Fracas of the Fruits, or, Apples and Oranges Mix It Up

As many of you know, CESJ's new edition of Dr. Harold G. Moulton's 1935 classic The Formation of Capital was released. Because we're a little short of staff and have somewhat limited resources, we haven't — yet — sent out a press release on the book, although we expect to, shortly. In the meantime, there is nothing to stop anyone from going to Amazon, calling up the book's webpage, purchasing the book, and posting a review.

Before doing that, however, we thought we'd issue a few guidelines — not about what to write, of course. Your opinion is your own. Some authors are of the opinion that a nasty, ignorant review is infinitely superior to a good review . . . if the goal is to sell books. If you want us to sell lots of copies, then, post something that attacks the book, and be sure to get the facts wrong and misspell a few words while you're at it.

The worst sort of review is the pseudo-scholarly "critique," the author of which pretends (and in most cases actually believes) that he or she knows what he or she is talking about. Coming from academics with turf to protect, these exude an air of authority rooted in a desperate effort to discredit anyone with whom they disagree.

We found such a critique of The Formation of Capital, published by Raymond T. Bye in the December 1936 issue of The American Economic Review (Vol. 26, No. 4.) — hence a few guidelines to help you avoid similar mistakes, whether you agree or disagree with Moulton. A sound disagreement supported with solid evidence and argument is often more valuable than even the most adulatory comment in support, if the former is substantive and the latter mindless.

Unfortunately, when dealing with Binary Economics, a school of economic thought that comes under the "Banking School" (into which category Moulton's work also falls), the critiques — and the critics — turn out to be more than a little off base. We'll keep this short and just give four examples of what we mean from Dr. Bye's article, three rather minor, the fourth major.

First, Dr. Bye implied that Moulton was less than honest in the publication of Brookings's studies on "the Distribution of Wealth and Income in Relation to Economic Progress." As Bye complained, "it is unfortunate that such studies are not subjected to the scrutiny of economists at large before being widely disseminated among the general reading public." (American Economic Review, op. cit., 607.) Why? "If the propositions held by Moulton and his associates are true, a large part of economic theory must be rewritten." (Ibid., 608) In other words, Moulton wasn't "playing the game" by allowing economists who had established their reputations by asserting a different paradigm to trash his work and suppress it if at all possible. We can't trust the public at large to understand such esoteric matters until and unless their economic episcopate has granted the imprimatur to a work. Besides . . . looking at the people involved in the project, Moulton did run his work by other economists. What Dr. Bye seems to have been complaining about was that Moulton didn't run it by him.

Second, Dr. Bye relied almost exclusively on the logical fallacy of the "Appeal to Authority." He did not present his own arguments, or even those of the authorities cited (either of which would have been acceptable), but simply stated that because, e.g., Keynes, Wicksell, Robertson, von Hayek, etc., etc., said something different, Moulton had to be wrong. Without some familiarity with the work of the authorities, how are we to judge the validity of their arguments? Answer: we can't. Dr. Bye's critique does not stand on its own merits.

Third, Dr. Bye misstated Moulton's position, most egregiously when he claimed that Moulton meant the same thing as Keynes and the Gang by expansion of bank credit and the presumed "involuntary savings" that occurs within the paradigm of the Currency School: "Moulton appears to regard the same process as the only means of escape from disequilibrium." (Ibid., 614.) Oops. Sorry, Dr. Bye — Moulton was positing the expansion of bank credit based on the principles of the Banking, not the Currency School, and thus obviating the whole concept of "involuntary" or "forced" savings to which the authorities Dr. Bye cited attached so much importance. This is called the "Straw Man" logical fallacy, in which the critic asserts his or her opponent's position incorrectly, demolishes the incorrect position, and then claims victory in a battle that never occurred.

Fourth, — you guessed it. Moulton, in common with other "pioneers" of the Just Third Way and economic personalism such as (gasp) Adam Smith, Henry Thornton, Jean-Baptiste Say, John Fullarton, Henry Dunning Macleod, and a couple of guys named Kelso and Adler, operated within the framework of the British Banking School. Dr. Bye, however, in common with the authorities he cited to "disprove" Moulton (Wicksell, Keynes, von Hayek, and Robertson), was clearly operating within the framework of the British Currency School. (Caveat: not all Just Third Way pioneers were Banking School. For some odd reason, Banking School adherents tended not to recognize the importance of widespread direct ownership of the means of production — but that is a story for another day.)

Although we've covered the differences at some length in previous postings, we'll summarize them again so you don't have to go back and look it up. (Besides, we're getting better at expressing ourselves more clearly as we go along.)

Banking School: "Money" is anything that can be used in settlement of a debt, and functions as the medium of exchange and the store of value. Money represents the present value of existing or future marketable goods and services in which the issuer of the money has a private property stake. The essential principle of the Banking School is Say's Law of Markets, which — most simply put — is that we don't purchase what others produce with "money," but with what we produce by means of our labor and capital. Money is simply a convenient means of conveying private property rights in an exchange. Thus, production equals income, which boils down to supply creates its own demand, and demand its own supply. This is realized in the real bills doctrine, which is simply that we can turn the present value of existing and future marketable goods and services into "money" and use it to store value and in the exchange of value by "drawing a bill" and either using the bill itself to carry out exchanges, or discount the bill at a financial institution and convert the bill into "current money" or "currency." Thus, the money supply can, potentially, always match the supply of marketable goods and services in the economy, and there will be neither inflation nor deflation, but the real price of all goods and services. New capital formation can thus be financed by drawing a bill on the present value of the marketable goods and services to be produced in the future by the as-yet unformed capital, and either used as money directly, or discounted at a commercial bank and converted into currency through the expansion of bank credit, that is, the conversion of individual credit into a bank's general credit.

Currency School: "Money" is coin, currency, and (except for the absolute purists), demand deposits (checking accounts) and certain time deposits (savings accounts). The Currency School is divided into "Bullionists" (only gold is money) and "Anti-Bullionists" (gold and State-issued gold substitutes are money). Money is only one medium of exchange and one store of value, being necessarily limited to State-authorized currency and currency substitutes, such as checks. Money is backed not by a private property stake in the present value of existing or future marketable goods and services, but by the State's ability to tax future income and issue claims against existing wealth. Currency School adherents disagree on whether the private sector should be left alone to accumulate savings for reinvestment, or whether the State must intervene to control saving and investment. The only way to finance new capital formation is to cut consumption, save, then invest. This can be done either directly by producers cutting their own consumption and accumulating unconsumed income, or in a "roundabout" way by inducing inflation, which raises the price level. This forces reductions in consumption, but maintains profits at their former level or greater, resulting in a transfer of purchasing power from consumers to producers. These profits are either used directly by producers to finance new capital, or are deposited in a bank and loaned out to other producers to finance new capital.

Now — whether or not you understand the differences between the Banking School and the Currency School, it is evident that there are, in point of fact, differences — and these differences are extremely significant. Dr. Bye, however, failed to note the differences at all, much less their significance. Consequently he insisted on critiquing Moulton's Banking School analysis in The Formation of Capital as if it were a Currency School analysis.

This is like judging the entrants in a cat show using the guide for a dog show, or trying to find your way around downtown Manhattan using a Betty Crocker Cookbook. To use a more homely analogy, Dr. Bye mixed apples and oranges, and came up with a vegetable salad. Dr. Bye's critique doesn't make sense because he judged Moulton for adherence to principles that Moulton wasn't even using! As G. K. Chesterton explained this error in his short bio of St. Thomas Aquinas, The "Dumb Ox,"

It is no good to tell an atheist that he is an atheist; or to charge a denier of immortality with the infamy of denying it; or to imagine that one can force an opponent to admit he is wrong, by proving that he is wrong on somebody else's principles, but not on his own. After the great example of St. Thomas, the principle stands, or ought always to have stood established; that we must either not argue with a man at all, or we must argue on his grounds and not ours. (The Dumb Ox, 95.)

Consequently, Dr. Bye's critique is of value only to show his own misunderstanding of what Moulton was talking about. This misunderstanding was evidently widespread in the 1930s, and continues to afflict those economists Dr. Bye referred to as "orthodox" — a word to which Joseph Schumpeter managed to attach a somewhat pejorative air in his History of Economic Analysis (1954) when referring to the damage done by the failure to question theories such as those of Malthus that had become "enshrined as economic orthodoxy."

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News from the Network, Vol. 3, No. 32

Many long years ago Mad Magazine had its 100th issue, celebrated with a dull brown cover emblazoned with "MAD PROUDLY PRESENTS ITS ONE HUNDREDTH ISSUE!" over a full-face portrait of Alfred E. Newman with a tiny speech bubble and an even tinier "Big deal." These days, of course (as in days of yore), it is a very big deal to survive for a hundred issues. So the Just Third Way blog is proud to present its 100th issue of its weekly (or almost) News from the Network.

