The Mortgage Crisis in Ireland

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

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

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

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

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

Here's what you can do:

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

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

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

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

On Usury and Other Dishonest Profit, Part XXVIII

Before the advent of the Great Defunct Economist (Lord Keynes), the necessity for widespread ownership of the means of production was an idea almost universally accepted. The problem was how to bring it about. To take only one example, the 19th century political economist Charles Morrison explained the situation this way.

Referring to worker ownership as an application of the "principle of cooperation," he stated, "There is nothing in the principle inconsistent with the fundamental laws of industry. The expediency of applying it more extensively than is at present done, must be judged of by striking a balance between the advantages and the disadvantages which are likely to result from it in practice, as compared with the plan of remuneration rating the laborer by fixed wages." ("On Cooperation," An Essay on the Relations Between Labour and Capital, 1854) Morrison goes on to say,

The co-operative principle presents this advantage, that the participation of the workmen in profits tends to give them a motive for working with industry, and using their intelligence as well as their manual labor in promoting the improvement of the business. Each working man will have an interest in doing his own duty, and in seeing that every other workman does the same. In this way the men will have a motive for exercising a superintendence over one another; and a public opinion is likely to be created among the whole body in favour of diligence and good conduct. Another advantage which may be expected, is, that the community of interest which will exist to a certain degree in a co-operative association between capitalists and men, and in a more complete manner in an association of workmen alone, will tend to prevent or soften collisions and obstructions to the progress of the business, arising from the pretensions or passions of any of the parties concerned. (Ibid.)

There are, however, two problems associated with Morrison's analysis. One, he accepted the assertions in Thomas Malthus' 1797 Essay on Population as a given, even unquestioned dogma, although by 1854 they had been disproved not once, but many times over. As one economic historian described the situation, in words that apply equally well to the Keynesian paradigm and its insistence on the necessity of existing accumulations to finance capital formation,

The teaching of Malthus' Essay became firmly entrenched in the system of the economic orthodoxy of the time in spite of the fact that it should have been, and in a sense was, recognized as fundamentally untenable or worthless by 1803 and that further reasons for so considering it were speedily forthcoming. It became the "right" view on population, just as free trade had become the "right" policy, which only ignorance or obliquity could possibly fail to accept — part and parcel of the set of eternal truth that had been observed once for all. Objectors might be lectured, if they were worthy of the effort, but they could not be taken seriously. No wonder that some people, utterly disgusted at this intolerable presumption which had so little to back it began to loathe this "science of economics" quite independently of class or party considerations — a feeling that has been an important factor in that science's fate ever after. (Joseph Schumpeter, History of Economic Analysis, 1954, 581-582)

Two, Morrison accepted without question the necessity of existing accumulations of savings in financing capital formation. This is ironic, for it was Keynes' acceptance of the same disproved premise that led the Great Defunct Economist to exactly the opposite conclusion, that small ownership must be eliminated from the economy in the interests of greater efficiency and a more equitable distribution of effective demand. Note that Keynes defined "functionless investor" as someone who spends the income from capital on consumption rather than reinvestment. A "rentier" is a small investor who gains the bulk or entirety of his or her consumption income from capital. To do him justice, Keynes did not really advocate actual "mercy killing" of small investors. He was trying to be clever.

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution. (General Theory, 1936, VI.24.ii)

Further, several refutations of the need for existing accumulations of savings to finance capital formation were widely available by 1854. The debates over Sir Robert Peel's Bank Charter Act of 1844 and especially the "Battle of the Bank" that resulted from Andrew Jackson's quarrel with Nathaniel Biddle and the Second Bank of the United States and the Specie Circular of 1836 had generated a vast body of literature on the subject. This was particularly so in that some economic historians credit the Specie Circular with causing "Hard Times," the depression of the late 1830s. Notable in this respect was the treatise by George Tucker, an American Congressman and political economist (who is also credited with being America's first science fiction writer under the pseudonym "Joseph Atterly), The Theory of Money and Banks Investigated (1839), a careful analysis of the validity of the "Real Bills" doctrine and a refutation of Andrew Jackson's theories on money and credit.

Morrison therefore saw only four ways in which ordinary workers could become owners of even a sub-economic ownership stake of capital:

One plan is, that the employer should find all the capital, paying to every workman a fixed rate of wages, as at present, and that any surplus which may remain after paying wages and expenses, and a certain rate of interest on capital, should be divided between the workmen and the employer.

Another course, which might be adopted where the workmen had some funds of their own, would be, that they should put these funds into the business, and thus become partners in respect of these funds, while they would receive wages for their labor as at present.

A third plan is, that the working men should associate themselves with a capitalist, who might be willing to become a sleeping partner in the business, leaving to them both the labor and the management, and dividing the proceeds with them.

A fourth is, that the working men should keep the entire business in their own hands, supplying the requisite capital either from their own funds, or by borrowing, or by a combination of both means. (Morrison, op. cit.)

Morrison's reliance on existing accumulations of savings as the only source of financing for capital formation, however, led him to the gloomy conclusion that, as a widespread thing (regardless of the great benefits that would accrue to capitalists, workers, and society as a whole), worker ownership would be very slow to implement, and would apply only to certain favored classes of workers:

The principle of part payment for labor by a share in profits is impracticable, when the average remuneration of labor is so low that it will only furnish necessaries, and therefore cannot admit of reduction; and it is only consistent with the welfare of the working man, when his average remuneration is so high that he can in a bad year bear some considerable reduction below that average without much privation. It is more applicable where the number of workmen in a business is small, and the share of each in the result considerable. It is most applicable where the profitableness of the result depends chiefly on the skill and zeal of the workmen; and it is least so where the results are mainly determined by mechanical arrangement, magnitude of capital, or the business talents of the heads of the establishment. It can hardly be adopted excepting in cases where the workmen are select in character, and are usually employed for a long time in the same establishment. It cannot work well in any case, unless much mutual confidence and good feeling prevails between the employers and the employed These considerations show the great difficulties which stand in the way of any extensive application of this principle to the productive industry of this country. To give it a fair chance of success it should be tried in the first instance in particular cases, which present the conditions most favorable to success, and with workmen select in character and intelligence. If in these cases its results should be satisfactory both to the employers and employed, its application will be gradually extended. (Ibid.)

Is there, however, another way to achieve the desired result of widespread ownership of the means of production? We will examine that question in the next posting in this series.

On Usury and Other Dishonest Profit, Part XXVII

In the previous posting in this series we examined why the restoration of the rights of private property, particularly in corporate equity, is such a critical aspect of a just economic order. We discovered that, contrary to the traditional understanding of property rights, as well as the claims of supporters of capitalism, capitalism undermines private property in three important ways:

Denial of the "fruits of ownership." The only reason someone engages in productive activity is to produce something of utility, that is, to make a profit, whether tangible or intangible. As Pope Leo XIII pointed out, "It is surely undeniable that, when a man engages in remunerative labor, the impelling reason and motive of his work is to obtain property, and thereafter to hold it as his very own. If one man hires out to another his strength or skill, he does so for the purpose of receiving in return what is necessary for the satisfaction of his needs; he therefore expressly intends to acquire a right full and real, not only to the remuneration, but also to the disposal of such remuneration, just as he pleases. Thus, if he lives sparingly, saves money, and, for greater security, invests his savings in land, the land, in such case, is only his wages under another form; and, consequently, a working man's little estate thus purchased should be as completely at his full disposal as are the wages he receives for his labor. But it is precisely in such power of disposal that ownership obtains, whether the property consist of land or chattels." (Rerum Novarum, § 5) An owner has the right to the profits generated by what he or she owns. Denying this right, as Henry Ford did to the Dodge brothers, abolishes private property to that degree.

Financing Growth out of Existing Savings. First, of course, capital isn't usually financed out of existing accumulations of savings — directly. The chief use of savings (which necessarily equal investment, as Keynes agreed, indeed, insisted on) is as collateral for debt financing. Henry Ford undermined the natural right to private property in two ways by accumulating cash to finance plant expansion: 1) he denied the Dodge brothers their fruits of ownership by withholding dividends, and 2) he violated principles of sound finance embodied in the "Real Bills" doctrine and Say's Law of Markets, thereby monopolizing access to the means of acquiring and possessing private property.

