursday, April 15, 2010. Please visit the "Own the Fed" website for details, and plan to attend.

• This week's activities have largely been in preparation for next week, so there isn't much news to report. We have been making outreach efforts as opportunities present themselves, but — as always — we rely on you to open doors for us to help get the message across.

• We received word this past week that the home of Gary Davis, First World President, burned to the ground recently. Checking out his website, http://www.garrydavis.org/, there was no information available, and what was there was somewhat out of date. We do know that contributions are being solicited to help Gary out. We should have more information in a future posting.

• As of this morning, we have had visitors from 48 different countries and 46 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, Brazil, and Ireland. People in Venezuela, Maldives, Rwanda, Finland, and France spent the most average time on the blog. The most popular posting continues to be "Thomas Hobbes on Private Property," followed by Guy Stevenson's "Expanded Capital Ownership Now," "The Crash of 1929" in the "Own the Fed" series, "Full Employment" and "Henry Ford and John Maynard Keynes," also in the "Own the Fed" series.

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#

"A Second Call to Battle" — Happy 500th

Shortly after co-founding the Center for Economic and Social Justice ("CESJ") in 1984 to develop practical applications of his analysis of the social doctrine of Pope Pius XI and the economic justice principles developed by Louis Kelso and Mortimer Adler, Reverend William J. Ferree, S.M., Ph.D., "America's greatest social philosopher," began a massive revision of his 1941 doctoral thesis. This had been published in 1943 as The Act of Social Justice, and condensed in 1948 as Introduction to Social Justice. Having been left unfinished at Father Ferree's death in 1985, the manuscript still awaits completion, but the reason for the effort was embodied in the new title: Forty Years After . . . A Second Call to Battle. After his exposure to the Kelso ideas, Father Ferree seemed to catch fire and saw in the revolutionary concepts of binary economics a necessary complement to the equally revolutionary social doctrine of Pius XI. This fire still inspires CESJ and the wider world of the Just Third Way.

We therefore thought it might be appropriate to break between the two parts of our "Own the Fed" series, not just to give the reader a breather, but to pause a bit to celebrate our 500th posting on the blog. We realize that for the past six months or so the postings have been getting longer and, for a blog, pretty deep. This reflects both our basic "blog philosophy" as well as our concern for the world's political situation. Most especially, we are concerned for the economic situation that, for good or ill, largely determines the stability of the political system and the degree of freedom enjoyed by people within the system. We need to renew our commitment to the Just Third Way, and to reflect on the best way to heed a "second call to battle" in order to implement the vision of Kelso and Adler, and Pius XI at the earliest possible date and in the most effective and efficient manner.

This blog serves two purposes, 1) bring important events to the attention of the readership, and 2) help teach Just Third Way principles. Our basic blog philosophy is that blogs fill more or less the same role as newspapers in Jacksonian America. While these periodicals reported some news, they were, by and large, organs to publicize the personal opinion of the editor, who was often also the publisher, reporting staff, and printer, all in one. While there was doubtless a great deal of tripe published, there was also a significant measure of well-considered political commentary. The press was, in a sense, the literary equivalent of the social and political activism Alexis de Tocqueville noted as prevalent in the United States during this period in his monumental sociological study, Democracy in America.

As for our concern for the economic situation, both national and global, it should be obvious to anyone familiar with the "four pillars" of an economically just society that the powers-that-be are still unfamiliar with the basic principles of the Just Third Way. We are convinced that for the mere survival of any degree of civilization it is becoming increasingly critical that Just Third Way reforms be adopted as soon as possible. We only hope that the global financial meltdown that appears imminent holds off long enough to implement necessary reforms. The last economic disruption even remotely approaching the scale of what we anticipate should Just Third Way reforms not be adopted gave us the Second World War.

For that reason, it is becoming increasing critical that all our readers as well as all supporters of the Just Third Way heed the "call to battle" and work to the best of their abilities to open doors for the CESJ "core group" to deliver the message that something other than the remarkably confused and grim world situation is more than possible, it is entirely feasible and achievable within a remarkably short period of time. All it takes is you, and a personal commitment to action.

First, do not hold yourself back from a false or even genuine sense of modesty. As Father Ferree pointed out, each of us has an individual and personal responsibility for the common good. Opening doors so that the Just Third Way can get a fair hearing is, in a very real sense, your duty, both to yourself and to the rest of humanity.

Second, do not assume that you need to be able to "make the sale" yourself. You are not the best salesman for these ideas. (Neither am I, for that matter — as should be evident from the length and content of these blog postings. My job is to fill in the blanks and present the arguments for people who want to find out more about the Just Third Way, not to convince them that they should investigate our claims.) The best you can do is get a good grasp of the four pillars so that you can present a quick introduction, inspire some interest, and get a commitment to meet with a member of the CESJ core group. If pressed for more details, you can use the late Senator Russell Long's declaration when, after years of avoiding coming to grips with the Kelso ideas integrated into the Just Third Way, he stated emphatically, "One of my basic principles that I had from the time I first entered politics is that I don't care who's right, I care what's right. This is right." As for the four pillars,

One, a limited economic role for the State. For at least a century, and a good argument could be made that the process has been going on for at least half a millennium, the State has been assuming more and more control over people's lives, fortunes, and sacred honor. In light of the bumbling over the current economic crisis a good case can be made that the State, a very specialized and powerful tool, long ago passed the stage of functional overload and is now causing the very chaos, both economic and political, the State is established to prevent.

Two, free and open markets as the best means of determining just wages, just prices, and just profits. Leaving such matters to the State, no matter how beneficent, is simply to substitute the limited knowledge of one person or a small group for that of everyone. The collected mass of people may not be smarter than a single individual or a small group — but the individuals who make it up have the natural right to be free from unnecessary coercion. The State's role must be limited to maintaining the common good, policing abuses, and providing a "level playing field," that is to providing a strong juridical order that supports human freedom and the dignity of the human person in all its complexity.

Three, restoration of the rights of private property, particularly in corporate equity. The unique social invention of the corporation has been excoriated by self-appointed champions of human freedom. That is because the corporation, designed to allow participation by many people in a single productive enterprise, has, instead, been used to concentrate ownership instead of spreading it out. This is a direct result of the methods of finance used to form capital. Most people assume incorrectly that it is essential to cut consumption in order to save, then invest. On the contrary, using modern commercial and central banking, it is possible to invest first, then generate the production necessary to repay the financing. Most simply put, the old way assumes incorrectly that production is a derivative of money. On the contrary, money is a derivative of production. This is obvious if we stop to think about it.

Four, widespread direct ownership of the means of production. Most simply put, private property in the means of production links the human person to the means of sustaining and protecting his or her life in the most intimate manner possible, whether we are talking about the ownership each person has of his or her labor, or of the capital instruments that, increasingly, are replacing human labor as the predominant factor of production. As William Cobbett declared, "Freedom is not an empty sound; it is not an abstract idea; it is not a thing that nobody can feel. It means, — and it means nothing else, — the full and quiet enjoyment of your own property. If you have not this, if this be not well secured to you, you may call yourself what you will, but you are a slave."

That's it. There are only two steps to effective door opening. At this critical time, however, that is all that is needed. This is your "call to battle." It is up to you to respond.

#30#