And what have we been doing for the past 100 weeks? Plenty, as the following news items reveal:

• In first place this week is the availability on Amazon (Barnes and Noble doesn't seem to be putting up any new books at all for some reason) of Harold Moulton's The Formation of Capital, featuring a new foreword by Norman G. Kurland, Dawn K. Brohawn, and Michael D. Greaney. Without taking anything away from Supporting Life or Capital Homesteading for Every Citizen, The Formation of Capital is absolutely critical in demonstrating that our financial system was not only designed to operate in a way fundamentally different from the way it's now being used, but to operate in a manner directly opposed to Keynesian, and even Monetarist and Austrian economics. The Formation of Capital show how, by applying the principles of the British Banking School consistently, we can break what Kelso and Adler called "the slavery of [past] savings," and, as they argued in The New Capitalists, open up financially sound and democratic access to the means of acquiring and possessing private property in the means of production. The Kelsonian paradigm as applied in Capital Homesteading has the potential to establish a sound and sustainable economic recovery. The Formation of Capital is not "economics lite," offering a panacea, but a scholarly and even profound analysis of the U.S. financial system in the wake of the Crash of 1929 and the ensuing Great Depression. Had Moulton's instead of Keynes's analysis been the basis of the New Deal, there is a very good chance that the world would not now be in the grip of another Great Depression. Adding in Kelso and Adler's prescription, and there would be no stopping the U.S. economy, even now.

• Sales of Supporting Life are, to put it mildly, encouraging. We haven't set any records — yet (Capital Homesteading still holds the record for most copies sold in a single month, although, to be honest, we weren't keeping monthly records for Curing World Poverty back in 1994, which sold in the hundreds in some months) — but a number of important publications have requested review copies, and complimentary copies have gone out to a number of key people. As November and the election draw ever nearer, we expect to see a great deal of interest in both Supporting Life and The Formation of Capital as both parties struggle to find a vision and a goal other than to throw the (other) rascals out.

• Still, good as Supporting Life and The Formation of Capital have proved to be, they're not exactly something you can hum. For a lively and entertaining performance that summarizes the Just Third Way message — and has great lyrics and a beat you can dance to — check out Daniel Moore's "We the People Anthem USA." What the heck — annoy both the liberal and the conservative media and send the link to your local television and radio stations. (Right after you send them the press release for Supporting Life, of course . . . )

• Today Norman Kurland was interviewed by Mokhtar Kamel on his Fairfax County television show. The show went well, and Norm introduced our new publications to a wider audience, the solid core of moderate Muslims.

• If you know of an organization or individual that you think should be made aware of Supporting Life, The Formation of Capital, or Daniel Moore's song, please feel free to send the Amazon and YouTube links. You never know when someone may have his or her eyes opened.

• As of this morning, we have had visitors from 46 different countries and 43 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Brazil, India, and Canada. People in Venezuela, Guatemala, France, Bangladesh, and the United States spent the most average time on the blog. The most popular posting is the posting on "The Federal Reserve . . . This Time It's Personal," followed by "The Rich, Who Needs 'Em?" two of the "Interest-Free Money series postings, and Geoff Gneuh's piece on "Money and Morals after the Crash."

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.

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Creating A Life-Supporting Economy . . . Without Raising Taxes

Washington, DC, USA. A new book takes a revolutionary stance on a question many people fear has no answer: Is there a way to revive a moribund U.S. economy and turn it into an economy that supports life?

While the declining U.S. economy commands the immediate attention of the American public, abortion continues to polarize our society into warring camps. Innocent human life continues to be destroyed. There is, however, a way to address both issues, asserts the book Supporting Life: The Case for a Pro-Life Economic Agenda, by Michael D. Greaney, Director of Research for the Center for Economic and Social Justice (CESJ) in Arlington, Virginia.

Supporting Life steps outside the conventional boxes of the abortion debate. It confronts head-on a moral and economic challenge that the pro-life movement has so far failed to address: How can a pro-life society provide the economic means to support every human life? Faced with massive government intervention, debt and income redistribution, how can we grow from an economy now on "life support" to a free, vibrant and just economy that supports human life, dignity and empowerment — not only from conception to birth, but throughout all its stages?

As Rev. Edward C. Krause, C.S.C., Ph.D., professor of moral philosophy at Gannon University and editor of Social Justice Review, the official journal of the Catholic Central Union of America notes in his foreword, "Our growing dependency on the State and our acquiescence in unjust laws and institutions will only be broken when each human person can become an owner not only of his or her own labor, but of capital as well."

Starting from a pro-life perspective, Supporting Life looks unflinchingly at the moral, constitutional and tactical implications of "choice" and at the economic pressures for abortion. It then offers a principled, commonsense and achievable political strategy and economic solution called "Capital Homesteading" that would secure for every man, woman and child a new right of citizenship: the equal opportunity to acquire and own capital assets that would provide for that citizen a direct and independent source of income.

Supporting Life should be read by all leaders, policymakers and citizens who seek a life-promoting economy that can deliver prosperity, power, freedom and justice for every person and family.

SUPPORTING LIFE: THE CASE FOR A PRO-LIFE ECONOMIC AGENDA
Michael D. Greaney, CPA, MBA, Foreword by Rev. Edward C. Krause, C.S.C., Ph.D.
ISBN 978-0-944997-05-5, Economic Justice Media, $10.00, 120 pp.
Available through Amazon.com.

Contact: Dawn K. Brohawn, Email: publications@cesj.org, Telephone: (703) 243-5155

Unplanned Obsolescence

Today's Wall Street Journal had what many might consider the media coup de grace for the Obama presidency. Fouad Ajami's op-ed piece, "The Obsolescence of Barack Obama" (Wall Street Journal, 08/11/10, A15) is a devastating critique. It paints a picture — true or not — of a man who has utterly failed, a president who, less than halfway through his term of office, has not just been relegated to the dustbin of history, but who has already been collected and incinerated.

That's a pity on more than one account. Primarily, of course, the opposition isn't offering anything much better. Less spectacularly bad, of course, but still not much better in objective terms. To all appearances, the liberal Democratic hegemony with no vision will be overturned in a couple of months by a conservative Republican hegemony with no vision. The only advantage is that, with Barack Obama to blame for everything, the lack of vision will not become obvious for at least four more years. Precious time will be thrown away arguing about who is more to blame for the rapid slide of the United States into a second rate economic, and third rate moral power.

The worst thing about the president's unplanned obsolescence, however, is that it can very easily convince him that "they" were out to "get him" all along. The signs of incipient "Nixonism" are there, from the grandiose gestures to the blaming others (especially George W. Bush), and, of course, the increasing suspicion that the media are after him. It would be very easy for Mr. Obama to give up, blame everyone else for his failure, declare that in two more years they won't have Barack Obama to kick around any more, and sit as a self-pitying and ineffectual lame duck for the rest of his term.

Or he could pull off another miracle, only this time one with more substance. He needs a vision and a plan, or at least something other than warmed over Keynesianism. That "something" can be found in the immediate passage of the Capital Homestead Act. Within three months of the passage of the Act, it is entirely possible that a real economic recovery will be under way — not a recovery that the politicians and Wall Street manufacture to give the consumer enough false hope to start borrowing and living beyond any possible means again.

Take one small example. Right now companies are very prudently holding on to cash, neither reinvesting it in the company nor paying it out as dividends. Under Capital Homesteading, however, there is a source of financing that does not entail either retained earnings or debt. New equity can be issued and sold to investors who purchase "full payout" shares on credit, and who collateralize their loans with capital credit insurance.

The company is not on the hook, because equity is ownership, not debt, and there is no obligation to pay if the profits aren't there. The investor is not on the hook, because if the stock fails to generate sufficient dividends the insurance will take care of it. Admittedly, the insurance company is on the hook, but that is only if the investment doesn't pay off. In any event, the insurance company should have factored the risk of failure into its premiums, and collected enough to make good any losses.

Current cash holdings above working capital needs could be paid out as dividends to existing shareholders, increasing consumption income and stimulating the economy naturally. If done quickly enough, it might even be possible that the old low dividend tax rate will still be in effect at the same time that the dividends are tax deductible at the corporate level. This brief window wouldn't last very long, of course (a basic principle of fair taxation under Capital Homesteading is that ALL income above a very generous exemption be taxed at the same rate) — but it might be just long enough to give a terrific boost to consumption at just the right time, and be a tremendous incentive to pay out as much as possible as fast as possible before the window closes. The rich receiving the dividends wouldn't be able to reinvest them in financing new capital, and would be "forced" to spend the "windfall" . . . increasing effective demand and creating new jobs without a government subsidy.

It's all up to Obama, now. Will he be satisfied with going down in history as the worst president in American history — or be ranked among the top three, right after Washington and Lincoln? It's his decision.

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Catching the Wave

It's not too often that we who write for the Just Third Way blog manage to figure out which way the crowd is going, get out front, and wave the flag. More often than not we're standing on the sidelines trying to get people to listen to which way they should be going. We seem to have managed to catch the wave yesterday, though, with our posting, "I'm a Little Teapot."

William McGurn's opinion piece in today's Wall Street Journal ("Are Americans Bigots?" WSJ, 08/10/10, A13) confirms our opinion piece yesterday ("Cursed be he who said what I said before I said it!") discoursing on the claim that contempt for ordinary people has been increasing dramatically among leaders in politics, academia, and the media.

We've had discussions on this for some time at the office (doesn't everybody?), and we've come to the same conclusion drawn by Dr. Heinrich Rommen, one of Germany's leading jurists before being forced to flee from the Nazis, and who ended up teaching at Georgetown, although not, oddly, in the law school.