Power without Accountability. Henry Ford's chosen method of concentrating ownership — and thus power — in his own hands guaranteed that he would be accountable to no one for any of his actions. By concentrating ownership, Ford effectively negated others' right to be an owner, and actually went so far as to work to strip others not only of the rights of ownership, but of ownership itself.

This brings us to the fourth pillar of an economically just society: widespread direct ownership of the means of production, individually or in association with others. We need to examine why, in concert with the rights of private property, the universal and natural right to property must be restored as well, particularly as it applies to direct ownership of the means of production, individually or in association with others.

Widespread Direct Ownership of Capital

As many people as possible owning a significant amount of capital has both a moral and (not to imply that morality isn't the most practicable thing there is) a "practical" aspect, that is, a utilitarian side.

On the moral side, every human being has a natural right to own enough capital to generate an adequate and secure income. Most political scientists as well as moral philosophers have recognized this from the earliest times:

Aristotle: "Property is part of a household and the acquisition of property part of household management; for neither life itself nor the good life is possible without a certain minimum supply of the necessities (The Politics, 1253b23). . . . There is an immense amount of pleasure to be derived from the sense of private ownership. It is surely no accident that every man has affection for himself: nature meant this to be so. . . . The abolition of private property will mean that no man will be seen to be liberal and no man will ever do any act of liberality; for it is in the use of articles of property that liberality is practiced." (Ibid., 1263a40)

St. Thomas Aquinas: "Two things are competent to man in respect of exterior things. One is the power to procure and dispense them, and in this regard it is lawful for man to possess property. Moreover this is necessary to human life for three reasons. First because every man is more careful to procure what is for himself alone than that which is common to many or to all; since each one would shirt the labor and leave to another that which concerns the community, as happens where there is a great number of servants. Secondly, because human affairs are conducted in more orderly fashion if each man is charged with taking care of some particular thing himself, whereas there would be confusion if everyone had to look after any one thing indeterminately. Thirdly, because a more peaceful state is ensured to man if each one is contented with his own. Hence it is to be observed that quarrels arise more frequently where there is no division of the things possessed." (Summa, IIa IIae, 66, a 2.)

John Locke: "God gave the world to men in common; but since He gave it them for their benefit, and the greatest convenience of life they were capable to draw from it, it cannot be supposed He meant it should always remain common and uncultivated." (Second Treatise on Government, 34)

Religious authorities agree. The universal prohibition against theft embodied in all religions is a clear indication that private property is inherent in human nature as an inalienable right. As Dr. Heinrich Rommen explains,

"Thou shalt not steal" presupposes the institution of private property as pertaining to the natural law; but not, for example, the feudal property arrangements of the Middle Ages or the modern capitalist system. Since the natural law lays down general norms only, it is the function of the positive law to undertake the concrete, detailed regulation of real and personal property and to prescribe the formalities for conveyance of ownership." (The Natural Law, 59)

While this constitutes only a small sample of the support for the idea of private property as a natural right, that is, a right inherent in every human being (and some of the authorities differ in particulars as to what they think constitutes a natural right as well as where and how they believe private property originated), the basic fact remains: private property is a natural right, and thus is a right belonging by nature itself to every single human being. To put it more simply, every single human being on the face of the earth has the right, by the mere fact that he or she is a human being, to acquire and possess private property.

Logically, this also means that every human being has, as a natural right, full and complete access to the means of acquiring and possessing private property. Otherwise the right to be an owner would be meaningless, and that would be a ludicrous contradiction. Thus, as Pope Pius XII noted,

When God blessed our first parents He said to them: "Increase and multiply and fill the earth and subdue it." And to the first father of a human family He said later: "In the sweat of thy brow thou shalt eat bread." Therefore the dignity of the human person normally demands the right to the use of earthly goods as the natural foundation for a livelihood; and to that right corresponds the fundamental obligation to grant private property, as far as possible, to all. The positive laws regulating private property may change and may grant a more or less restricted use of it; but if such legal provisions are to contribute to the peaceful state of the community, they must save the worker, who is or will be the father of a family, from being condemned to an economic dependence or slavery irreconcilable with his rights as a person. (The Rights of Man, 1942, § II)

Obviously, then, the right to be an owner naturally includes the right of access to the means to become an owner. The right to be an owner would otherwise be completely meaningless, much like the right to life is meaningless to anyone who is prevented from living, or the right to liberty is a non-issue for someone who is a slave.

Thus, no rational person could argue against the fact that private property is a natural right, and that no barriers should be put in the way of anyone acquiring and possessing private property. What this means from a utilitarian perspective we will examine in the next posting in this series.

News from the Network, Vol. 2, No. 27

While the news items this week are few, they are significant. We would like to see more happening in the network, but it seems that people are too busy doing to be reporting. We urge everyone to send in their brief news notes.

• Speculation is rife on the internet over the content of Pope Benedict's new encyclical, expected now to be released Monday or Tuesday of next week. Naturally we won't know what the encyclical says until we see it, but most of the self-appointed analysts (none of which can have seen an official copy — the official text doesn't exist until it is released) seem to focus on two things: 1) an expected endorsement of socialism or capitalism (as if there is any substantial difference between the two as far as non-owners are concerned), and 2) a call for "renewal" as the start of a solution to the vast economic problems of the world, inevitably to be interpreted by most people as a call to conversion and personal sanctification. If that is indeed the case, we would respond that, 1) socialism can't be endorsed because it has already been condemned on the basis of its substantial nature and cannot be reversed or reconsidered; capitalism can't be endorsed because the Catholic Church, by its own admission, doesn't have the power to endorse specific systems. What the Catholic Church has the power to do is teach the principles that must be embodied in every system for it to be just, that is, the essential principles of the natural law. This leads into the second expectation about a call for "renewal." 2) How should we understand a call for renewal, however it is phrased? This is even easier to answer than the expectation that the pope will somehow endorse capitalism or socialism. As pope, and before that as cardinal, Benedict XVI has made it clear that society must return to the basic principles of the natural law as its guiding moral light. This is, in point of fact, the only thing that a call for renewal could possibly mean in the context of any encyclical. How this renewal, this getting back to basics, is to be achieved is a matter of prudential judgment. The important thing is that people learn the principles of natural law, and then apply them in the restructuring of the social order through acts of social justice. Since encyclicals are documents issued by the Catholic Church primarily for Catholics, it is inevitable that the recommended means by which Catholics are to learn and internalize the principles of the natural law would be greater participation in sacramental life, prayer and meditation. This is because understanding and adhering to the natural law means acquiring and developing virtue, which we must be careful to realize includes both individual and social virtue, in this context especially, social charity and social justice. Participation in the sacramental life of the Church is the chief (but not sole) means by which Catholics are expected to gain an understanding of the precepts of the natural law — although that is, paradoxically, not the chief reason for participating in the sacramental life of the Church. Does this mean, however, that only Catholics can participate in acts of social justice, or that people must be individually perfected in virtue before participating in acts of social justice? Such a demand would be self-contradictory. Our institutions exist to assist us in the acquisition and development of virtue. If they inhibit or prevent that task, they must be restructured through acts of social justice. To demand that people who have been prevented or inhibited from gaining virtue due to flaws in our institutions first gain virtue in order to fix the institutions so that they can gain virtue is, obviously, ridiculous. No, a call to participate in the sacramental life of the Church (or whatever act or acts are best suited to individuals of other faiths and philosophies) as the first step in restructuring the social order can only be understood in a social context as a call to learn and internalize essential principles of the natural moral law as a necessary prologue to engaging in acts of social justice. This is the only thing that makes sense, for we must know that to which we need to conform our institutions before we can conform the institutions. Does anybody need to be spiritually perfect before beginning the task of social restructuring? Such a demand would be both nonsensical and contradictory, as we already noted above. Can only Catholics participate in such a task? Again, no, for the natural law is "written in the hearts of all men," without any such qualification, as the Catholic Church admits, and, in fact, teaches as an essential doctrine. Thus, in a social context it is learning the essential precepts of the natural law, not specific religious practices, to which any call for renewal must necessarily apply.

• On Thursday of this week we had a long and very interesting discussion with Dr. L. Michael Farrell, a professor from Montreal on Sabbatical. A participant in last year's Social Justice Collaborative, Dr. Farrell is studying how to integrate the principles of the Just Third Way into college and university curricula in order to help restore a sound moral orientation to all disciplines in academia.

