| Subject: | [socialcredit] "monetary reform" v. "social credit" | | Date: | Thursday, December 23, 2004 09:42:29 (+1030) | | From: | John Hermann <hermann @............au>
|
In a way I'm glad that
Bill Ryan has seen fit to place both "monetary reform"
and "social credit" within quotation marks. Because Bill's
version of what each
movement is about is highly idiosyncratic and flawed. I don't
believe there is
any fundamental conflict between these two movements - contrary to the
gospel
that Bill propagates so assiduously. In support of my view are the
following two
recent items relating to the philosophy of Douglas from the pen of
William Krehm,
co-founder of the Committee on Monetary and Economic Reform (COMER) and
editor of the COMER journal. -- John
Hermann.
Extracted from article by William Krehm -
COMER's philosophical position (30/01/04)
Major Douglas had a great neglected truth by the tail, when
he emphasized that our inventions, and even our social practices would be
unthinkable without the great “social heritage” of philosophers, martyrs,
anonymous inventors and scientist slaves (he was an engineer by training,
but coined the poetical great question, “Must we build machine guns in
order to buy a cabbage?). This “social heritage” must not be appropriated
entirely by those who patent an invention or a gene and employ it as
though it were not based to a significant extent on this vast
social heritage. Hence he developed the idea of a social dividend, which
would be a modest payment to all members of society. Not enough for them
to live on completely, but that would help them survive the rat race, or
even to pursue alternate life styles. That is not a complete
alternative to the market or our mixed economy, but an important element
in humanizing it somewhat, gearing down the drive towards exponential
expansion that is clearly unsustainable. In that respect it resembles
Georgian economics - not the total solution but a vital ingredient of
it.
---
Extracted from: Report on Bromsgrove conference - COMER journal, November
2004
In some ways I am a late learner. It was only recently, that
I grasped the important message Major Douglas was trying to convey in his
cryptic language - his A + B theorem. I was nudged over that barrier by
the previous writings of Frances Hutchinson. Almost as important was her
recent essay in drawing on thinkers as diverse as Marx, Veblen,
Schumpeter. If “late learner” refers to those who finally manage to climb
over the fences that closed in their thinking, it can be a badge of
honour. Keynes was a late learner who needed the Great Depression to
shake him out of some inherited convictions. This last year I have spent
much time and carfare attending conferences on heterodox economics from
Kansas City to Cambridge, Amsterdam to Tokyo. And nowhere did I find such
complete an open-mindedness - with one possible exception - as in
Bromsgrove. Let us then rejoice in our talents as late-learners. In a
world of early-forgetters, late learning is a noble calling. The
salvation of this troubled world could depend on it.
I will take as my point of departure an explanation of what
Major Douglas’s much-reviled A and B Theorem is about. It has nothing to
do with the merits of capital accounting (a.k.a. accrual accountancy).
That makes a clear distinction between the current and capital
expenditure of government as well as in the private sector. But today
almost all governments treat the cost of building a bridge or a school in
exactly the same way as they do the soap for their wash-rooms. By now
most of you will have heard COMER sing our song urging governments to
recognize capital budgeting. Recently the party that Connie Fogal now
heads in Canada, The Canadian Action Party, has joined us for the chorus.
And the far greater reform party, the New Democratic Party, now lists
Capital Budgeting as an option. Which is progress, but grossly
understates the case. Without incorporating accrual accountancy into its
national bookkeeping, any government is headed for disaster. We cannot go
on treating crucial government investment in both human and physical
capital as an extravagant current expenditure because it is not traded on
the stock market. And most certainly we cannot bring in the national
dividend of Major Douglas without it.
Our Governments’ present accountancy mistakes the private
sector for the entire economy. What is not marketed is taken to be an
“externality.” That is as though you calculated your personal net worth
by mentioning only the mortgage on your home, but omitting the home that
the mortgage financed. That is what has for years been fobbed off on the
public as “prudent fiscal management.” Nor is it an innocent error. It
serves the interests of those who have for three or four decades been
destroying the redistributive functions of the state.
If you carry capital assets on the government books at a token dollar,
you can sell them for a tiny fraction of their real worth to deserving
cronies or charming strangers. And then organize a public company, and
earn a bouncing profit. And the taxpayers who have already paid once for
those assets in taxes, will start paying for them again in user
fees.