In his book on the natural law, Rommen, who was a student of the great Father Heinrich Pesch, S.J., renowned as the founder of Solidarism, and a member of the Königswinterkreis (headed by Father Oswald von Nel Breuning, S.J., who drafted Quadragesimo Anno under the direction of Pius XI), theorized that the shift in the basis of the natural law from Intellect (Nature), discernible by reason alone (the Thomist concept), to Will, interpreted by faith (William of Occam's distortion of Duns Scotus's emphasis on primacy of the Will) was responsible for the unfortunate rise in positivism, even nihilism, and provided the ultimate philosophical basis for the rise of totalitarian governments, notably (not surprisingly, given Rommen's experiences) the Nazism of the Third Reich.

The bottom line to all this is to put inordinate power over the social order into the hands of elites who surrender to the urge to run other people's lives . . . always for the good of those others, of course. To achieve this, the elites find it necessary first to redefine basic natural rights such as life, liberty (freedom of association), property, and the acquisition and development of virtue ("pursuit of happiness") — thereby redefining the natural law, an impossibility under the Thomist primacy of the Intellect — and then redefine humanity's substantial nature.

In other words, the elites, using a profoundly anti-Catholic orientation (and anti-Jewish and anti-Muslim as well, if you accept the philosophy of Maimonides and Ibn Khaldûn as normative for those faiths), divide the human race into two parts. These are "Us" and "Them." "We" (Us), of course, are fully human, the only ones who truly understand the truth, and are ordained by God to run the world. "They" are inferiors, only partly human or not human at all; e.g., Hitler's division of humanity into Culture Creators (Aryans, or full humans), Culture Carriers (non-Aryans, or partial humans), and Culture Destroyers (Jews, Gypsies, Negroes, etc., or non-humans).

This is obviously a disturbing trend, but at least some in the media appear to be taking note of it. Whether those who should be paying attention to the warning signs are, in fact, doing so is another issue.

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I'm a Little Teapot

This isn't exactly what I planned for our 600th posting to this blog, but sometimes the important takes precedence over the ego gratification. In any event —

Call it cognitive dissonance. Call it functional overload. Call it the arrogance of wealth and power. Whatever you call it, it's causing a lot of problems, and making existing problems worse. Our leaders in Washington and elsewhere — many of which only hold the title by courtesy — have managed to achieve a state of being almost completely divorced from reality. As Peggy Noonan explained in her op-ed piece in this past Saturday's Wall Street Journal ("America Is at Risk of Boiling Over," WSJ, 08/7-8/10, A13), there is now a chasm separating "the political and media class, the universities — and those living what for lack of a better word we'll call normal lives on the ground in America."

As Ms. Noonan noted, there has always been something of a gap between us COCOAs (Concerned Ordinary Citizens Of America) and the political, media, and academic elite. As anyone knows who's ever put in his or her time in college, had anything to do with the media, or suffered through more than a couple of weeks inside the DC Beltway, it's a different world. Whether you call it the Ivory Tower, Hollywood, or Capitol Hill — regardless of the fact that relatively few if any denizens of those rarified atmospheres live in towers, woods, or hills (unless going by the name of Frodo) — there is a distinctly different belief system in place, and that belief system has little if any connection with reality.

Take, as a minor example, a personal peeve of this writer. I'm told that when I speak, it's generally with a "standard" American accent. On occasion (if I'm not watching myself) I'm told I "sound like a southerner," probably as a result of thirty years below Mason-Dixon. People within the DC Beltway seem almost shocked when they find out I was raised in Indiana — Evansville, to be precise (which people on either coast seem inevitably to confuse with Evanston, Illinois, 400 miles away) — and went to school in South Bend. "But you sound so normal, and you're so cosmopolitan!" I guess that's a good thing.

Frankly, I didn't realize that my attitudes were any less parochial than the people with whom I went to high school, or that my cultural background was so far advanced over everyone else in southern Indiana. In Evansville we had (and still have), believe it or not, a symphony, museums, libraries with real books, two universities, opera (light opera, it is true, but opera is opera — and I even got to be a real spear — or at least halberd — carrier in one production), musical and choral groups . . . yeah, and tractor pulls and Fourth of July Parades, the West Side Nut Club (don't ask from whence came the name, because nobody knows) Fall Festival, everything.

The point of this is that when people here inside the Beltway "imitate" a presumably typical Midwesterner, they speak in an accent that would cause anyone on the banks of the Ohio, Wabash, or Mississippi to start edging away while making soothing sounds. Hear a so-called Midwesterner described, and you'd never know that most of us have at least a moderate working knowledge of shoes, automobiles and electrical lighty things. Pass the jug and crumble summore pork rinds in that there burgoo, woodja? (Bleah. Pork rinds in burgoo? No way.)

The fact is that the academic, political, and media elite have an enormous — and growing — contempt for us COCOAs. This attitude of disdain has resulted in an almost total deafness regarding the concerns of most of the people in this country. The Tea Party movement is a case in point. Sure, a lot of the signs are handmade — it's kind of required for a popular movement, don't you think? The problem is that our alleged leaders seem so concerned with belittling and denigrating the Tea Party people as a rabid pack of defrocked Klansmen that they aren't bothering actually to read the signs. (I realize as a uneddikated Midwesterner I shoulda split that there infinitive, but I jes' ain't got it in me.)

Sadly, as Ms. Noonan analyzes the situation (sitchy-ay-shun?), the contempt as well as the overall disconnect is not only getting deeper and wider, it's spreading rapidly. Politicos, academics, and media mavenistas and their friends and allies (or, at least, those who suck up to them — do they really have friends other than themselves?) increasingly view the rest of us wherever we are as unimportant nobodies who only get in the way of their perfect world. There is, to put it bluntly, no other way I can explain why, for example, President Obama made the almost unbelievably stupid move of failing to address the Boy Scouts of America on their 100th Anniversary, or a judge in California decided that an issue not even addressed in the Constitution — kinda required by the 9th and 10th Amendments before it can be considered, by the way — is "unconstitutional."

People are getting just a little steamed up over the elites' perceived inattentiveness and disregard for ordinary people. The shouting, however, is only going to get louder.

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News from the Network, Vol. 3, No. 31

Ordinarily we'd say a few pithy things about the volatility of the stock market in the intro to the Friday News from the Network (now in its third extremely popular year), but that's about the level of dog bites man/old hat/your-point-being these days. Yes, the stock market is up and down like a yo-yo, yes, the similarities between both pre-1929 Crash and pre-1937 Decline are too obvious to ignore (so of course they're ignored), blah, blah.

Also ordinarily we read the op-ed page in the Washington Post and toss it away after shaking our collective heads and wondering how such seemingly intelligent people can keep on saying the same silly things. (Did you know that the "op" in "op-ed" doesn't mean "opinion," but "opposing" or "opposite"? File that under "Interesting Facts to Dish Out at Cocktail Parties When the Weenies Run Out.")

Surprise, surprise. Today's Post had two, count 'em, two, editorials that echo what we've been saying on this blog for almost two and a half extremely popular years (supra). Michael Gerson ("Democrats Under Stress," Washington Post, 08/06/10, A19) pointed out that the Democrats appear to be trying to make up for the lack of a viable political and economic agenda by working as hard as they can to make a bad situation worse.

It sounds a little like the old joke about Stalin and the two envelopes. "Uncle Joe" allegedly handed his successor two envelopes, the first to be opened when things got bad, and the second when things got really bad. The first contained a brief note that read, "Blame everything on me." The second contained a note that read, "Prepare two envelopes." According to Mr. Gerson's analysis, President Obama seems to have been following the advice in the first note, and should think about preparing two of his own — unless he takes a serious look at the potential of a Capital Homesteading program.

What we found particularly intriguing, however, was Charles Krauthammer's column, "Who Makes the Laws, Anyway?" (Ibid.) As a Certified Public Accountant who reads between the lines as well as the bottom line, this writer immediately zeroed in on Mr. Krauthammer's comment about proper separation of function among the branches of government.

As a matter of sound internal control, every auditor — every accountant, for that matter, as well as every CEO or Chairman of the Board — should know that you never, never, never assign incompatible functions to the same office or person. The person who authorizes a disbursement must never be the same person who signs the check.

Thus, a government, business, financial system, or anything else must be structured to avoid, say, people who enforce the laws or evaluate the laws also creating them. If, for example, the executive or the courts can make law, there is nothing to stop them from making laws to advance their own agendas, regardless of the will of the people or some objective standard of right or wrong, that which Mortimer Adler referred to as the natural moral law. The will of the executive or the courts becomes paramount, the basis of the law shifting from the natural moral law discerned by reason (lex ratio), to the will of the strongest (lex voluntas) — Kallikles the Sophist's "might makes right."

Ultimately, as the great German jurist Heinrich Rommen pointed out, getting away from the objective standard of the natural moral law that necessarily provides the foundation for all human positive law, and claiming that the executive or the courts can create law bases everything on the will, ending with complete moral relativism and (as Adler concluded) totalitarian government.

In the economic sphere, of course, we've seen the dramatic results of adopting an economic paradigm — Keynesian economics — that holds as a basic principle that the State has the power to "re-edit the dictionary," as Keynes put it (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.) or, in other words, change reality.

Again, until and unless the United States (and, as soon as possible, the world) adopts a Capital Homesteading program, we can only expect things to get worse. To ensure as far as humanly possible that day never comes, we need to accelerate our efforts to spread the word to prime movers and shakers. Here's what we've been doing this week:

• Big News: we sold the first copy of Supporting Life: The Case for a Pro-Life Economic Agenda. Well . . . we must have sold a lot more than one copy, because the Amazon sales rating jumped rather dramatically, but the first is always the most encouraging. Be sure to buy your own copy and leave reviews.