• As of this morning, we have had visitors from 26 different countries and 41 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, Brazil, Venezuela, and the UK. People in Egypt, Venezuela, Chile, the United States and Brazil spent the most average time on the blog. Not surprisingly, the most popular postings are the series on usury (which may actually finish soon), and the news reports.

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.

On Usury and Other Dishonest Profit, Part XXVI

In 1919 automotive pioneer Henry Ford, considered one of the "high priests" of American-style capitalism, did something that, paradoxically, undermined the institution that many people consider fundamental to the capitalist system: private property. In that year, the Dodge brothers sued Henry Ford because he changed the dividend policy of the Ford Motor Company, retaining earnings to finance corporate expansion instead of paying income out in the form of dividends. (Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668. (Mich. 1919))

The court ruled, in effect, that minority shareholders are able to enjoy their full "fruits of ownership," including the right to receive any and all income generated by what is owned, only if the majority owner so agrees. That is, the majority owner(s) in the person of the Chairman of the corporate Board of Directors alone has the right to set dividend policy for a company, and does not need the consent of a minority owner or owner(s) to withhold that which belongs to the minority owner(s) by natural right.

In English, that means (according to the Michigan Supreme Court) someone who owns less than 50% of an asset doesn't really own it in the full sense of the term. Anyone who owns more than 50% of that same asset can withhold some of the rights of ownership from the minority owner or owners, consisting of the right to enjoy the income generated by the asset, at his or her discretion.

The decision by the Michigan Supreme Court thereby undermined what it means to be an owner. This struck directly at what has long been considered an inalienable right and the foundation of civil society itself. Unfortunately, many commentators have obscured the true import of the ruling by focusing on a relatively minor issue that was raised as part of the plaintiffs' case. This was whether Henry Ford had the right to lower the price of Ford automobiles in order to increase sales, retain earnings, and keep as many people as possible employed — and lower corporate earnings. As Ford declared, "My ambition is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business."

The court agreed that a corporation was not to be run as a charitable enterprise, but for the benefit of the shareholders. Most conventional analyses of the case stop at this point, without realizing the import of the fact that Henry Ford did not, in fact, base his defense on his stated ambition, but on the "business judgment rule." Thus, if the individual elected by the shareholders (who happened to be Henry Ford, as he retained the majority block of shares) decided it was in the best interests of the company — and thus the shareholders — to stop payment of dividends, the minority shareholders had no recourse other than to retain their shares and take whatever the majority owner(s) chose to dish out, or exercise their "take-it-or-leave-it" right to sell their shares and wash their hands of the whole business.

What is also frequently ignored in analyses of the case is the fact that Henry Ford had previously blocked every effort of the minority shareholders to have input into decisions and exercise some degree of control over the business, such as design improvements and marketing strategy. This was particularly egregious with respect to the Dodge brothers, who owned the next largest block of shares (10%) after Henry Ford, and who were increasingly unhappy with the degree of control exercised by Henry Ford.

Consequently, prior to their lawsuit over Ford's restriction of dividend payments, the Dodge brothers began setting up their own automobile manufacturing company in secret, using their Ford dividends to finance the effort. Ford got wind of this and began withholding dividends. Ford was also suspected of wanting to reduce the price of Ford automobiles as a way of justifying the proposed reduction in dividend payouts and reducing the company value per share.

After the Michigan Supreme Court ruled in his favor, Ford threatened to set up another rival automobile manufacturing company, probably to be wholly-owned by Ford personally, apparently as a way to compel the Dodge brothers to sell their shares back to the Ford Motor Company at the reduced value per share that Ford had manipulated. In this he was successful — and thereby undermined another right of private property, that of disposal, by taking away the Dodge brothers' free choice in the matter of whether or not to sell their shares.

It was, however, a Pyrrhic victory. The Dodge brothers used the proceeds of the forced sale to complete setting up their own automobile manufacturing company. They soon designed and marketed an automobile that many car enthusiasts still consider one of the best popular vehicles ever made, the 1926 Dodge. This made the venerable Model T Ford, the basic design of which Henry Ford had resisted changing for almost twenty years (1908-1927), obsolete. Henry Ford was forced to invest vast sums in developing a competitor to the Dodge product, and spent millions more retooling his factories to produce the Model A in 1928. His refusal to share power and pay dividends to minority shareholders cost Henry Ford a huge fortune, and ensured that his company lost its throne as the world's leading automobile manufacturer.

Restoration of Private Property

Aside from the personal cost to Henry Ford, the social cost of Dodge v. Ford Motor Company was enormous. It embodied the attenuation of the property rights of minority shareholders into law, economic theory, and fiscal and monetary policy — and thus into the United States Internal Revenue Code. In consequence, restoring the rights of private property as a feature of economic life will require a vast educational effort to overcome generations-old prejudices and attitudes, as well as to instruct people on what private property is and how it is to be exercised within a just social order.

First, we need to know of what private property consists. Many people believe that "property" is the thing owned. On the contrary, property is two things. One, property is the natural (inalienable) right that every single human being has to become an owner. This is the right to property. Two, property is the bundle of socially-determined rights (the rights of property) that define what an owner may own and how he or she may exercise his or her ownership. The caveat that must be kept in mind when defining how property is to be exercised is that the exercise must never be defined in such a way as to negate the underlying natural right to be an owner.

Second, we need to know why private property is so important. Pope Leo XIII may have said it best in his landmark encyclical, Rerum Novarum (1891): "Every man has by nature the right to possess property as his own. This is one of the chief points of distinction between man and the animal creation." (§ 6) In other words, it is through the acquisition and possession of material goods, especially the means of production, that the human person chiefly distinguishes his or her humanity. To deny anyone the right to be an owner, or attenuate or negate what an owner may do with what he or she owns beyond what is required by the needs and wants of the individual, other groups, and the demands of the common good is to undermine or deny the humanity of the individuals or groups so affected.

Third, as human labor is replaced by capital as the predominant factor of production, it becomes critical that workers who previously relied on the sale of their labor to generate an adequate and secure income become empowered with ownership of the means of production. Only by this means do they acquire as owners of capital the same right to the income generated by capital that they presumably enjoy as owners of labor to the income generated by labor.

Finally, we need to know what to do about this situation. This is embodied in the third pillar of an economically just society: restoration of the rights of private property, particularly in corporate equity. This leads into the fourth pillar of an economically just society, widespread direct ownership of the means of production, which we will look at in the next posting in this series.

On Usury and Other Dishonest Profit, Part XXV

People with a moral orientation seem to have a tendency to excoriate the free market as the source of many of the evils that afflict the modern economic common good. The fact remains, however, that, as an application of the human person's natural right of free association ("liberty") and a manifestation of free will, a truly free market that has no barriers to full participation by any individual or group and protects individual and social rights by maintaining a strict juridical order is most consistent with the demands of individual human dignity and the common good as a whole. For this reason, the Just Third Way incorporates free and open markets as a necessary pillar of an economically just society.

Free and Open Markets

"Free and open markets" does not mean the socialist bogeyman of a capitalist laissez-faire Donnybrook. On the contrary, a free and open market is one to which everyone has free access, whether as a producer or a consumer, and as a worker or an owner. Common sense implicit in Say's Law of Markets tells us that, just as every consumer should also be a producer, every worker should also be an owner of the means of production. This enables anyone to produce either by means of his or her labor, or by his or her ownership of capital. Ideally, all these roles — producer, consumer, worker, and owner — should be combined in every individual. The alternative is a society in which a few produce so that many might consume, and a few own so that many might labor.

When the four roles of the market are filled by free choice by every member of society (or at least a determinate number), the action of the market is circumscribed by a strict and just juridical order, and there is an adequate flow of accurate information, the free market is the best means that can be constructed by humanity for determining just prices, just wages, and just profits.

In its function in determining just wages, just prices, and just profits, the free market is an application of Aristotle's "theory of universals." Without perfect knowledge (something normally beyond human realization in any event), however, we can never know a universal exactly or in its entirety. We can, however, approach a reasonable and workable facsimile of a universal by aggregating the "particulars" or specifics that we observe. This is because one and the same universal (the substantial nature of a thing) appears in its entirety and in the same way in every member of a class, although obscured by the particular form ("accidentals") of each thing observed, and inadequacies and errors in human understanding.

As the theory of universals applies to determining the just price for a particular good or service in a free and open market, then, we have to realize that the universal we are working to discern is the price itself — and the price of a thing must be clearly differentiated from the cost of the thing, as well as from the thing itself. We have to realize that an "accidental," that is, something that is related to a thing but not part of that thing's substantial nature, itself has a substantial nature.

