Bromsgrove Paper 2004

12:  In Celebration of Late Learners

William Krehm

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.

William Krehm

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

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