• We got the problems with Harold Moulton's The Formation of Capital straightened out, and ordered a case to begin infiltrating the think tanks. The goal is to let them know that there is a viable alternative to the non-viable Keynesian economics that have plagued the world's economy since the New Deal. As everyone knows (or will soon know, as soon as The Formation of Capital begins to have an effect), The Formation of Capital is the third volume in a four-part series that the Brookings Institution put together to present an alternative program for recovery from the Great Depression. Unfortunately, while it was in preparation, Lord Keynes nipped in and got his policies adopted . . . although he complained when they started to fail that FDR hadn't gone far enough. We won't be republishing the other three volumes, as the first two present the state of the economy in 1934/35, and the fourth gives general prescriptions for recovery that were superceded by Kelso and Adler in The Capitalist Manifesto (1958) and The New Capitalists (1961).

• CESJ's president, Norman Kurland, has started making the rounds on Capitol Hill. Admittedly, we haven't gotten into the post-scarcity Kelsonian paradigm when it comes to our current resources (especially time and the number of people willing to wear out shoe leather), but we've targeted a select few legislators who, more than most, might be both open to Capital Homesteading AND be in a position to do something. There aren't too many of the caliber and position of a Russell Long wandering about these days. Opportunities for a "Dinner at the Madison" don't come over the transom. They only come after a great deal of legwork.

• We mentioned a couple weeks ago that we came across a Pro-Life, Military Science Fiction (now there's a sub-genre for you) novel by Tom Kratman, State of Disobedience (2003), and intended to review it "in a few days." Right. We still intend to do so . . . just like we intend to write the next thirty-six articles in our on-going series on Irish coinage from a Just Third Way perspective for a popular hobby magazine. We always get it done, but sometimes it just takes a little longer than anticipated. We've yet to miss a deadline, except in-house. We're shooting for next week — and that very weak pun was not intended.

• As of this morning, we have had visitors from 43 different countries and 41 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Brazil, India, and Canada. People in France, Venezuela, the United States, Brazil, and the Philipines spent the most average time on the blog. The most popular posting is the posting on "the Right Way to Raise Wages," followed by "The Rich, Who Needs 'Em?" two of the "Interest-Free Money series postings, and Geoff Gneuh's piece on "Money and Morals after the Crash."

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.

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The Federal Reserve . . . This Time It's Personal

It's always tempting to label anything we don't understand or dislike (an area, it seems, of considerable overlap) as the product of a conspiracy or a conspiracy itself. Did I mention the Federal Reserve? Since the New Deal resulted in what, according to Harold G. Moulton, was an effective takeover of the Federal Reserve System, the story starting going around that the Federal Reserve was established as a conspiracy. As one of our readers reported:

I recently heard for the first time of the Jekyll Island meeting from a conservative gentleman in reference to what-was- wrong with the Federal Reserve; that the FRA was a conspiracy by bankers to hoodwink the citizenry into approving a central bank and then using it against them.

Following up on sources via Google ("Jekyll Island" AND "Federal Reserve"), it seems to me that the subsequent subversion of the FR into government debt is taken as the original intent of the act, because the actual reforms legislated are not understood by the authors of the books, articles, and web pages that attack the FR.

Of particular conspiratorial interest, to my source, was the attendance of Paul Warburg at the meeting. If his "European Banker" contribution was subversive, how was the act so progressive with respect to a flexible money supply?

I did not investigate to reasons that Woodrow Wilson later retracted his endorsement of the act; this was claimed by one author. Perhaps you could explain.

Another aspect of the arguments is the "unconstitutionality" of the FRA (and central banks) that goes back to Jefferson.

Have fun with these thoughts!!!

Uh, yeah. Thanks. Lots o' fun.

Anyway, some of this material was covered in the postings from March 9-15 in the "Own the Fed" series. We've turned these into drafts of Volume III and IV of a "short" history of the Federal Reserve. Volumes I and II are (sort of) outlined, and are planned to cover 1893 to 1906 (Volume I), that is, from the Panic of 1893 and the subsequent Great Depression (as it was known until the 1930s) to the eve of the Panic of 1907, and 1907 to 1913 (Volume II), covering the Panic of 1907 and its aftermath. What follows is from memory, so there may be some misstated facts.

According to Harold Moulton in his Financial Organization and the Economic System (1938), the Jekyll Island meeting did not have the influence that many people impute to it. Certain minor features were incorporated into the Federal Reserve Act of 1913, but the most important parts of the Aldrich proposal that came out of the Jekyll Island meeting (keeping control over money and credit concentrated in private hands in New York City and maintaining the dependency on existing accumulations of savings), were eliminated, and the system of a dozen autonomous regional development banks based on the real bills doctrine adopted, somewhat analogous to what Congressman George Tucker proposed in the 1830s.

The Aldrich proposal was, effectively, for a single, privately controlled national bank in New York ("reserve fund") to replace the National Bank system established in 1863 (heavily amended by the National Bank Act of 1864), taking away the individual National Bank's power to issue banknotes backed by government debt in an amount determined by the federal government. The single institution would be privately owned and would continue to back the currency with government debt as provided for in the National Bank Act, but the bank would instruct the federal government as to the quantity of currency, not the other way around, thereby putting control over the currency as well as the rest of the money supply into the hands of an elite group of private individuals.

The Federal Reserve System was designed along different lines. Right before the Jekyll Island meeting, some of the participants, such as Warburg, visited Europe and were impressed with the design of the commercial banking system of the Second Reich under the oversight of the Reichsbank. The German system functioned in accordance (more or less) with the real bills doctrine. It appears that their confidence in Aldrich's proposal to maintain a past savings-based system was thereby somewhat shaken. This was not enough to effect changes in the proposal, but it was sufficient to weaken support for it at a critical time, when the new Democratic Congress took their seats in 1912 and finally got to work reforming the system.

Far from being a hoodwinking or a secret conspiracy, the public debates and testimony on the Federal Reserve take up thousands of pages in the Congressional Record. One authority noted that the volume of documentation was greater than anything previous in the history of the country. All the newspapers covered virtually every detail; nothing was carried out in secret. The bill finally passed the House in September, and the Senate in mid-December. One commentator described the debates as the most violent he had ever seen. When it finally passed the Senate, it was immediate sent through the channels, getting to Wilson's desk right before adjourning for the holidays. Since the legislation had been pending for two years and everyone was anxious to get the system in place after waiting since 1907 for effective action, Wilson signed the bill immediately, to take effect January 1, 1914, rather than wait until after the holidays, and sent it back, where it was immediately adopted, there still being a quorum present, although just barely.

The effort to institute the Federal Reserve had been led by the Democratic Congressman from Louisiana, Arsene Pujo, and Carter Glass of Virginia, later to push for the Banking Act of 1933 that became known as Glass-Steagall. It would not have made it through Congress without the assistance of the Secretary of State, William Jennings Bryan, who saw, in the implementation of the real bills doctrine, the way to reconcile the populist demand for inflationary free silver and the supporters of the deflationary gold standard demand for financial responsibility and sound credit. One economic historian commented that the Federal Reserve — as designed, anyway — was a triumph of "Jacksonian hopes and financial responsibility."

Most of the conspiracy lore about the Federal Reserve dates from the 1930s, when the weaknesses of trying to use an institution designed to operate in accordance with the real bills doctrine as if it were a past savings-based bank of deposit became evident. The member banks have never "owned" the Federal Reserve in the sense the conspiracy theorists fear. The mandatory "shares" carry only a nominal rate of interest and no voting power. They are, in effect, an interest-paying membership deposit, not true ownership.

That is not to say that the Federal Reserve is independent. As a result of the New Deal the federal government completed its effective takeover of the Federal Reserve that it had begun in 1916 to finance the U.S. entry into the war, as Moulton related. The autonomy of the regional Federal Reserves was destroyed, and virtually all power vested in the new Open Market Committee of the New York Federal Reserve, under the direction of the Board of Governors in DC. Moulton rather strongly hinted that this was akin to financial fascism. Wilson's objections to the Federal Reserve possibly resulted from this hijacking of the system to finance the war, and its shift from the real bills doctrine to what became known as Keynesian economics — effectively "chartalism," or the belief that only the State has the power to create (not just regulate) money, and that all money comes from the State, making the State the effective owner of everything in the economy.

Chartalism is a socialist monetary theory, lauded by Keynes in his 1930 Treatise on Money, described by the Weimar socialist economist Georg Friedrich Knapp in his book, The State Theory of Money (1924). Although a socialist (and a few other things) one of the few "good" things Hitler did was repudiate chartalism, and insist on a predominantly asset-backed currency to restore the financial and economic power of the Third Reich. (That wasn't really Hitler's doing, of course. He was following the advice of Dr. Hjalmar Schacht, the "Old Wizard," the man who stopped the hyperinflation of the early 1920s . . . and who later tried to assassinate Hitler.)

As you point out, the authors of the numerous books and articles on the subject do not understand the original design of the Federal Reserve, or even the correct definition of money. Given that, they are not going to understand what it wrong with it today.

The alleged unconstitutional nature of the Federal Reserve results from misreading the part of the Constitution dealing with federal government regulation and setting of standards for weights and measures. The federal government has the responsibility to set the standard of value of the currency, but it cannot create money; it has a regulatory, not a creative function. Money is anything that can be used in settlement of a debt, and as long as the matter of an exchange is legal and both parties are satisfied with the consideration, it doesn't matter what they use as money.