This is because everything that exists, exists as fully as everything else that exists, and exists in the same way. Thus, a loaf of bread possesses the substantial nature of "breadness," or the capacity to acquire and develop "bread virtue." Similarly, a human being possesses the substantial nature of "humanness," or the capacity to acquire and develop human virtue. The aroma, freshness, ingredients, price, cost, and many other things, while characteristics of a loaf of bread, are not themselves bread. A loaf of bread would remain a loaf of bread even if it lacked one or more of these characteristics, as long as the capacity to acquire and develop the missing, un- or underdeveloped characteristics remained intact.

With this understanding, it becomes clear why, in a free market, David Ricardo's labor theory of value, congealed by Karl Marx into an absolute dogma, simply does not make sense. According to Ricardo, "correcting" what he perceived as the mistake of Adam Smith and Jean-Baptiste Say, the value of a thing, and thus its true or universal price, is the cost of the labor that went into it. Unfortunately, cost and price, while accidentals of the good or service produced, each have a substantial nature of their own, as shown by the fact that they have different definitions.

We can therefore discern that cost and price are different from the simple fact that two words exist. Unfortunately, many people use the terms cost and price interchangeably when employing them in ordinary speech, as demonstrated by the definitions in the American Heritage Dictionary: A "cost" is, "An amount paid or required in payment for a purchase; a price. To have as a price." (American Heritage Dictionary.) A "price" is, "The amount as of money or goods, asked for or given in exchange for something else. The cost at which something is obtained." (Ibid.) These definitions make it sound very much as if "price" and "cost" are simply different words for the same thing. That is, in fact, how many otherwise intelligent people understand them.

We, however, are concerned with the technical meanings of cost and price, not the popular meanings. Technically, then, price refers to the amount of money you give up to acquire a good or service. Cost, on the other hand, refers to the amount paid to produce a good or service. Cost represents the sum of the value of the inputs to production — capital and labor — and can be objectively determined on a case-by-case basis. Price, however, is subjectively determined on a case-by-case basis, depending on the perception of the value of the good or service to the buyer.

This is because while price is a function of many things, such as quantity, quality, utility, and so on, the primary determination of price is what a knowledgeable consumer is willing to pay for the thing. This can be, and often is unrelated to what it cost the seller to acquire or produce the good or service. It is an economic and financial decision whether to provide a good or service based on a comparison of the cost to acquire or produce it with the anticipated price at which the good or service can be sold. Pricing being more of an art than a science, there is no necessary correlation between what it costs the provider to produce or acquire something, and the price that can be realized from the consumer.

Individual consumer's subjective decisions on whether or not to buy at a particular price can, however, be objectified after a fashion. By aggregating the prices that individual consumers are willing to pay for a thing in a free market, we approach an approximation of the true, "universal" price of that thing. Paradoxically, we can never know the actual, precise universal price of a particular thing because such factors as quantity, quality, utility and, above all, the price a consumer is willing to pay for a thing are (like society itself) all in a constant state of flux. Within a free and open market maintained within a just and stable social order, however, we can get a good approximation of the objective price of things, and thereby determine just prices, just wages, and just profits in as objective a manner as possible.

Wide fluctuations in prices, wages, and profits, inflation or deflation of the currency, and so on, are all therefore good indications that the institutions of the social order (particularly money and credit) are seriously flawed and that the free market is not operating in a manner consistent with the demands of human dignity.

In the next posting in this series we will examine the third pillar of an economically just society, the restoration of private property, especially in corporate equity.

On Usury and Other Dishonest Profit, Part XXIV

From a more realistic understanding of the demands of human dignity, of money and credit, and the three principles of economic justice, we can derive the necessary characteristics of a sound — and, above all, human — financial and economic system. We have distilled these necessary characteristics into four basic "pillars" of an economically and politically just society. These are:

1. A limited economic role for the State,

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

3. Restoration of the rights of private property, particularly in corporate equity, and (the "fatal omission" in virtually all economic systems today),

4. Widespread direct ownership of the means of production, individually or in free association with others.

In understanding these four pillars, we must always keep in mind the principles from which they are derived: 1) respect for human dignity, 2) a more realistic understanding of money and credit, and 3) the principles of economic justice. In this context, the principles of economic justice in particular must be kept explicitly before us at all times: a) Participation (or Participative Justice), b) Distribution (or Distributive Justice), and c) Harmony (Social Justice).

A Limited Economic Role for the State

The State is a necessary institution, the need for which is embedded in human nature by our Creator. Any particular State, however, is a human creation, whether spontaneous by chance human interaction and the accidents of history, or by conscious design. That being the case, the State is subordinate to the human person; the State was made for man, not man for the State. Citizens are bound to the State by a natural law "social contract," consisting of the State's implicit agreement to abide by those rights that are inherent in the human person by virtue of humanity itself, among which are life, liberty, property, and the pursuit of happiness, and the citizens' duty to obey the State in all things that do not violate the natural law.

The primary responsibility of the State is care of the common good. The common good is that complex network of institutions within which the human person normally acquires and develops virtue, that is, becomes more fully human and fits him- or herself for his or her final end. Thus, in what at first glance may seem like a paradox, each human person realizes his or her individuality best within a social context.

The State therefore has the task of maintaining a stable and orderly society that respects individual rights as well as the demands of the common good. This requires maintaining and protecting those rights and other institutions of the common good. This extends to demanding, in extreme cases, the sacrifice of individual members of society (as in a just war) in order to maintain the integrity of the common good. Otherwise the whole of society would be flawed to such an extent that the acquisition and development of virtue by each member of society would be rendered unnecessarily difficult or impossible.

A stable and orderly society is so great a good that we must, on occasion, tolerate even unjust laws and situations if correcting the flawed institution would result in the serious disruption or destruction of the social order. As long as a law, however unjust, does not force any individual to commit an act that violates his or her individual conscience, it can and must be tolerated until such time as individuals organize and carry out acts of social justice to restructure and reform the affected institution(s), putting an end to the injustice.

The State's proper role is thus not to ensure equality or even equitability of results. That is, the State is not supposed to care for individual goods, singly or in aggregate, except in a dire emergency as an expedient, but to ensure equality or equitability of opportunity. The State carries out this function by passing and enforcing just laws in conformity with the natural moral law. The State thereby provides a "level playing field," and protects our natural rights to life, liberty (free association), access to the means of acquiring and possessing private property in the means of production, and acquiring and developing virtue ("pursuit of happiness").

As a human creation, the State only gets its authority from those who come together to form the State. As explained by Aquinas, clarified by Bellarmine, and corrected by Pope Pius XI, consistent with the demands of human dignity, God grants sovereignty to each individual human being. When human persons organize in a group, a portion of this sovereignty is delegated by revocable grant to the group, which becomes a "person" itself by means of that grant.

Depending on the role that the group is intended and designed to play in the common good, this revocable grant of sovereignty may be extremely limited and temporary, or very great in scope and of long duration. Because the State's role is care of the common good itself, the grant typically constitutes the full amount of all that can legitimately be granted, subject in all cases, of course, to the demands of individual human dignity within the common good.

The State may consist of a number of different levels of sovereignty, and even divide different aspects of sovereignty internally, but all, ultimately, derive from the human persons who make up the State. Individuals, as an organized expression of their values and goals, form such institutions as means of assisting each individual's acquisition and development of virtue, and thus enhance the quality of each person's individual and social life.

When the State abuses its authority, and the abuse has a material effect on the common good, the citizens have the duty to change rulers, even the form of government in order to correct the problem. Similarly, when citizens, individually or in free association with others, become able to carry out a task that is traditionally carried out by the State, the State is obligated to devolve its authority and responsibility for that task back to the citizens, or it is guilty of abusing its authority.

Thus, when the citizens are able to take care of their material needs without undue interference by the State, the State is obliged by the terms of the natural law "social contract" that binds citizens to the State to permit the citizens to meet their own needs through their own efforts. Further, when the citizens organize and come together in solidarity with the goal of meeting their material needs, the State is obliged to pass and enforce any laws necessary to make it possible for the organized groups of citizens to meet their material needs in the most efficient and cost effective manner possible.