I can tell you stories out of Canada, and you can recount
whoppers from the era of Maggie Thatcher.
Accrual accountancy will always be necessary with or without
Douglas’s A + B Theorem. The latter, is concerned with something quite
different, and no less important. Together, they sing like two well-mated
canaries.
What Douglas’s A+B theorem is about is essentially liquidity
- the length of time before new output can be marketed into cash to pay
incoming bills. Until that happens the producers will depend on outside
financing. And that’s the fatal crack through which the Devil
enters.
Sealing that opening is what the Douglas A+B Theorem is
about. His way of doing so was to deliver a national dividend from the
government to all citizens. The justification? It would represent the
unrequited contribution of generations of slaves, martyrs, scientists,
saints, engineers and other common mortals who contributed to the
cultural heritage that made possible our wealth-creating powers
today.
Let us deal with these two very different concepts - capital
budgeting and national dividend - and see how they overlap. Douglas’s
idea of a national dividend would serve more than a single purpose. It
would help make possible alternate life styles less destructive of the
environment and society than the compulsive accumulation of private
wealth beyond all need or feasibility. It would liberate great talent to
do what it was born to do, not compete on a balding wage market. But in
the process of filling that important function, part of the national
dividend would have to be kept in some cooperative form of banking
controlled by small producers with government cooperation. For much of
the soaring might of banks today has been based on their fairly recent
engrossing of the farthings of the working population for their black
arts. The very essence of banking is to lend out many times the money
actually held by the bank. A long line of economists including Karl Marx,
Thorstein Veblen, Joseph Schumpeter-have described banking as a mixture
of swindle and beneficent innovation. Increasingly, the deposits left
with the banks by the public play hooky. Many times their total is lent
out in the hope that there will always be enough money left in the kitty
to honour any cheques written on it. However, should too many depositors
ask for the return of their deposits at the same time, banks would close
their doors, while desperate depositors lined up for blocks outside every
bank in the land. Essentially, in the good and bad senses of the word
banking is a confidence game.
That is why central banks were devised to act as a “lender
of the last resort.” However, repeatedly the bankers pushed up the
critical multiple of their credit creation beyond discretion Until the
institution of the central bank and government-backed deposit insurance
were introduced, runs on banks were neither infrequent nor pretty sights.
Our trouble today is that the “lenders of the last resort” have mutated
into “donors of the first resort,” as finance capital corrupted our
governments. And at the same time, the banks have been deregulated to
gamble on an ever larger scale in every aspect of the economy. And those
who produce our real wealth have been paying for the government’s
underwriting this sport.
Because of banking’s sinister potential, in 1935, under
President Roosevelt fire walls were thrown up between banks and other
financial institutions. Brokerages, underwriters, insurance companies,
merchant bankers, mortgage companies keep on hand pools of liquid capital
essential for their businesses. Allowing the banks to get their hands on
these and use them as base for their money creation is the surest way of
guaranteeing that the economy will go up in smoke. And in being bailed
out, the bankers will convert the experience into further ways of
mulcting the rest of society from wage-earners and industrialists
to the sick and the dying. That contributed to the Great Depression and
the Second World War. It is well on the way to similar results
today.
Hence even if we should finally introduce a “national
dividend,” without obliging the banking system to stick strictly to
banking, the national dividend would end up serving as just another pool
for bankers to splash in.1
Retrieving the History of Economic Thought
The reform of the banking system is inconceivable without
society retrieving the history of economic thought. Without the
suppression of that record the financial community could never have
highjacked power to the very hilt.
I am impressed by the way in which Frances Hutchinson and
her co-authors have bridged the gulf separating Social Credit from other
reform movements. However, there are a few details still needing
attention from either side.
Let’s begin with page 215 of Ms. Hutchinson’s fine recent
book The Politics of Money where a supposed document by Abraham Lincoln
on monetary reform is reproduced. That document has long since been
proved bogus. It dates from the period of the bimetallism debates that
rocked the US. Monetary reformers felt free to put into words what
Lincoln had enacted his Greenback issue backed neither by gold or
silver, but only by the nation’s credit. While writing his fine works on
money reform almost 20 years ago Bill Hixson, one of the founders of
COMER, told me that he had considered using those supposed Lincoln quotes
but decided they were not authentic. More recently one of our newer
contributors, Keith Wilde, a federal civil servant who specializes in
tracking down both neglected or fraudulent sources, arrived at the same
conclusion. Lincoln did refuse to finance the North in the Civil War at
the usurious rates that bankers demanded, and issued paper “greenbacks.”