Jefferson did not understand this. He believed that the only "real" money was gold and silver. He was an adherent of what would become known as the British Currency School. Alexander Hamilton was a bit more advanced in his thinking. He defined money the way the British Banking School would: anything that can be used in settlement of a debt. In an advanced economy, such as Hamilton was attempting to provide the foundation for, this meant that the bulk of the money supply would not be gold and silver (however important that might be for day-to-day transactions), but bills of exchange, which even today make up more than half the money supply in the U.S. If you want a uniform currency based on bills of exchange, however, you need some kind of central authority to maintain a stable and uniform value.

Depending on your lexicon, this is necessarily either a national bank or a central bank. When businesses and commercial banks are discounting and rediscounting bills of exchange, they need a "final authority" to put its stamp of approval on the value of the instruments, and to convert the bills into legal tender on demand. Otherwise banknotes and demand deposits, even the coinage, can have different values and will pass at a discount or premium, depending on which bank issued the notes or holds the deposits. This was, in fact, the case in the United States until 1864 when private bank note issues were replaced by a national currency, the United States Notes (greenbacks), backed by federal government debt and issued by the National Banks against government bonds on deposit. Until the coinage act of 1873, to enter populist legend in the 1890s as "the Crime of '73" as a result of the (first) Great Depression and people seeking someone to blame, silver coin passed at a discount with gold coin, and the greenbacks passed at a discount with both gold and silver coin.

Anyway, Jefferson never forgave Hamilton for allegedly swindling him to accept the establishment of the Bank of the United States. Because the bank was intended to deal primarily in bills of exchange and issue banknotes backed by the present value of the existing and future marketable goods and services represented by the bills brought to the bank for discounting and rediscounting, Jefferson believed the operation of the bank to be a fraud, and attempted to assert its unconstitutionality. Neither Congress nor the Supreme Court accepted Jefferson's argument, which did nothing to advance Hamilton's career. Jefferson wasn't exactly vindictive, but he let it be known that he considered Hamilton dishonest, and helped lay the groundwork for a couple of centuries of confusion over what money and credit really are.

As you can see, this issue is far from simple. The basic problem, however, is the fixed idea that "money" is whatever the State says it is and the rejection of Say's Law and the real bills doctrine. This "enslaves" humanity to existing accumulations of savings as the sole source of financing for new capital formation, with the result we see today, in "Great Depression III: This Time It's Personal."

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Toward a Just, Life-Supporting Economy

Washington, DC, USA. Is it better to have today's moribund economy, or one that provides every man, woman, and child with the opportunity to gain a living income through his or her own efforts and the direct ownership of both labor and capital? Is it better to keep most people dependent on the State, or to reform the economy to support life from the beginning to natural death? Do we need an economic agenda to support life?

The issue of abortion continues to polarize our society into warring camps, while innocent human life continues to be destroyed. Supporting Life: The Case for a Pro-Life Economic Agenda by Michael D. Greaney from the Center for Economic and Social Justice ("CESJ") in Arlington, Virginia steps outside the conventional boxes of the abortion debate. It confronts head-on a moral and economic challenge that the pro-life movement has so far failed to address: How would a pro-life society provide the economic means to support every human life? How can we grow from an economy now on "life support" (through massive government intervention, debt and income redistribution), to a free, vibrant and just economy that supports human life, dignity and empowerment — not only from conception to birth, but throughout all its stages?

As Rev. Edward C. Krause, C.S.C., Ph.D., professor of moral philosophy at Gannon University and editor of Social Justice Review, the official journal of the Catholic Central Union of America notes in his foreword, "Our growing dependency on the State and our acquiescence in unjust laws and institutions will only be broken when each human person can become an owner not only of his or her own labor, but of capital as well."

Starting from a pro-life perspective, Supporting Life looks unflinchingly at the moral, constitutional and tactical implications of "choice" and at the economic pressures for abortion. It then offers a principled, commonsense and achievable political strategy and economic solution that would secure for every man, woman and child a new right of citizenship: the equal opportunity to acquire and own capital assets that would provide for that citizen a direct and independent source of income.

Supporting Life should be read by all leaders, policymakers and citizens who seek a life-promoting economy that can deliver prosperity, power, freedom and justice for every person and family.


SUPPORTING LIFE: THE CASE FOR A PRO-LIFE ECONOMIC AGENDA
Michael D. Greaney, CPA, MBA, Foreword by Rev. Edward C. Krause, C.S.C., Ph.D.
ISBN 978-0-944997-05-5, Economic Justice Media, $10.00, 120 pp.

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Interest-Free Money, Part IX: Reforms

The global economy is a system built to collapse. The stresses caused by the terrorist attacks on 9/11 merely exposed serious problems that had been building up for nearly two centuries. As advancing technology made labor redundant and cheaper labor in other parts of the world became increasingly accessible as a result of improvements in transportation systems, wages alone proved insufficient to provide adequate income.

The Root of the Problem

This would not have been a problem had not the belief in the necessity of existing accumulations of savings — achieved only by cutting consumption — to finance capital formation become accepted as a virtual religious dogma. This ensured that most people would have to rely on wages as their sole source of income at a time when technology was rapidly becoming the predominant factor of production. Only the rich have the ability to save by cutting consumption without suffering deprivation, so — as a general rule — only those who already owned the capital that was generating most production and thus income were and are able to own future capital.

The fact that the utility of existing accumulations of savings in financing new capital formation is problematical at best has made no difference. People (especially those with political and financial power) believed it to be true, and shaped the institutional environment — "the system" — to conform to that belief. As we have seen, however, the idea that new capital formation cannot be financed except by cutting consumption and savings does not conform to reality.

The flaws built into the system have thus resulted in a situation in which, to try and hold things together, those in power have extended their control over both politics and economics. While this has resulted in most people losing a great deal of control over their own lives, it has not brought about the hoped-for results.

In the political realm, the effort to try and keep the system functioning has resulted in increasing amounts of legislation attempting to impose results, rather than reforming the system itself so that it functions properly. Economically, this has resulted in seriously distorting monetary and fiscal policy to try and force the system to work against human nature and common sense.

Manipulation of the Rate of Interest

As one major example, almost exclusively due to the belief that only existing accumulations of savings can be used to finance new capital formation, the money creation powers of the Federal Reserve, the central bank of the United States (intended to be used to provide the private sector with adequate liquidity), have been used to finance government operations. To further this objective, interest rates — the share of profit due to owners of savings — on existing accumulations have been artificially manipulated, and imposed unjustly on pure credit loans when no existing accumulations were involved except as collateral or to provide reserves.

This method of funding government expenditures has deprived the private sector of this source of financing. In addition, misuse of the central bank by the State has resulted in a currency that is almost completely backed with government debt and "toxic" assets purchased to provide politically motivated price supports for failed stock market speculation. To encourage the savings that mainstream economists and the policymakers who rely on them believe are necessary to finance new capital formation, the tax system favors the concentrated ownership on which Keynesian economics relies, and treats property income differently from wage income.

Within the conceptual framework dictated by what Kelso and Adler called "the slavery of [past] savings," the State ends up trying to do everything. The role of the State expands from its legitimate job of policing abuses, enforcing contracts when there is a dispute over the terms, and in general providing a "level playing field" — in short, caring for and maintaining the common good — to attempting to care for each person's individual good.

The common good is not the aggregate of individual goods in society, nor is it goods that, for the sake of expedience, are owned "in common" by the State on behalf of the citizens. The common good is the one good that is common to all humanity: the analogously complete capacity to acquire and develop virtue, "virtue" being construed as "human-ness."

"Man is by nature a political animal." (Aristotle, The Politics, I.ii.) This means that the human person is an apparently unique combination of individual and social. He or she thus carries out the task of developing as a human being within the consciously structured framework of the polis, that is, the political unit. The common good, therefore, manifests itself as the complex network of institutions that make up "the system," and which is intended to assist each human being to develop more fully as a human person.

The State's job is therefore not to provide for each person's individual good, except as an expedient in a time of extreme emergency. Rather the role of the State is to ensure that each person has an equal opportunity to pursue his or her individual goods, assisting in this process by maintaining a justly structured institutional environment within the political unit under its purview.

Functional Overload

When the State goes beyond this legitimate but limited sphere of action, it rapidly approaches a condition of "functional overload." By trying to do everything, the State ultimately ends up doing nothing other than spreading chaos. As a result of the slavery of savings, methods of corporate finance and the tax system concentrate ownership of the means of production. This requires increasing levels of State control to keep the economy running until it takes on too much and implodes. In the meantime, the wealth gap increases, society decays, and extremism is heightened.

A less-than-modest example of the functional overload of the State is the colossal mess of Social Security and Medicare. These programs were "sold" to the American public as an emergency social safety net and, as such, never intended to provide the entire retirement package for everyone.