Finally, the State is obliged to assist all citizens to the fullest extent possible in gaining power over their own lives so as to meet their material needs adequately through their own efforts. Except as an expedient to address an emergency situation, the State may never maintain citizens in a dependent condition (effective infants) on itself or others through failure to assist the citizens in becoming independent adults, or by failing or refusing to pass any necessary enabling legislation that would allow all citizens equal access to the economic and political institutions of the common good.

Thus, the first pillar of an economically just society, a limited economic role for the State, is a necessary foundation for the other three pillars, the second of which — free and open markets — we will examine in the next posting in this series.

Can We Spend Our Way Out of a Recession?

Due to the extended series on usury (which we hope to complete soon) and the fact that the Wall Street Journal and the Washington Post seldom pay attention to letters that call their fundamental assumptions into question, we didn't post this letter last week. We're making up for that now, as we await word on whether or not the new encyclical on justice will be released today, and when and where it will be available.

Dear Sir(s):

Today's statement by the Honorable Messrs. Hoyer and Miller, while not the point of their article ("Congress Must Pay for What It Spends," WSJ, 06/25/09, A13), revealed why Congress — or anyone else — isn't able to pay for what it spends. Referencing "the necessary, though costly, efforts to get our economy out of recession," they expose our government's adherence to discredited Keynesian economics and reliance on programs that fail because they reject reality.

A recession is, "An extended decline in general business activity." (American Heritage Dictionary.) Unserviceable and non-productive debt increases. Marketable goods and services are not produced because they cannot be sold. Jobs disappear as companies lay off workers who would otherwise be productive.

According to Keynes, the way out of this is to debauch the currency to redistribute effective demand through the "hidden tax" of inflation. This defies common sense. You cannot get out of debt by spending money. The only sane solution was given by Jean-Baptiste Say (1767-1832), whose "Law of Markets" was rejected by both Marx and Keynes. As Say explained in Letters to Malthus (1821),

All those who, since Adam Smith, have turned their attention to Political Economy, agree that in reality we do not buy articles of consumption with money, the circulating medium with which we pay for them. We must in the first instance have bought this money itself by the sale of our produce. . . . From these premises I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said — As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce.

The way to end a recession is not to increase liabilities and spending, but to increase feasible capital investment and production, as Dr. Harold Moulton, president of the Brookings Institution explained in his 1935 monograph, The Formation of Capital. Carried out within a free market circumscribed by a strong juridical order to ensure equality of opportunity and protection of persons and property, the process is not costly, but profitable.

Louis Kelso and Mortimer Adler outlined a financially sound means to achieve this end in their two co-authored books, The Capitalist Manifesto (1958) and The New Capitalists (1961). To the principles of Say and Moulton, Kelso and Adler add the necessity for everyone to participate in the ownership of capital to achieve a stable and sustainable economic recovery.

News from the Network, Vol. 2, No. 26

Welcome to our 300th blog posting. While it seems a little self-serving to announce your "tercentenary" in your own news report, nobody else is going to do it. Fortunately, we can quickly pass from that to the real news items.

• The current issue of Inside the Vatican (June-July 2009) contains as its lead story an article by Michael D. Greaney, " 'They': The Illusion of Barriers to a More Just Social Order."

• Rowland Brohawn reports that work is progressing steadily on editing and formatting the video footage of the annual demonstration outside the Federal Reserve on Wednesday, April 15, 2009.

• Two responses from the mailout of the "Declaration of Monetary Justice" have been received. One was from the Federal Reserve Bank of Richmond, Virginia, while the other was from the Federal Reserve Bank of New York. Both responses were relatively neutral, conveying the impression that they did not feel it was within their area of competence to address the proposal.

• The Declaration of Monetary Justice itself will be amended in the near future to include the proposal that every citizen and legal resident be vested with a single, non-transferable, no cost, voting and fully participating share in his or her local Federal Reserve Bank. We believe that changing the ownership structure of the Federal Reserve System will distance the System from control by the politicians and financial interests, and allow the System to fill its proper role more efficiently and in a cost-effective manner.

• CESJ is currently exploring a general overhaul of its internet communications vehicles and strategy. Mr. Ed Langhals of "Williamsburg Revolutionary Radio" is contributing a great deal to this effort.

• The Clarendon Foundation has just launched its website. The Clarendon Foundation is a tax exempt nonprofit corporation that was organized in March, 1991 as a public interest law firm in the Commonwealth of Virginia. In September 1991, the Foundation added a new nonprofit activity of providing free instructional television service to accredited educational institutions. The FCC has granted licenses for educational broadcast services in 21 markets across the United States.

• As of this morning, we have had visitors from 31 different countries and 39 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Brazil, Canada, Venezuela, and the UK. People in Egypt, Venezuela, the Netherlands the United States and Brazil spent the most average time on the blog. The most popular postings are the series on usury (which we hope to wind up next week), and the news reports. While the postings on Keynesian economics have dropped out of the top ten, the usury postings give a critique of that discredited economic system and a contrast with the binary economics of Louis Kelso and Mortimer Adler.

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.

On Usury and Other Dishonest Profit, Part XXIII

To say that people need to get organized and carry out acts of social justice is all very well, but the question then becomes, "organized to do what?" We've seen that programs based on Keynesian economics are contrary to human nature, that is, to reality. That being the case, they are necessarily doomed to fail. On the other hand, the analyses of Jean-Baptiste Say and Harold Moulton are true as far as they go, but seem to leave something out. If a non-usurious economic system is consistent with human nature, it should be possible to put human ingenuity to work. We should be able to design a system that not only makes good economic and financial sense, but is fully consistent with human nature.

We have already hinted at the essential elements of such a system, but let's recap them briefly:

1. Respect for human dignity. This sounds like a throwaway line, or something tossed in for the "touchy-feelie" crowd. On the contrary, this is the most important aspect of any institution or system devised by humanity for humanity. "Dignity" means recognition and protection of the full spectrum of natural rights of every individual, among which are life, liberty (freedom of association), access to the means of acquiring and possessing private property in the means of production, and the acquisition and development of virtue ("pursuit of happiness"). Human dignity extends to the "secondary" or "derived" rights, those which are not explicitly natural rights, but which necessarily accompany the natural rights and optimize the enjoyment and exercise of each individual's natural rights within the common good. The existence of rights implies the functioning of justice, the highest temporal virtue. Justice must be tempered with charity, but we must never define the exercise of charity or justice in any way that confuses the two, or in a way that negates one or the other. Charity is not truly charity if justice has not been observed as perfectly as possible, while justice that is not tempered with charity tends to reduce or even eliminate the "human factor." Thus we may never, for example, violate one individual's natural rights for the benefit of another, regardless of the need. All elements of every human institution must be derived from and be directed toward respect for the human dignity of everyone.

2. Money and credit. Until we understand that this thing we call "money" is derived solely from production of marketable (exchangeable) goods and services, that is, from the ability to deliver on the promise to convey or transfer things of value, we will continue to be baffled by the mavens of Wall Street and government pundits who blindly follow the false assumptions of Lord Keynes and other economists who fail to grasp the nature of employment, interest, and money. "Money" is anything that can be used in settlement of a debt. "Credit" is the act of creating money by making a promise to deliver something of value. We can create money legitimately by making a promise to deliver anything of value in which we have ownership. We can create money illegitimately by making a promise for someone else to deliver something of value in which they have ownership. The ability to create money is a natural right under "freedom of association." Because money and credit have such a profound effect on the common good, the creation of money and the extension of credit must be strictly regulated and policed by the State when passing through the channels of commerce. (Private transactions affecting only two parties can be much less formal, and may or may not be properly regulated by the State, depending on the type of transaction and the materiality, i.e., its relative importance.) We must, however, never confuse the State's regulatory role with the creative function. Money and credit are "derivatives" of production (whether existing goods and services or the present value of to-be-produced goods and services), and the State by its nature produces nothing.

