Bromsgrove Paper 2004
12: In Celebration of Late Learners
I n 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 and 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 book- keeping, 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 mar- keted 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 accumula- tion 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 Schum- ¬peter-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. Broker- ages, underwriters, insurance compa- nies, merchant bankers, mortgage companies keep on hand pools of liquid capital essential for their busi- nesses. 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 sepa- rating 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. Hutch¬inson’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 de- manded, 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 defini- tion should be interest-free – as was gold and silver, and as is paper cur- rency. 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 in- cluding 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 – supple- menting the inadequate supply of precious metals when gold or silver was still legal tender. Properly control- led, 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 divi- dends 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 union- ists. 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 com- plex before proper transport connec- tion 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 them- selves 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 govern- ment 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 disa- greement with something in the admirable Hutch¬inson 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 ques- tion concentrates on a single number, i.e., a classic instance of number-crunch- ing; 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 glutton- ous. 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 mathemati- cians 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 intro- ductions 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 intro- duction 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 urbaniza- tion. And all these factors are exerting increasing pressures on the environ- ment. In distant periods when or- thodox 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 hyperin- flation similar to Ger¬many’s in 1923 implied that if interest rates had been raised high enough in 1923, retrospec- tively 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 urbaniza- tion 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 govern- ment-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 invest- ment 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 over- coming them. In this sense they may offer false hope. At the same time, people involved in developing new strategies may gain substantial empow- erment 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 relation- ships can and must make their contri- bution 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 re- peating 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.
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 differen- tial calculus. The first derivative is the velocity of their growth rate, the second is the accelera- tion 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 Schum- peter 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 incorpo- rate 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 Amer- ican 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 develop- ment 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 obliga- tions under the treaties with the aboriginals and the Kyoto agreement respecting the environ- ment were fulfilled, the unfulfilled obligations would be treated as budgetary liabilities. However, the settlement of the dispute in- cluded 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.
- from Economic Reform, November 2004