Prior to the September 11 attacks, according to the Washington Post, congressional estimates projected that the government would drain almost all the Social Security surplus to operate at current levels through 2011, "imperiling the retirements of the baby-boom generation." (Michael Grunwald, "Terror's Damage: Calculating the Devastation," The Washington Post, October 28, 2001, A12.) In the face of massive layoffs and economic displacement caused by the attacks, Congress must now consider in its budget debates the billions needed to cover the replacement of destroyed property, insurance losses, homeland security, rebuilding postwar Iraq and Afghanistan, and the massive cost increases caused by the various stimulus packages and bailouts. In the long-term, then-Federal Reserve Chairman Alan Greenspan warned that the demand for added security will force firms to cut back on employment and productive activities such as research and capital investment. (Ibid.) That this has taken place in the present "Great Recession" is obvious.

The bipartisan Presidential Commission on Social Security issued its final report, Strengthening Social Security and Creating Personal Wealth for All Americans, on December 11, 2001. The report concluded: "Social Security is in need of an overhaul. The system is not sustainable as currently structured. . . . (p.7)" While the commission members agreed on the use of Private Savings Accounts (PSAs) to allow Americans to invest in the stock market a portion of their Social Security funds, they were unable to offer a unified set of recommendations. There was no consensus on what percentage of Social Security assets should be put into publicly traded securities. It was also assumed that there was no better way for workers to invest than to place their wages and savings in the stock market (mainly via mutual funds). Even more important, as many commentators observed, the commission failed to recommend any significant structural reforms for maintaining the long-term viability of Social Security.

Flawed Assumptions

At the inception of the Social Security program in 1936, the United States Government promised explicitly, "What you get from the Government plan will always be more than you have paid in taxes and usually more than you can get for yourself by putting away the same amount of money each week in some other way." (Social Security Board, "Security in Your Old Age" Washington, DC: Government Printing Office, 1935.) Unfortunately and predictably, however, the increase in benefit obligations over time has made the original promise unsupportable, even though today 76% of Americans pay more in payroll taxes than they do in federal income taxes. (Michael Tanner, "Privatizing Social Security: A Big Boost for the Poor," report by the Cato Project on Social Security Privatization, July 26, 1996, SSP No. 4, p.8.)

The basic problem even with the solutions is obvious. Everyone assumes as a given that the only way to finance new capital formation is by cutting consumption, saving, then investing. This automatically shuts out from ownership anyone who does not have enough income to meet current consumption needs, as well as those who, even if not in debt (a very rare condition these days) cannot afford to reduce consumption and suffer a decline in the standard of living. Clearly what is needed is a program by means of which people without savings can invest without cutting consumption.

Capital Homesteading for Every Citizen

The Capital Homestead Act is a comprehensive national economic strategy for empowering every American citizen, including the poorest of the poor, with the means to acquire, control and enjoy the fruits of productive corporate assets. This long-range agenda involves major restructuring of our tax system and our Federal Reserve policies to lift unjust artificial barriers to more equitable distribution of future corporate capital and faster growth rates of private sector investment. It would shift primary national income maintenance policies from inflationary wage and unproductive income redistribution expedients to market-based ownership sharing and dividend incomes.

The Capital Homestead Act's central focus is the democratization of capital (productive) credit. By universalizing citizen access to direct capital ownership through access to interest-free productive credit, it would close the power and opportunity gap between today's haves and have-nots, without taking away property from today's owners.

The Capital Homestead Act is designed to: 1) Generate millions of new private sector jobs by lifting ownership-concentrating Federal Reserve credit barriers in order to accelerate private sector growth linked to expanded ownership opportunities, at a zero rate of inflation. 2) Radically overhaul and simplify the Federal tax system to eliminate budget deficits and ownership-concentrating tax barriers through a single rate tax on all individual incomes from all sources above basic subsistence levels. Its tax reforms would: a) eliminate payroll taxes on working Americans and their employers; b) integrate corporate and personal income taxes; and c) exempt from taxation the basic incomes of all citizens up to a level that allows them to meet their own subsistence needs and living expenses, while providing "safety net" vouchers for the poor.

The basic interdependent components of the Capital Homestead strategy are like the legs of a three-legged stool:

Democratization of productive credit. Capital Homesteading would reform monetary policy to conform to the goal of sustainable, market-oriented, non-inflationary growth. The new policies would aim at an immediate reduction in prime supply-side credit charges to 3% (without subsidies) for private-sector investment, through a two-tiered credit policy. Central banks would:

(a) Be restrained from further monetization of deficits or encouraging other forms of non-productive uses of credit (i.e., demand-side credit), which would then be forced to seek out already accumulated savings at market interest rates; and

(b) Use the Fed discount mechanism exclusively for discounting, at low discount charges but subject to a 100% reserve requirement, "eligible" industrial, agricultural and commercial paper financed through its member commercial banks. This reform would synchronize the supply of real money with real growth of the economy. It would provide, from the bottom-up, an asset-backed currency reflected in more efficient instruments of production and keep basic economic decisions and corporate accountability in local hands.

Simplification of tax systems. Capital Homesteading reforms would be centered around taxing incomes from all sources (above poverty levels) at a single rate. This would offer a universal yardstick for political hopefuls to compete against, and a direct means for:

(a) Balancing national budgets and restraining overall spending, including social security and Medicare programs;

(b) Ending the use of the tax system to circumvent the appropriations process; and

(c) Eliminating double taxation of profits in ways that maximize greater savings and investments in new plant, equipment, rentable space and infrastructure, plus removing other taxes that discourage expanded capital ownership as a basic pillar of national economic policy.

Linkage between all tax and monetary reforms to the goal of expanded capital ownership. This would encourage every citizen to share directly in the equity growth and profits from our ever-expanding high-technology frontier, and would insure the broadest possible base of private sector stakeholders (and thus political supporters) of reforms affecting "green growth" policies.

In contrast to mounting social security deficits, this strategy would create for every voter a "Capital Homestead Exemption" for accumulating over his or her working lifetime an income-producing, tax-sheltered personal estate of up to $1 million, a modern equivalent of the 160 acres of land that government made accessible to American pioneers.

Citizens would accumulate their Capital Homestead shares in many ways, including such "credit democratization" vehicles as: Employee Stock Ownership Plans (ESOPs); Capital Homestead Accounts (CHAs); Consumer Stock Ownership Plans (CSOPs); and Citizens Land Cooperatives (CLCs). These high-powered financing vehicles would systematically close the wealth and income gap by linking all new monetary and tax incentives for productivity growth under the proposed Capital Homestead strategy, with an ever-expanding base of empowered citizen-shareholders.

Effects of Capital Homesteading

Capital Homesteading will have an immediate effect on the economy. This is because the new capital goods, as Harold Moulton pointed out in The Formation of Capital, are only capital goods to the purchaser — they are consumption goods to the seller. Thus, the immediate effect on the economy in the first year of Capital Homesteading would be a per capita increase in effective demand of approximately $7,000, despite the fact that the Capital Homestead borrower will only get a few dollars, if that, at the end of the year in the first year.

If the government continues to create money backed only by future tax revenues to finance its deficits, we would expect to see moderate-to-high inflation, but the Capital Homesteading program includes cutting off the government from access to the Federal Reserve. What should happen is that the cash that companies have accumulated to finance new capital formation will be distributed as dividends, and treated as tax deductible at the corporate level.

These dividends will, in justice, be paid to the currently wealthy with their virtual monopoly on individual share ownership, and on which they will pay taxes as on regular income. If the rich spend their dividend income, this will generate the consumer demand that drives the demand for capital goods, thereby creating jobs.

If the rich do not spend their dividends, they will have to locate some investment to "park" their surplus . . . yet the capital needs of private sector companies are, presumably, being met completely by Capital Homestead financing. Dividend recipients will either have to find some speculative start-up — or a "safe" investment.

Given that the government will not be able to monetize its deficits, it will be very hungry for funds, and will very likely be the largest borrower of the initial unconsumed dividend payouts that go to the currently wealthy after being taxed as regular income. By draining this "excess effective demand" out of the economy by borrowing and taxing, the government should prevent inflation, even cause a lowering of the price level through a temporary deflation. This will benefit people on fixed incomes, as many of them have invested in government securities as the "safest" investment around. The government will not be able to set the market interest rates any more through its control of the Federal Reserve, and thus retiree income should increase at the same time that the decrease in the price level makes their money go further.

Once private sector companies can discount their paper backed by existing inventories either among themselves ("B2B") or at a commercial bank or even, through legitimate open market operations — as originally intended under the Federal Reserve Act of 1913; it wasn't for government securities — at the Federal Reserve, there will be no question of a permanent deflation, or lack of an adequate money supply. Private companies will simply take advantage of what the Federal Reserve was set up to do in the first place: monetize existing inventories of marketable goods and services through rediscounting and open market operations in privately issued paper, not government bills, thereby providing an "elastic" currency that expands and contracts with the amount of existing marketable goods and services in the economy.

Consistent with Say's Law, private companies that can produce in the near future or have on hand existing supplies of marketable goods and services will, in a sense, create their own money by drawing short-term (90-day) bills (issuing private promissory notes) and either discounting and rediscounting among themselves in high denominations (the lowest denomination of such commercial paper is typically $100,000; $1 million or more is not unusual, there is also a classification for paper denominated in billions now, or, to create money in a form that can be used in day-to-day transactions, discount the paper at a commercial bank in exchange for banknotes (rare, these days) or a demand deposit. Since this type of paper would be based on existing inventories that are already owned and not on future new capital formation that does not yet have an owner, as well as being short-term, the commercial banks should be able to rediscount the paper at the Federal Reserve without the expanded ownership requirement.