3. The principles of economic justice. The principles of economic justice are applications of respect for human dignity. Economic justice thus encompasses the moral principles that guide people in creating, maintaining, and perfecting economic institutions. These institutions determine how each person produces an independent material foundation for economic subsistence. The ultimate purpose of economic justice is to free each person economically to develop to the full extent of his or her potential, enabling that person to engage in the unlimited work beyond economics, that of acquiring and developing virtue, and so fitting one's self to mankind's proper end. The triad of interdependent principles of economic justice are the principles of 1) Participation (or Participative Justice), 2) Distribution (or Distributive Justice), and 3) Harmony (Social Justice). Participative justice refers to the right that everyone has to participate fully in all institutions of the common good, especially the right of equal personal access to the means, or "social tools," to participate fully as a producer to meet one's needs as a consumer. In economic justice, this refers to the right each person has to participate in the economic process as a supplier of labor, an owner of capital, or both. Distributive justice is often misunderstood as distribution on the basis of need, the principle directing charity. As defined by Aristotle (Ethics, V), however, distributive justice is based on a proportionality of value given and received. This virtue deals with a distribution or division of something among various people interacting cooperatively with one another, in shares proportionate to the value of each one's relative contribution to the outcome. The third principle of economic justice operates as the "feedback principle" for ensuring that participative and distributive justice are in balance and working properly. This principle of limitation prevents such concentrations of capital ownership as are injurious to the economic rights of others, i.e., their right of effective participation in production and to earn thereby a viable income in the form of the distributive share to which they are justly entitled by the value of their contribution.

These essentials of a non-usurious economic system guide us in discerning the four pillars of a just market economy, an application of our natural right to freedom of association. We will examine the four pillars in the next posting in this series.

On Usury and Other Dishonest Profit, Part XXII

Before we get into what to do about the problem of usury, we need to know how to do what we want to do. That is where social justice comes in. This is going to be a little choppy and somewhat sketchy, as it is a very condensed version of what is contained in Father Ferree's Introduction to Social Justice (1948).

Social justice is the particular virtue whose object is the common good of all human society, rather than, as with individual justice, the individual good of any member or group. Social justice is one of the basic social virtues in the field of social morality.

Social justice guides humans as social beings in creating and perfecting organized human interactions, or institutions. Social justice is the principle for restoring moral balance and harmony in the social order.

Social justice imposes on each member of society a personal responsibility to work with others to design and continually perfect our institutions as tools for personal and social development. To the extent an institution violates the human dignity of any person or group, organized acts of social justice are required to correct the defects in that institution.

Social justice is the specific virtue ("habit of doing good") that relates to reforming our social structures ("institutions"). In other words, the act of social justice fixes what's wrong socially so that we can do good individually.

There are (so far as we know . . . ) seven "laws" and six characteristics of social justice.

Let's go over them one by one.

The first law is that the common good be kept inviolate. Care for the common good is our most important work. To endanger the common good for private gain is wrong. Safeguarding the common good is a top priority.

Two, cooperation, not conflict. The unity of human society cannot be founded on opposition. The common good is the object of social justice, not individual goods. Unbridled greed, competition and dictatorship are wrong.

Three, your first particular, individual good in your place in the common good. "Man is by nature a political (social) animal." (Aristotle) Individual rights are best protected in a social environment.

Four, each individual is directly responsible for the common good. Every individual is directly responsible for the "common good" — the social order. This is because the common good is built up in "hierarchical order." That is, the human person under a sovereign Creator is at the top of all institutions in the social order. Institutions — laws, customs, traditions, families, the State, organized religion — are "social props" created by humanity to assist in the perfection of each individual.

Five, higher institutions must never displace lower institutions. Not the highest level, not the lowest level, but the most appropriate level is "where the action is."

Six, freedom of association. Everyone and every group has the right and duty to organize. The solution to social problems must be social, that is, organized.

Seven, Specialization: All vital interests should be organized. Organizations should be deliberately designed to perfect the common good. This is a full-time job that never ends. Each person a specialist in his or her own life. The choice is between organization for or against the common good, not organization or no organization. Not a new way of life, but a new purpose in life.

The Six Characteristics of social justice:

The first characteristic of social justice is that social justice can only be carried out by members of groups. Individuals as individuals act . . . Individually! Individuals as members of groups act socially. To effect social change, individuals must act within their institutions as members of those institutions, not outsiders or mavericks. Finally, it takes time.

Two, tend to perfection, but do what is possible with others in an organized manner with what is available. Rather than not work at all for the common good or to work ineffectively, we must be willing to work with imperfect people and institutions.

Three, nothing is impossible. In social justice, there is no such thing as "helplessness." No problem is too big. No problem is too complex. By "nothing is impossible" we mean that anything designed by human beings — especially our institutions — can be redesigned by human beings, joined together in free association to effect changes in the common good. No field is too vast. Social justice gives us the tools to make any problem solvable.

Four, eternal vigilance. The work of social justice is never finished.
Institutions are always changing. When institutions stop filling our needs, or do so inadequately, we need to organize and correct those institutions — and this is happening all the time!

Five, effectiveness. The work of social justice is never finished. It must, therefore, be effective. We can't just have a vague "good intention" for the common good, and ignore the outcome. For something to be "socially just," we must ensure that we are making progress toward our goal of a good society. (And always remember that ends don't justify means!)

Six, you can't "take it or leave it alone." Social justice is a personal ("rigid") obligation on each individual. Everyone has the ability to work on the common good, therefore everyone has the obligation to work on the common good!

As Father Ferree reminds us,

". . . . The power that we have now to change any institution of life, the grip that we have on the social order as a whole, was always there but we did not know it and we did not know how to use it.

"Now we know.

"That is the difference."

On Usury and Other Dishonest Profit, Part XXI

In Social Justice there is never any such thing as helplessness. No problem is ever too big or too complex, no field is ever too vast, for the methods of this Social Justice. Problems that were agonizing in the past and were simply dodged, even by serious and virtuous people, can now be solved with ease by any school child. (Rev. William J. Ferree, S.M., Ph.D., Introduction to Social Justice, 1948)

What Social Justice demands is something specifically social: the reorganization of the system. (Ibid.)

As far as most people are concerned, "the way things are" is a given. It cannot be changed. The only recourse when confronted with injustice, then, is to search for the individuals who are guilty of committing the injustice. Just or unjust, you can't do anything about the system, so you go after those whom you believe to be responsible. Somebody has to be guilty . . . don't they?

Unfortunately, the ones usually blamed for the injustice are frequently just as individually helpless to change things as those who are suffering from the injustice. Does that mean that nothing can be done? No. The response when faced with individual helplessness in the face of social injustice is to organize, and through the "people power" gained, restructure the institutions that are causing the problem.

Thus, if we want to blame the takers and givers of interest on loans of money make for consumption with wrongdoing, we must change the system to make it possible to function in society without taking or giving interest on loans of money made for consumption. In the current state of society, that means providing the means whereby people can increase their income and so be able to afford what they need to live in a manner befitting the demands of human dignity without borrowing.

The case for State borrowing is similar. The scholastic philosophers "allowed" the State to borrow when tax revenues were too low, but that was not because government usury is somehow right while individual usury is wrong. The reasoning is that the State maintains and protects the common good, the social order. The maintenance of a stable social order is such a great good that the principle of double effect may be applied. The principle of double effect states that we are permitted to do something that has evil effects in order to obtain a greater good.

Some caveats, of course, apply. First, the wrong we do may not be "objectively evil," that is, evil by its very nature. Taking a profit, for example, is not wrong in and of itself. What is wrong is taking a profit when no profit is due. Second, evil that is done must not be directly intended. Third, the intended good must be greater than the unintended evil.

Thus, an individual may accept interest on a government obligation without doing wrong, and the government does not do wrong to pay interest on what it borrows, as long as there is no other way to raise the funds for necessary State expenditures. Similarly, in the current state of society a consumer may pay interest on a loan of money made for consumption purposes, and a lender take it without wrongdoing — as long as there is no other way for the individual to obtain what is needed to pay for necessary consumption items, and the lender is not charging more in interest than would have been obtained from a borrower who used the loan proceeds for a capital investment.

There is a final caveat, however. That is, we are not permitted to let an inherently unjust condition of society remain uncorrected. A society in which people or the State cannot obtain sufficient funds to meet ordinary expenses without usury is a society that has some seriously flawed institutions. The problem then becomes how, when the helplessness of the individual is a virtual byword, and the State is supposed to keep its hands off individuals' goods, to correct the situation.

That is the subject of the next posting in this series, in which we will examine the "act of social justice."

On Usury and Other Dishonest Profit, Part XX

In the previous posting in this series we examined how a commercial bank can legitimately create money to finance the formation of capital when there is insufficient or non-existent savings in the system. We discovered that a commercial bank can create money in concert with a borrower. Money can be created out of the bank's ability to have its promises accepted everywhere in combination with the borrower's ability to produce marketable goods and services.