And don’t for a moment think that he had an easy ride with those
Greenbacks. At no time did they rise to par and for stretches were under
water. But they were redeemed at par. The bankers who bought them up saw
to that. All that may have contributed to his assassination for putting
an end to that other slavery. But I know of no evidence to prove or
disprove that belief. What difference does it make if we stretch the
facts in a good cause? An enormous one. Our opponents, having all the
power at their command, have that privilege. We don’t, nor do we need it.
But if we are caught uttering a single remark that cannot be backed with
hard evidence, it will be exploited to undermine decades of conscientious
research.
On the following page Ms. Hutchinson quotes approvingly
James Huber and James Robertson’s In Creating New Money not
Robertson’s fine recent collaboration with Bundzel “calling on the
UK and other governments to restore seigniorage, thereby ending the
creation of money by the banks.” That would in fact reduce the banks to
the role of “intermediaries.” Actually that is what they claim to
be at a time when their money-creation embraces nearly the entire
money supply. However, most of our money is described by conventional
economists themselves as near-money since almost all of it is
interest-bearing, created by being lent out. Legal tender by definition
should be interest-free as was gold and silver, and as is paper
currency. There is good reason for that, especially if the central bank
has made overnight interest rates on interbank loans the benchmark
interest rate the one blunt tool against inflation. For whenever the
central bank raises its rate, the market value of preexisting loans with
lower coupons takes a dive. That undermines the performance of such
“near-money” as a store of value and much else.
The 100% money idea was widely espoused by many economists
including Milton Friedman and Irving Fisher in the depth of the Great
Depression of the 1930s. But that was a time when Henry Ford, Thomas
Edison, and an amazing list of other mighty industrialists and even
bankers were demoralized enough to listen to just about any scheme for
getting the economy out of the ditch.100% money, however, excluded the
socially useful banking function supplementing the inadequate
supply of precious metals when gold or silver was still legal tender.
Properly controlled, the banking “miracle” could serve the world by
supplementing our need for what we might call “complete-money,” money not
being loaned out, but by being spent into existence for essential “public
capital,” alongside a controlled amount of near-money loaned out for
private profit. The private banks would have that field of providing
banking services for the private sector, and creating near-money in the
process. But a modest portion of the legal tender base on which this
would be done would have to be re-deposited with the central bank on a
non-interest earning basis. That is in return for the surrender of a part
of the government’s seigniorage rights the ancestral monarch’s
monopoly in coining precious metals for a profit. That would provide the
government with more room within the constraints in force to use the
central bank to lend it money on a virtual interest-free basis. In
countries like the UK and Canada where the governments are now the sole
owners of their central banks that would take place in the form of
dividends. But in the US and other countries where the central bank is
owned by private banks, the dividends to those private shareholders are
strictly limited, and the bulk of the profits also go to the government
as consideration for part of the ancestral rights of seigniorage granted
the banks.
Those statutory reserves have been abolished in Canada and
New Zealand, and reduced to insignificance. In the UK, 0.35 of one
percent. In the US such statutory reserves are confined to working hours,
like good trade unionists. When the banks close their doors their
reservable deposits are shifted to non-reservable accounts and the
reserves are no longer required.
The old statutory reserve system you will find described in
minute detail in university economic texts published in
Canada prior to 1991. In that year any reference to that chapter of
our banking history suddenly vanished. That was the year when the
statutory reserves were discontinued so that the banks could recoup their
heavy losses in speculative investments during the previous decade in gas
and oil and real estate. The Reichmann family’s building of your Canary
Wharf complex before proper transport connection with the City was
remotely in place is but a single sample of what brought on the revision
of our Bank Act in 1991.
But there is this about miracles: they tempt those who hold
them in the palm of their hands to confuse themselves for the Lord
Almighty. Vesting 100% of our money creation in our central bank would
leave it to the government through the central bank to distribute the
necessary credit to the private sector, and that prospect should make us
wince. We are not short of public mega-scandals even today.