Moulton's proposal in the 1930s was not to limit central bank rediscounting and open market operations to monetizing existing inventories, but to finance future new capital formation — financed at the present value of future marketable goods and services to be produced by the new capital — the same way: by rediscounting qualified paper for capital investment for terms of up to five years, not just short-term (90-day) commercial paper backed by existing inventories or the general credit-worthiness of the issuer. Kelso and Adler improved on this by adding that the new capital financed in this way must be broadly owned by people who currently own little or nothing in the way of capital, and adjust the term of the note to make the capital purchase financially feasible.

The bottom line is that, fueled by "interest free money" that does not depend on existing accumulations of savings financing the acquisition of capital by people who currently own nothing, the global economy could conceivably be well on its way to recovery within three months of the passage of the Capital Homestead Act, and make a full recovery within 18 months. Within three to seven years it should be possible to reach the unattainable Keynesian goal of "full employment" — not of labor alone, but of all resources and productive capacity, including labor.

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Interest-Free Money, Part VIII: Good Credit v. Bad Credit

As we saw in the previous posting, a basic shift in the understanding of money and credit early on had a significant influence on how we understand the proper use of these uniquely social institutions and the role of existing accumulations of savings in financing new capital formation. As a result of the idea that "saving" consists exclusively of cutting consumption, the belief grew that money as money is somehow productive, and that interest is somehow the charge for the use of money, rather than a sharing in the profits of a productive enterprise. In consequence, lenders began asserting that, regardless whether the loan of money is put to a productive or non-productive use, the lender is due a fee for the use of the money.

Good Credit v. Bad Credit

This blurring of the distinction between different types of loans has led to the failure to distinguish between "bad" uses of credit and "good" uses of credit. To those with accumulated savings, all uses of credit are "good" because all yield a profit. To those without accumulated savings, naturally enough, all profit therefore tends to become bad.

This did not happen overnight. During the Middle Ages the idea had grown up that "good" doesn't consist of what we can figure out about God's Nature (Intellect) by observing humanity, but in the carrying out of what we believe to be God's commands revealed to us in some fashion. The basis of the natural law thereby shifted from God's Nature or "Intellect" (which by definition is unchanging) to whatever people believe to be an expression of God's Will, usually the Bible — and people's interpretations of anything, but especially the Bible, tend to experience a very high degree of change, as ministers, psychiatrists, and politicians are well aware.

Prior to the Reformation, with varying degrees of success, the three great Abrahamic faiths had uniformly and consistently condemned something called "usury." In Christendom, the authority of the pope backed up by the Magisterium (as the body of official Church teachings is called) supported the ancient ban on usury, which began at least as far back as Aristotle. As late as 1745, Pope Benedict XIV, the head of the Catholic Church, issued an encyclical titled "On Usury and Other Dishonest Profit."

What is "usury"? The easiest (and most correct) way to understand usury is in terms of "good credit" versus "bad credit." Aristotle's definition of usury, which is the systematized basis of the ban on usury in the three Abrahamic faiths (although not restricted to them, as we shall soon see), is straightforward. Usury is the taking of a profit from something that does not, by its nature, generate a profit:

Now money-making, as we say, being twofold, it may be applied to two purposes, the service of the house or retail trade; of which the first is necessary and commendable, the other justly censurable; for it has not its origin in nature, but by it men gain from each other; for usury is most reasonably detested, as it is increasing our fortune by money itself, and not employing it for the purpose it was originally intended, namely exchange. And this is the explanation of the name, which means the breeding of money. For as offspring resemble their parents, so usury is money bred of money. Whence of all forms of money-making it is most against nature. (The Politics, I.x)

As a result of the "usury war" we are about to relate, many translations substitute "interest" for "usury." The Medieval interpretation of what Aristotle said, however, was not that interest is wrong (for interest consists of taking a share of real profits), or that retail trading in goods in which a merchant sells for more than he or she paid is wrong (for that is providing a necessary and valuable service, and should, in justice, be compensated). What is wrong is dealing in money as a commodity or charging rent for it, or buying and selling goods in the hope of gaining by a change in the price (speculation). Charging for the use of money as money is what Aristotle condemned, not taking a share of the profits from a productive project financed by money that is lent by its owner.

Productive v. Non-Productive

Thus, lending money to finance capital formation is "good credit." Lending money to spend on consumption, speculation, or to cover government deficits is "bad credit." Taking interest on a loan of money used to finance capital formation is legitimate, as the interest represents the lender's just share of profits. This is due him or her in justice for contributing to the financing of the project out of his or her existing accumulation of wealth. As long as it is not excessive, that is, constitutes more than what the lender is due as his or her fair share, taking interest does not constitute usury or any other form of unjust profit.

Every culture oriented in accordance with the natural law has condemned usury, although this has been most strongly expressed in Hinduism, Buddhism, and the three Abrahamic faiths: Judaism, Christianity, and Islam. Ancient Vedic (Hindu) texts from India dating back 3,500-4000 years make several references to the Kusidin, or "interest taker," (Lakshmi Chandra Jain, Indigenous Banking in India. New York: Macmillan and Company, 1929.) although it seems clear that by "interest" is meant usury, for lending for a productive project was virtually unknown in the ancient world, east or west; "interest" is a poor translation.

Hindu Sutras from around 700-100 BC, and Buddhist Jatakas from 600-400 BC go into more detail and make it clear that the usurer was universally excoriated. The Hindu priestly and warrior castes were forbidden to engage in usury. The Laws of Manu from the second century AD refine the concept in a way that suggests that there can be legitimate interest taking, though not in excess, describing anyone who takes excessive interest as partaking of "pus and urine." (The Laws of Manu. London: Penguin Books, 1991.)

Monotheism and Usury

Judaism was strict on usury, at least in its teachings. The fact that there are so many prohibitions expressed against the practice suggests that it was as widespread as it was condemned. (Exodus 22:25; Leviticus 25:36-37; Deuteronomy 23:19-20.) Again, however, this is not a condemnation of profit, but of unjust profit, that is, taking a profit when no profit is generated.

The Islamic prohibitions against usury are very clear on the distinction between good credit and bad credit. Still, the Islamic attitude toward interest and usury puzzles people today unfamiliar with economic and philosophical history. There is a general refusal to take usury, or "riba," but usury is clearly distinguished from interest.

This requires a little explanation, for Islamic thought in this area is advanced and rather sophisticated, although fundamentalists have tended to obscure the Prophet's common sense teachings on the matter. There are two types of riba. The first is prohibited in the Qu'ran, and consists of an increase in financial capital without any services being provided. The second is prohibited in the Sunnah, and consists of commodity exchanges in unequal quantities. Both are obviously instances of taking a profit when no profit has been generated. Yet again, it is unjust profit-taking that is forbidden, not a just profit:

Those who charge usury are in the same position as those controlled by the devil's influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever. (Al-Baqarah 2:275.)

Condemnations against riba (as distinct from interest) are manifold in the Qu'ran:

God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Lo! those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Al-Baqarah 2:276-280.)

O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. (Al-'Imran 3:130)

And for practicing usury, which was forbidden, and for consuming the people's money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)

The usury that is practiced to increase some people's wealth, does not gain anything at God. But if people give to charity, seeking God's pleasure, these are the ones who receive their reward many fold. (Ar-Rum 30:39)

Clearly, just as in Judaism, the problem of usury in Islam was widespread, but was nevertheless looked upon as vile, being universally condemned. Nor were matters any different in Christendom, and, before that, in Paganism. (See, e.g., Plutarch's essay, "Against Borrowing Money," available in Selected Essays and Dialogues. Oxford, U.K.: Oxford University Press, 1993.) The urge to take a risk-free profit, whether or not it is due in justice, is evidently very strong, regardless of your religious beliefs or lack thereof.

The problem is that nobody likes to be told he is doing wrong . . . especially when the wrongdoing is extremely profitable. In common with the modern urge to get rid of the guilt instead of the reason for the guilt, the Medieval proto-capitalist and usurer didn't want somebody sitting on a throne a thousand miles away in Rome condemning him.

The Effect of the Reformation

There were thus two very good economic reasons for "throwing off the yoke of Rome" in the 16th century. One, the Catholic Church's insistence on the personal sovereignty of each individual person prevented, or at least inhibited or ameliorated the drive to centralized, totalitarian rule by the political elite. Two, the Catholic Church's prohibition against taking a profit when no profit is generated interfered with the power of the rising moneyed classes to make as much of it as possible while risking as little as possible. Due to the false assumption that existing accumulations of savings are necessary to finance capital formation, combined with the demand for collateral in the form of existing wealth, the "new men" already had a virtual monopoly on all future ownership of the means of production.

Even before the Reformation the new doctrines of divine right and the incapacity of ordinary people to look after their own interests had resulted in an increasing concentration of ownership of land, the chief productive asset of the time. In Utopia (1516), Thomas More's biting satire on the abuses of the natural law prevalent in Tudor England, mocked the increasing trend toward concentration of ownership.

In several places in the first and second books of Utopia, More declared that the Utopians had carried Tudor policy to its logical conclusion and abolished private property. This has weirdly been reinterpreted by modern academics as advocating the very thing that More was satirizing! (Paul Turner, "Introduction" to the Penguin Books edition of Utopia. London, 1965, 11-12, 13.) Significantly, More put the whole story in the mouth of the "narrator" Raphael (One of the great philosophical problems of the Middle Ages was Raphael the Archangel, a patron of travelers, who tells a lie and deceives Tobit as to his origin and identity.) Hythloday, whose name signifies "Lying Traveler Who Speaks Nonsense." (Turner, op. cit., "Hythlodaeus means 'dispenser of nonsense." 8.)