This power of commercial banks in combination with borrowers sets up a seeming paradox. A bank of deposit shouldn't be used to finance capital projects. By doing so, as Dr. Harold Moulton proved, consumption must be cut to the extent that the new capital is no longer financially feasible. On the other hand, only by lending its deposits for capital investment is it legitimate for a bank of deposit to charge interest. Profit sharing is a right of private property, and "interest" is nothing more than a saver's rightful share of what his or her savings helped produce.

A bank of issue — a commercial bank — is designed to create money to finance capital investment without the necessity of existing accumulations of savings. This presents a problem, because there is no saver with whom the borrower needs to share the profits. The money — the savings — didn't exist before the borrower and the bank got together and, through joint action, created the money. No one, therefore, has a right to interest, because no one is putting up something that he or she owns, that is, in which he or she has private property.

Having private property in something (that is, having ownership of something) confers the right to enjoy the fruits of ownership (the usufruct thereof). Usury consists of enjoying the fruits of ownership — taking a profit — from something that does not generate a profit, or in taking more than the owner is entitled to. Usury is like demanding apples from a pine tree, or in taking two bushels of apples from a tree that only produced one bushel.

The less obvious aspect of usury is that it also involves taking a profit from something that you don't own, regardless how much profit it generates. The problem with the "Real Bills" doctrine, then, is that nobody owned the money that was lent before the loan was made that brought the money into existence. To charge interest on such a "pure credit" loan, then, is illegitimate, and constitutes usury, for (again) you can't take a profit from something you don't own.

This is because the bank doesn't own the money it created, the borrower does. What the bank owns is a claim on future income expected to be generated by the capital financed by the loan, and a lien on the capital — not the money that was created. All interest (the word comes from "ownership interest"), that is, all the profits generated from the capital in which he or she invested, thus belongs by right of private property to the borrower.

Does this mean that the lender — the bank — legitimately gets nothing? By no means. Because it provided a service, the bank is due a fee. The fee should be enough to cover the bank's costs and provide a market-determined just profit. The bank also took a risk that the loan would not be repaid. It has a right to be compensated for that risk. This "risk premium" is usually built into the "interest rate," although it is not, strictly speaking, "interest." (The risk premium can generally be determined by subtracting the "risk free" interest rate paid on government debt from the rate actually charged to the borrower.)

Thus, it is possible to finance capital formation in a modern industrial economy without the necessity of usury. Admittedly, the superabundance of consumer credit and government borrowing will always be usurious and thus a serious problem until it can be eliminated as a usual thing. Consumer borrowing at interest is clearly contrary to the prohibition against usury.

Interest on consumer loans can be "allowed" not because paying or taking interest on loans of money for consumption purposes is somehow no longer wrong, but because requiring someone to do what is impossible is wrong. Interest can be taken and paid today because the system works that way, and it is beyond the power of a single individual to change the system. The problem then becomes what to do when the system forces you to do what is wrong.

News from the Network, Vol. 2, No. 25

The news this week is superficially thin. There have, however, been a few brief but significant events.

• Joe Recinos dropped in from El Salvador, where he is working on a project that would, if successful, result in workers owning 70% of a number of business enterprises. El Salvador and other countries in the region are also discussing a currency union, possibly with the goal of building a foundation for a future political union. Norman Kurland pointed out the importance of reforming the regions central banks so as to encourage democratic access to capital credit so that everyone can become an owner. CESJ is currently studying the feasibility of and preparing a position paper on every citizen and legal resident of a country becoming a direct owner of his or her country's central bank. This would be through the medium of a single, lifetime, no-cost, non-transferable, fully-participating voting share in the central bank. If instituted in the United States with the Federal Reserve, such a program would eliminate concentrated control over money and credit, provide sufficient liquidity to restore and grow the economy in a sound and responsible manner, and answer the fears of people who believe the only solution to today's economic problems is to abolish the financial system rather than reform it. A "natural resources bank" that would vest ownership of the land and and natural resources directly in the people was also discussed.

• CESJ held its monthly Executive Committee meeting on Wednesday, June 17. Much of the discussion centered around revamping CESJ's communications in order to present the message of the Just Third Way to a broader audience.

• Norman Kurland of CESJ received a telephone call from an official at the Federal Reserve, reporting that she had personally handed the "Declaration of Monetary Justice" to Chairman Bernanke. Norm reiterated the importance of meeting personally with Mr. Bernanke in order to explain our proposals more fully and to respond directly to any questions the Chairman might have.

• An e-mail response to a "mass mailing" resulted in a very productive exchange with some individuals involved in corporate finance and the money markets. One of the individuals agreed that the four pillars of the Just Third Way (1, limited economic role for the State, 2, the free market as the best means of determining just wages, just prices, and just profits, 3, restoration of the rights of private property, especially in corporate equity, and 4, widespread direct ownership of the means of production) are sound and desirable goals. He did not agree, however, despite the obvious growing concentration of economic power in the hands of a few and the correlative economic disenfranchisement of the many, that there are any barriers that inhibit or prevent people from participating in the economy, both as suppliers of labor and as owners of capital.

• As of this morning, we have had visitors from 32 different countries and 39 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Venezuela, the UK, with Brazil and Finland rounding out the "top five." People in Egypt, Venezuela, the Netherlands the United States and Brazil spent the most average time on the blog. The most popular postings are the series on usury (which we hope to wind up next week), the news reports, and the Keynesian "paradox of thrift."

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.

On Usury and Other Dishonest Profit, Part XIX

You can get out of debt by spending more money . . . or so Keynesian economics would have us believe. The only thing that happens, however, is not a diminution of debt, but a transfer of existing and new debt, a shuffling of liabilities. For example, a government bailout doesn't eliminate debt, but transfers the debt from a private company to its new owner, the State. The government borrows money to fund economic stimulus packages in order to increase effective demand in the economy.

Increasing effective demand encourages companies to borrow money (i.e., go into debt) to create jobs. Job creation entices consumers to borrow money to purchase goods and services on the assumption that future wage income will allow them to pay back the loan. The government then engages in a new series of bailouts to transfer private debt (and ownership) to the State, beginning the cycle all over again.

Clearly this is insane, or (to use the technical term), "nuts." A government or a private company can't decrease liabilities by increasing them. Neither can people increase effective demand (disposable income) unless they have the means to engage in production, as Jean-Baptiste Say pointed out, by means of their labor, capital, or land.

Unfortunately, in the Keynesian paradigm, the only way to finance capital formation to increase production is to cut consumption and save. Since saving decreases effective demand (i.e., cuts consumption), this makes the investment in new capital non- or less feasible. Thus, as we have already seen, the only way in the Keynesian paradigm to keep things going is to engage in redistribution of what already exists, either directly through the tax system, or indirectly through inflation.

The sane alternative is to discard the Keynesian paradigm and start using commercial banks, that is, banks of issue, in the way they were designed and intended to operate. This is what Dr. Harold G. Moulton advocated to finance recovery from the Great Depression following the Crash of 1929 in his short book, The Formation of Capital (1935).

A commercial bank operates in conformity with something called the "Real Bills" doctrine. Unilaterally rejected by Keynes & Co. as "discredited" (without giving any reasons), the Real Bills doctrine is that a commercial bank (as opposed to a bank of deposit) can create money without inflation, as long as the new money is backed by existing marketable goods and services, or the present value of a reasonably-expected future stream of income generated by the production of marketable goods and services.

The Real Bills doctrine, in short, recognizes that, because production = income, this thing we call "money," that allows us to transfer claims on production between parties to a transaction, is derived from production itself — not from government debt. Money is, in fact, a "derivative" of production. Money is illegitimate (i.e., counterfeit — whether legal or illegal) if not backed by the present value of existing marketable goods and services, or the present value of a reasonably-expected future stream of income generated by as-yet unproduced marketable goods and services. Money is legally defined as anything that can be used in settlement of a debt. It doesn't have to be in the form of government-issued currency, or even in any physical form at all. Money can take the form of an oral agreement or a handshake, if both parties reach a "meeting of the minds."

What, then, is "currency"? Currency is "current money," i.e., something that has a standard value in an economy, and passes from hand to hand without having to be revalued every time a transaction takes place. Currency can (and most often is) regulated by the government, but it doesn't have to be. Currency is simply a socially-supported convenient form of money.