On the other hand, having the government borrow from its
central bank at virtually zero interest rates would make possible
essential investment in physical and human capital, including the
national dividend.
And that brings me to another disagreement with something in
the admirable Hutchinson book, The Politics of Money. I quote: “When
loans are paid back they do not cancel out the debt and return to zero.
Money created into existence by the repayment of debt remains tangible:
the bank has got ‘its’ money back. As lenders to owners and investors,
banks have become major owners and investors themselves in modern
society.”
This passage mixes up two very different things. If we keep them
separate, we will gain not only in credibility but in understanding what
must be done.
When the near-money created by banks out of thin air is
repaid to the banks, that near-money is destroyed. But it is equally true
that before their repayment those loans contribute to a higher profit for
the bank in that year, and that rate of increase in their profit is
automatically extrapolated on the stock market into the remotest future.
And that increased stock price serves as collateral for further borrowing
and investment.
The real problem is that the ghost of that loan after its destruction by
repayment lives on in the fictitious growth rate of the banks’ earnings
and net worth. And the rate of that growth is automatically extrapolated
into the remotest future. But you may ask what real difference there is
between the two positions. In either isn’t the end-product a huge
speculative bubble bound to burst? The answer is: a crucial one. One
answer to the question concentrates on a single number, i.e., a classic
instance of number-crunching; Our approach is to analyze the process. And
it is the process that we must grasp if we are to formulate suitable
policies. Number-crunching concentrates on a single figure, often of
dubious reliability. Analysis deals with the very different factors that
may influence that figure in different ways. Very few phenomena in our
ever more complex world can be really summed up in a single figure.
The mathematics of derivatives that dominates economic
theory today deals not only with growth rates, but with the various
powers of growth rates of increase in detached aspects of a security.
Thus the growth rate of its yield, or of the currency in which it is
denominated; complicated swaps and other combinations of two or more such
derivatives are “customized” for their clients by our banks’ “derivative
boutiques.” This opens an entire universe for the design of instruments
for questionable deals. As in the Enron Corp.’s partnerships which were
not even entered on Enron’s balance sheet because derivatives are still
unregulated and don’t have to be reported. And once you start trading in
the fragrance of roses rather than in the entire plant, you can skip the
thorns and the sweat of planting and caring for the rose bushes. That
permits you to control far larger quantities of such isolated aspects.
That is how George Soros could outgun your Old Lady of Threadneedle
Street to shoot down the pound. And then go on to do the same with the
lira and other currencies.
Most economic reformists still talk about the voracity of
compound interest, but we are in fact confronted with something
infinitely more gluttonous. Alongside it compound interest is a mere
Franciscan monk. Exponential mathematics deal with the indexes of
infinite series of powers of growth rates rather than with the variables
themselves. And here I used the word “infinitely” in a perfectly literal
sense. Exponential infinite series were first explored by 18th century
mathematicians and reached their pinnacle in the exponential curve. This
is defined as follows: the rate of growth of the function always keeps up
with the value already attained by the function itself. When you say that
you imply that all higher derivatives to infinity do the same. The first
derivative becomes the value of the function itself, the second
derivative becomes the first which by definition is the value attained by
the base function and so on into infinity. It is in fact the mathematics
of the atom bomb.
Mention maths, and most people will head for the doors. But
what is involved here is essentially taught in high schools today. It is
both a sermon on and a diagnosis of our sick, sick world. I refer you to
a footnote for some details.2
Road Blocks in our Derivative World
There are serious road-blocks in this derivative-run world
to be cleared before the national dividend advocated by Social Credit and
the rest of the reforms that we may be advocating can be brought
in.
Balancing the budget, paying down the national debt and
controlling inflation are seen as the main concern of governments. But is
a balanced budget, based on what is essentially non-accountancy,
possible? Even the suggestion of balancing a budget without capital
budgeting is a scam.
Let the children starve, crime take over, our streams be poisoned, and
our air polluted, while our governments use our surpluses to pay off the
debt. But what are they going to pay off the debt with? Gold and Silver
are no longer legal tender. Only the debt of central governments have
that status. So the question arises: Will they then pay off the debt with
government paper notes with a different colour? While trying to climb up
this non-existent greased pole, the government would be reducing the
money in circulation and driving up interest rates, and favouring the
money-lenders once more.