As a lawyer as well as a student of the "new learning," More (as well as his readers) was fully aware that private property is the basis of civil society. To abolish private property was, as far as the people of that time were concerned, raving insanity. More's point, of course, was that the Tudor policy of concentrating ownership of the means of production was effectively the same as abolishing private property for the great mass of people, and, by destroying their livelihood by clearing agricultural land to raise sheep for the staple, destroying them. This was not only by giving people a justification for theft out of necessity, turning ordinarily honest people into thieves, but by taking away their means of making a living:

"But I do not think that this necessity of stealing arises only from hence; there is another cause of it, more peculiar to England." "What is that?" said the Cardinal: "The increase of pasture," said I, "by which your sheep, which are naturally mild, and easily kept in order, may be said now to devour men and unpeople, not only villages, but towns." (Thomas More, Utopia. New York: Alfred Knoph, Inc., 1992, 26.)

Today's interpretation of what may be one of the most important points in More's book would, in all probability (and taking into account his well-known love of a good joke) have reduced him to helpless, if wondering, laughter. (See the Lives of Saint Thomas More by William Roper and Nicholas Harpsfield, published in a single volume in Everyman's Library, London: J. M. Dent and Sons, Ltd., 1963.)

Usury, of course, is closely related to private property, but represents a serious distortion of the concept. The Catholic Church carefully distinguished between loans for consumption and investment in productive endeavors, the latter being legitimate and a positive good for individuals and the social order. This, however, did not satisfy the greed of those supporting the reformers. As one authority noted,

The denial of the legitimacy of interest was a natural evolution from conditions of the time. The rigors of the church were directed primarily against loans for consumption to persons in need. When saved capital was the exception, and opportunities for organized industry were rare, loans for productive purposes were the exception. When the time came for escaping the restrictions of the canonical laws, several ways were found of doing so. Already, as early as the thirteenth century, Albert le Grand conceded that "if usury is against the perfection of Christian law, it is at least not contrary to civic interests." Even St. Thomas admitted the loss resulting (damnum emergens) to the lender who was kept out of his money, and the interval of time and the value lost (quantum ejus intererat) gave birth to the word interest as a substitute for usury (usura). (Charles A. Conant, A History of Modern Banks of Issue. New York: G. P. Putnam's Sons, 1927, 14-15.)

Risk Sharing v. Risk Elimination

Getting out from under the censuring eye of Rome, the political and economic powers that backed the reformers were now free to demand a profit on a loan of money, regardless of the purpose of the loan. Just as is the case today, a loan of money for consumption was often preferred over a loan for productive purposes. A loan for a productive project was, being construed as a type of partnership, frequently non-recourse in effect, even if such was not specified in the loan agreement. This was because if a loan made for a capital project went into default, it was due to the fact that the project turned out to be worthless along with the collateral, or at least not quite as profitable as projected. Consequently, the lender shared in the loss just as he or she would have shared in the gain.

A loan for consumption purposes, on the other hand, left a borrower's collateral intact, as it was not at risk in a business. Further, a borrower for consumption purposes intended and generally had to prove that he or she could repay the loan out of his or her other resources, making it indifferent for what purpose the loan was made. Thus, a loan made for consumption purposes was, paradoxically, considered more certain than a loan made for a capital project that was intended to generate its own repayment and be subject to the risks of the market.

Consequently, both the political and the economic elites had good reasons for supporting the religious changes of the Reformation. There was sufficient flexibility in the new religious doctrines, especially those rooted in personal interpretation of Scripture, to allow anyone with a plausible argument to force through a desired change, especially if the change happened to be politically or economically to the advantage of the one pushing for the change. The eventual effect was that divine right theory undermined the idea of personal sovereignty and human dignity directly, while the new acceptance of usury undermined private property for the great mass of people, further eroding personal sovereignty and human dignity.

This was in spite of the fact that, by and large, the first generation of reformers made no essential changes in traditional moral philosophy, especially with respect to usury. (See, e.g., Martin Luther's A Treatise on Usury (1520) and On Trading and Usury (1524)) Instead, the changes in such areas as political philosophy and economics only began to make their appearance after people like Luther, Melancthon, and Zwingli, even Henry VIII Tudor, had passed from the scene. These men were, if anything, much more stringent and narrow in their interpretations of traditional moral philosophy than Rome had ever been, if only to allow them to demonstrate the alleged "laxity" of Rome in these matters and justify their break with the body of the Church.

Bending to Presumed Economic and Political Necessity

The problem, however, was that subsequent generations of reformers were in large measure far more dependent on the political and economic powers than their predecessors or Rome had ever been. At the start of the Reformation, the political and economic elite needed the support of the religious reformers to justify their political and economic break with the Empire and the Church. Afterwards, however, the reformers needed the politicians and the rich far more than the politicians and the rich needed the reformers.

There were reformers of the reformed churches, of course, who sought to return to the purity and faith of the original reformers, which they believed to be more consistent with primitive Christianity. The effect of these later reformers, however, was to foster the growth of non-conformist groups at odds with the new legally-established churches under the official control of the head of State, which then created their own conformity, and their own reformers, and so on.

Consequently, not only were there more political theories floating around than you could shake a stick at, views on finance, especially usury, were all over the map. Which view was accepted depended on who had the power to force his or her views on the rest of society — and that meant the political and economic elite, who could (as might be expected) be counted on to promote and maintain whatever theory gave them the most political and economic power over others.

It comes as no surprise that Sir Robert Filmer, who so avidly supported the divine right of kings, also came out strongly in favor of the idea that usury — bad credit — was no longer wrong, unless it exceeded just bounds . . . ignoring the question as to how taking a profit when there had been no profit generated could ever be just, regardless of the amount. That is, it is permissible to take interest on a loan of money as money, only don't exact too much. (Sir Robert Filmer, Quaestio Quodlibetica, or a Discourse, whether it may be lawfull to take Use for Money (1653).) Filmer was harshly criticizing a tract by Roger Fenton, a Bachelor of Divinity, who published A Treatise of Usurie in 1611. Reverend Fenton's treatise accurately defined usury in Aristotelian terms, demonstrating a much more thorough grasp of the subject than Filmer:

In the loane of money (of which principallie it is my purpose to write, being the most usuall and proper for these parts) be it thus concluded out of the premises; That gain or lucre which commeth not merely for loane; (such loane, which is before described) is no usurie. For the object of usurie is mutuum. It is no usurie, I say, if it be for other respective considerations, and not meerely for loane.

A man unskilfull in trading hath a stock of money, which he delivereth to a merchant or tradesman to imploy: receiveth part of gaine, and beareth part of hazard proportionably. This is no usurie, but partnership. No usury, because his money is not lent by mutuation, so long as he reserveth a propertie in it himselfe, in contracta societatis cessat obiectum usurae mutuum. In like manner the stocke of a widow or an orphant is in trust committed to a friend to imploy and use it in charitie, onely to their use: they have the benefit of the increase; which is no usurie; because the money is still theirs, it prospereth or perisheth to them, as to the right owners. (Robert Fenton, A Treatise of Usurie (1611), I.iiii.3.)

There were also commentators claiming that all interest is usury (Philippus Caesar (Philippus Caesar, A General Discourse Against the Damnable Sect of Usurers (1578). Also Sir Thomas Culpeper, A Tract Against Usurie (1621).)), and that no interest is usury (John Dormer (John Dormer, Usury Explain'd, or, Conscience Quieted in the Case of Putting out Mony at Interest (1695). Also Sir Francis Bacon, On Usury (1625).)). In the end, though, it didn't matter what the divines and philosophers said. Having the power (which, as Daniel Webster was to state a few centuries later, naturally and necessarily follows property (Massachusetts Convention of 1820.)), the rich were in the position to be able to dictate whatever truth was most expedient for them.

In this they were helped immensely by the fixed idea that capital formation cannot be financed without first cutting consumption and saving, or (better) having far more income than can be consumed. When their capital produces far more income than they can consume, the rich are "forced" to reinvest the excess in yet more capital, or, more accurately, leave retained earnings in a business. This provides a greater store of collateral that can be used to secure the financing for more capital, and so on, at an accelerating rate. This, in turn, creates yet more income that cannot be consumed, concentrating ownership ever more closely in fewer and fewer hands. As Karl Marx observed, capital breeds capital:

Capital is money: Capital is commodities. [Capital is only money or commodities in the sense that money is a derivative of production and consists of anything that can be used in settlement of a debt, or (to put it another way) can be used to purchase goods and services, that is, "financial capital." Properly speaking, capital means assets that produce a good or service, and thus "brings forth living offspring" in the sense that it generates its own repayment, and provides the collateral for further capital expansion.] In truth, however, value is here the active factor in a process, in which, while constantly assuming the form in turn of money and commodities, it at the same time changes in magnitude, differentiates itself by throwing off surplus-value from itself; the original value, in other words, expands spontaneously. For the movement, in the course of which it adds surplus value, is its own movement, its expansion, therefore, is automatic expansion. Because it is value, it has acquired the occult quality of being able to add value to itself. It brings forth living offspring, or, at the least, lays golden eggs. (Karl Marx, Das Kapital (1867), I.iv.)

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