Legal tender, despite the mystique that has developed around those two words, simply refers to the fact that the form of money to which legal tender status has been attached (and it doesn't even have to be a recognized currency) cannot be refused if tendered in payment of a debt. There appear to have been some statutory changes in various countries that limit the application of legal tender status (nobody ever said the interpretation or enforcement of laws was consistent or logical — just that it is supposed to be so), but the essential principle remains. It is altered or amended for the sake of expedience, e.g., the IRS would find itself in grave difficulties if everyone paid his or her taxes in cash, to say nothing of the fact that there isn't enough legal tender currency in circulation for everyone to pay his or her taxes in cash. This does not, however, change the basic principle: legal tender is that which cannot be refused in payment of a legal debt.

A commercial bank, therefore, can create money by taking a lien on existing inventories of goods and services, or the present value of future production of inventories of marketable goods and services that a prospective borrower brings to the bank. The bank exchanges a demand deposit or (formerly) prints bank notes, and loans it to the borrower. The borrower takes the funds and invests in some project expected to generate a future stream of income.

As the income comes in, the borrower repays the bank, plus whatever service fees, interest, and risk premium is charged on the loan. For its part, the bank cancels the loan principal and the funds used to repay the principal — the amount of money created to finance capital formation. The additional money the bank takes in debt service (service fees, interest, and risk premium) is "pocketed" by the bank and booked as revenue. Out of this, the bank meets its expenses, retains earnings, or pays out profits in the form of dividends. What money the bank doesn't cancel reenters the economy as the bank expends the funds.

Herein we see the paradox of commercial banking. While not usurious, commercial banks engage in usury — even though (in theory) they lend money only for productive projects, and taking a profit where a profit is generated is perfectly legitimate, even moral. This is a right of private property. A right implies the functioning of justice, a moral virtue. Thus taking a profit ("enjoying the fruits of ownership") is not only allowed, it is virtuous in the Aristotelian sense.

How this is possible will be examined in the next posting in this series.

On Usury and Other Dishonest Profit, Part XVIII

When a bank of deposit charges more on a loan made for consumption than is required to cover its costs and restore the full value of what was borrowed, the bank is engaged in usury. The only just profit-taking by a bank of deposit results from a loan made to finance a project that generates a profit. By right of private property the bank is entitled to a share of profits commensurate with the contribution to the productive process made by the financing. In today's economy, this is usually construed as the market cost of capital.

The problem is that, if existing accumulations of savings are used to finance capital formation, the capital that is formed is less financially feasible! This near-paradox was "discovered" by Dr. Harold Moulton, when he pointed out the rather obvious fact that if levels of consumption are decreased in order to finance capital formation, the market for the goods and services to be produced by the capital being formed also decreases. In other words, the incentive to invest in new capital formation ("effective demand") disappears, making is much less likely that the investor will be able to pay for the new capital.

Keynes' response to this is to inflate the currency. This "creates" effective demand by transferring (i.e., "stealing") purchasing power from savers whose accumulations are denominated in currency, to those receiving government largesse. This (allegedly) makes the capital financially feasible by generating artificial effective demand. This magically turns into genuine effective demand when jobs are created using the new capital to produce goods and services.

The "magic," however, turns out to be sleight-of-hand, for the value of the wages received from the new jobs is lowered in response to inflation. The workers for hire who have only their labor to sell for wages end up worse off than they were before. They still cannot purchase enough of the goods and services produced to keep the new capital financially feasible, so the companies begin reducing the number of jobs and lay people off. This begins the cycle all over again, with the government injecting increasing amounts of effective demand into the economy by inflating the currency, all the while throwing the system further and further out of balance, until some event (such as the Crash of 1929 or the home mortgage meltdown of 2008) causes a economy-wide, sometimes world-wide financial disaster.

The Keynesian balancing act of walking a tightrope between inflation and unemployment is, in light of such events as happened in 1929 and 2008, unsustainable. The rope — the economy and its financial infrastructure — is heavily frayed. At some point the rope can't be tied back together again. All the slack has been used up by the government playing games with the currency, private property, and the methods of corporate finance. You can't tie two pieces of rope together without slack.

At this point, it seems as if nothing can be done. Within the Keynesian paradigm, that conclusion is correct. Economists and politicians keep insisting that the recession is over, but they fail to realize that they have done nothing but make the ultimate collapse worse by inflating the currency to rescue failed companies from bad debts — that is, trying to get out of debt by spending more money.

There is, however, a way out, one that we will start to look at in the next posting in this series.

On Usury and Other Dishonest Profit, Part XVII

At its simplest, banking consists of people making deposits, and the bank lending out the deposits. People making deposits are called (obviously) "depositors," while the people to whom the bank lends the deposited funds are called "borrowers." This most basic form of bank is called a deposit bank or a "bank of deposit," to use three words when two will do.

Clearly a deposit bank cannot lend out more than is deposited. The only way for a bank of deposit to get into trouble (aside from the ever-present danger that borrowers will not repay their loans) is for depositors to demand back more money than the bank has on hand, the balance having been loaned to borrowers.

As viewers of the Frank Capra film It's a Wonderful Life (1946) know, a deposit bank can't make any money for itself or its depositors if it doesn't make loans — but at the same time, that means that the depositors cannot demand all their money. The funds are (presumably) invested in the community, and are not "liquid." In order to allow depositors to withdraw all their funds, the bank would have to call all the loans (probably bankrupting all its borrowers in the process), pay out the depositors, and shut its doors. . . just as the evil Mr. Potter planned when he caused a run on the Savings and Loan.

The funds loaned out by deposit banks represent accumulations of savings, that is, unconsumed income from prior periods. Given that the purpose of production is consumption, the existence of savings means that goods and services were produced that were not consumed, and the purchasing power that (per Say's Law of Markets) came into being with that production was — in an ideal world — set aside to meet future anticipated consumption needs. This keeps the economy in balance, the bank of deposit serving a valuable and necessary service. The proper role of a bank of deposit, therefore, is to provide a secure place for people to accumulate savings to meet future anticipated consumption needs, and lend them out to other people in the interim to allow them to meet current consumption needs.

There are two problems with deposit banking, however, both related to our subject. One, if a deposit bank charges a borrower more than a just fee for providing a loan for consumption purposes, the bank is engaging in usury. A loan of money spent on consumption obviously does not generate a profit by its nature. Taking a profit in the form of an interest rate on a consumption loan is therefore unjust — the bank is taking a profit when no profit was made. This is a form of theft.

Even the calculation of a just fee is problematical. If the amount of the fee is based on what the money would have generated in the way of profits had it been invested in a productive project, it constitutes usury. You can't morally take a profit from one individual or group on the grounds that you might have made an equal or greater amount of profit by lending to someone else. In essence, this is to make one individual or group pay for the opportunity cost of your not taking the moral (and productive) alternative.

Basing the fee charged on a loan for consumption purposes on the time value of money, while it makes a better case, is still usury. The time value of money is based on what a current sum of money will be worth in the future, or what a future sum of money is worth at the present time. Often this is calculated based on some expected or anticipated rate of return, that is, on what the sum of money would generate if it were invested in a productive project. Paradoxically, this is usually the "riskless" rate of return, typically determined by the rate paid by the government on its borrowings, one of the most obvious forms of usury in any economy, government by its nature being non-productive.

Basing the fee on the rate of inflation (if any) is more sound. A lender has the right in justice to have the full value of what was borrowed restored to him or her. A unit of currency that buys a one pound loaf of bread this year, yet only half a one pound loaf of bread next year has clearly lost half its purchasing power. In justice, the borrower should then restore to the lender two units of currency for every one unit borrowed, or the lender has incurred a loss through the transfer of purchasing power from the lender to the borrower.

The problem is that inflation is itself usurious by its nature. Inflation allows a debtor to make a profit from the decreasing value of the currency. This has the effect of transferring purchasing power from savers to debtors, without the debtors having produced anything or having provided any service to the lender. In times of inflation, debtors make a profit by consuming, and benefit by being wasteful and spendthrift. Effectively, during inflation, debtors steal purchasing power from lenders by paying back debts with "cheaper" units of currency. Keynesian monetary policy is based in large measure on these principles, redistributing purchasing power through the "hidden tax" of inflation.

The seemingly unavoidable plunge into usury by banks of deposit is obviously not good for society. The seemingly moral alternative, however — banks of deposit lending only for productive investment — while individually moral (and thus permissible), actually causes more harm to the economy than charging interest on consumer or government loans made out of existing accumulations of savings. Why this is so we will cover in the next posting.