There have been surreptitious introductions of partial
accrual accountancy in the US under Clinton at the beginning of
19963 and in Canada in 1999 relating entirely to physical
capital, and with zero effort to explain to the public what is involved.
Indeed, such information and the very introduction of accrual accountancy
is kept a closely guarded secret. The growing layer of taxation in price
reflects the need for increasing government investment in a society
undergoing incessant technological revolutions, a population explosion,
rapid urbanization. And all these factors are exerting increasing
pressures on the environment. In distant periods when orthodox economists
bothered trying to reply to such objections, the argument was that the
growth of productivity would increase sufficiently to absorb this
deepening layer of taxation in price without disturbing the price level.
It is a long time since that argument or any argument at all
has been employed to support the alleged need for “zero inflation.”
Figures on productivity, however, ignore the destruction of non-marketed
resources essential for the preservation of human life. Into the 1990s
the Bank for International Settlements (BIS) warned that the slightest
amount of inflation, if not eradicated, would develop into the likes of
the German hyperinflation of 1923, when it took a wheel-barrow of paper
money to buy a glass of beer. But that German hyperinflation resulted
from a lost world war, the occupation of the German industrial heartland
by the French and Belgian armies to collect Germany’s defaulted
reparations in strong currencies that Germany could not earn. The BIS
claim of the slightest “inflation,” if not suppressed, would become a
hyperinflation similar to Germany’s in 1923 implied that if interest
rates had been raised high enough in 1923, retrospectively there would
have been no German defeat in World War I, no impossible reparations
demanded, no occupation of the Ruhr by the French, no general strike
across German in protest to it, no virtual resulting civil war.
Then suddenly less than two year ago, we heard from
the same BIS and the US Fed there is “good inflation” (up to 2% or even
3% or 4%) and “bad inflation” anything beyond that. Most alarming is the
ease with which the group in command of official economic thinking
reverse the dogma they impose on the world, without a word of serious
explanation. The message is of irresponsible, brute power.
Meanwhile, governments are almost in unison attempting to
balance budgets that do not distinguish between spending on capital
account and for current account. In the US where capital budgeting was
brought in January 1996 for physical investments, and rolled back for
several years, $1.3 trillion dollars of assets had been recognized for
the first time.
French economic historians have caught up with the idea that
urbanization has always led to higher price levels an obvious point
that still escapes our equilibrium-economists.4
Obviously a national dividend must add to the price
level. The price level and balanced budgets however, have a very relative
meaning when Wall Street’s passions for balanced budgets come into
play.
COMER was a pioneer in advancing the view that in a
pluralistic society, price itself becomes pluralistic. It involves not
only costs of marketed inputs, but increasingly of non-market areas of
the economy, such as government-delivered services. Investments in human
capital covered by taxation. must be treated as a public investment even
though they are lodged in private heads and bodies. A better criterion
whether they rate as a public investment is whether they serve to expand
the tax-base.
We have made considerable progress in identifying the fatal
factors that are leading towards to downfall of the prevailing system. We
have also staked out some main traits of society that should
replace it. But how we will get from here to there is still unexplored.
One thing is clear, the forces currently in control, are not going to
give up easily. They organized their comeback from their disgrace during
the last Great Depression with a brilliant thoroughness. They are
determined not to let that happen again. Frances Hutchinson, (p. 206) has
this to say on the subject, “Without a fundamental criticism of
capitalist theory and practice many innovations are doomed in the long
run by the underlying social structure and its political-economic
inequalities. The danger is that they will tend to reproduce underlying
social inequalities rather than overcoming them. In this sense they may
offer false hope. At the same time, people involved in developing new
strategies may gain substantial empowerment or heightened awareness, and
the value of these achievements must not be neglected. Every attempt to
transform lives within capitalism is potentially an attempt to transform
capitalism itself.”
The present free-for-all that has taken over in the world
economy is bound to lead to confrontations of a degree of violence
overshadowing even what we are currently experiencing. All the diverse
reformers, each concentrating on a neglected aspect of social
relationships can and must make their contribution in addressing the
whole of this staggering problem. But that requires careful consultation
and the pooling of ideas. A clear line must be drawn between what we can
compromise on, and on which compromise would be surrender. We must
persist in listening critically to what other reformist streams have to
offer, and learn to regard the variety of views as an important asset.
For a knowledge of supplementary policies may serve to protect the flanks
of a common cause.
Discussion in itself is an invaluable resource, whether it
leads to agreement or not. The suppression not only of alternate views
but of our history threatens society’s survival. By repeating our
disastrous errors on an ever more monumental scale, humanity risks
self-destruction. And then some wiser species succeeding man in control
of this planet may speculate who it was that left it so cluttered with
poisonous debris.
-- William Krehm
References:
1. In Canada in 1946 the ratio of assets to cash held
by banks had amounted to 11 to one. Currently it is close to 400 to
1.
2. Financial derivatives derive conceptually from the rates of growth of
a function with respect to its independent variables in differential
calculus. The first derivative is the velocity of their growth rate, the
second is the acceleration of that growth rate, the third the increase in
the rate of growth of the acceleration and so on to infinite order. It is
one of the marvels of the human mind that a few decades after John Law
built his financial castles the most prolific mathematician of all time,
Leonard Euler not only developed the full potential of derivatives to
infinite degree, but also pioneered the exploration in the realm of
imaginary numbers (based on the non-existent square root of-1) a
virtual mathematical parallel of Law’s far frailer innovations in high
finance. These had to do with paper money wholly without backing of
precious metals. Likewise he stretched the concept of the corporation and
anticipated the Physiocratic School of proto-economists in France who saw
in land the ultimate sources of all economic value. These three
components Law mixed into a powerful witch’s brew to become the virtual
economic dictator of France financing the luxuries and wars of Louis XIV
by issuing paper currency backed by the future development to half of the
wilderness of North America to which France laid claim.
Marx, Thorsten Veblem, and Jospeh Schumpeter paid tribute to John Law as
half genius, half swindler.
In financial circles today an abstracted aspect of a given security is
taken as the variable, and various derivatives to any order to are taken
of it. Operating in this fairyland allows a far greater command of
crucial abstracted aspects of a given security say the value
increase of the security on the stock market, or of the exchange value in
which it is denominated, or endlessly ingenious swaps of such
derivatives. With this new technology in blowing financial soap-bubbles,
it becomes possible to incorporate in the present price of a security or
the derivative of its future price. But essentially this is a deal with
the Devil. Once such artificial valuations have been attained, its
promoters are committed to maintaining them including their growth rates
into the indefinite future. Any shortfall leads to the collapse of the
house of cards. This is the root of the seemingly endless financial
scandals that are clogging the American courts. There is in fact no room
left for morality. That explains the endless resistance to the financial
community to the oft-heard recommendations for the control of derivatives
in even exalted circles. The imposed development curve.
3. In Canada the situation is far worse. Over three years after the US
government smuggled in the essence of accrual accountancy in its handling
of physical assets, the then Finance Minister Paul Martin was still
slugging it out in private with the then Auditor-General Denis Desautels
resisting the latter’s ultimatum that he would not approve the
government’s balance sheet unless accrual accountancy had been brought
in. The result: a compromise whereby it would be brought in initially
only with respect to fulfilling the treaty obligations with the
aboriginal peoples of the country and the environment. This meant that
until the obligations under the treaties with the aboriginals and the
Kyoto agreement respecting the environment were fulfilled, the
unfulfilled obligations would be treated as budgetary liabilities.
However, the settlement of the dispute included demeaning a statement
from the Auditor General, that the assets recognized under the agreement
would represent no new money coming in to the treasury and hence would
not justify further expenditure. A decade ago the increased budgetary
deficit arising from the shift of federal debt from the bank of Canada to
the banks had created an annual entitlement of between five and $8
billion. To fill the hole in the federal budget created by that, Ottawa
slashed the grants to the provinces who passed the treatment onto the
municipalities. This has contributed to a severe crisis in municipal
finances across the land.
4. I made the point in Revue Économique, Paris, May 1970. “La stabilité
des prix et le secteur publique.” Significantly, the publication has
since disappeared.
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