Real Bills for Real Wealth

Leo XIII

In his landmark social encyclical Rerum Novarum, Pope Leo XIII managed to do two things that took the socialists, modernists, and New Agers off guard.  One, he followed up on the series of social encyclicals that had started with Gregory XVI’s Mirari Vos in 1832 with an unexpected twist.  Instead of simply condemning the “new things” of the modern world, he presented an alternative that could deliver what socialism, modernism, and the New Age only promised, and that without sacrificing one iota of the natural law or Catholic doctrine.

Two, Leo XIII based his solution on the one thing that the socialists had decided was the problem: capital ownership.  Where all forms of socialism abolish private property as a natural right (at best claiming it is a human-invented right allowed for expedience under the principle of double effect), Leo XIII made the following points clear:

Ignatius Loyola Donnelly, socialist

·      The socialists are striving to do away with private property and contend that individual possessions should become the common property of all, to be administered by the State or by municipal bodies. Their contentions are so clearly powerless that were they carried into effect the working man himself would be among the first to suffer. They are, moreover, emphatically unjust, for they would rob the lawful possessor, distort the functions of the State, and create utter confusion in the community.  (Rerum Novarum, § 4.)

·      When a man engages in remunerative labor, the impelling reason and motive of his work is to obtain property, and thereafter to hold it as his very own. A working man's little estate thus purchased should be as completely at his full disposal as are the wages he receives for his labor. But it is precisely in such power of disposal that ownership obtains, whether the property consist of land or chattels. Socialists, therefore, by endeavoring to transfer the possessions of individuals to the community at large, strike at the interests of every wage-earner, since they would deprive him of the liberty of disposing of his wages, and thereby of all hope and possibility of increasing his resources and of bettering his condition in life. (Ibid., § 5.)

Henry George, socialist

·      The remedy [the socialists] propose is manifestly against justice. For, every man has by nature the right to possess property as his own. This is one of the chief points of distinction between man and the animal creation, for the brute has no power of self-direction. It is the mind, or reason, which is the predominant element in us who are human creatures; it is this which renders a human being human and distinguishes him from the brute. And on this very account — that man alone among the animal creation is endowed with reason — it must be within his right to possess things not merely for temporary and momentary use, as other living things do, but to have and to hold them in stable and permanent possession; he must have not only things that perish in the use, but those also which, though they have been reduced into use, continue for further use in after time.  (Ibid., § 6.)

Charles Kingsley, Christian socialist

·      The fact that God has given the earth for the use and enjoyment of the whole human race can in no way be a bar to the owning of private property.  (Ibid., § 8.)

·      The first and most fundamental principle if one would undertake to alleviate the condition of the masses, must be the inviolability of private property.  (Ibid., § 15.)

·      We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners. (Ibid., § 46.)

Charles Fourier, socialist

In § 47 Leo XIII gave a long list of benefits that would accrue from widespread capital ownership.  There was only one problem.  The only suggestion the pope gave for how a program of expanded capital ownership could be financed was to increase wages.

This, to all intents and purposes, was as good as saying that widespread capital ownership is impossible.  Wages cannot be increased above the market rate for very long without causing serious problems, as the “Fight for $15” movement has discovered, e.g., job flight, replacement with technology, and loss of entry level positions and part time employment.

First and foremost, increasing wages adds to the cost of production and thus to a rise in prices.  Profits do not do this, because profits are what remain after costs are subtracted from revenue.  As the late Walter Reuther said,

Walter Reuther, labor leader

The breakdown in collective bargaining in recent years is due to the difficulty of labor and management trying to equate the relative equity of the worker and the stockholder and the consumer in advance of the facts….  If the workers get too much, then the argument is that that triggers inflationary pressures, and the counter argument is that if they don’t get their equity, then we have a recession because of inadequate purchasing power. We believe this approach (progress sharing) is a rational approach because you cooperate in creating the abundance that makes the progress possible, and then you share that progress after the fact, and not before the fact.  Profit sharing would resolve the conflict between management apprehensions and worker expectations on the basis of solid economic facts as they materialize rather than on the basis of speculation as to what the future might hold…. If the workers had definite assurance of equitable shares in the profits of the corporations that employ them, they would see less need to seek an equitable balance between their gains and soaring profits through augmented increases in basic wage rates. This would be a desirable result from the standpoint of stabilization policy because profit sharing does not increase costs. Since profits are a residual, after all costs have been met, and since their size is not determinable until after customers have paid the prices charged for the firm’s products, profit sharing as such cannot be said to have any inflationary impact upon costs and prices…. Profit sharing in the form of stock distributions to workers would help to democratize the ownership of America’s vast corporate wealth.  (Testimony before the Joint Economic Committee of Congress, February 20, 1967.)

Eliphas Levi, socialist

The plain and simple fact is, however, that “because” raising wages is not a practical way to finance widespread capital ownership, most people have either assumed that ownership is really just prudential matter and is therefore completely discretionary (capitalism), or is mandatory by everyone regardless of the rights of existing owners (socialism).  All of which is true . . . unless there is a means of financing new capital formation that does not involve reducing consumption in order to save.

Fortunately, there is such a means.  Although the term is little used today and was not well understood even when it was in relatively common use, “the Real Bills Doctrine” constitutes the foundation of “the Banking Principle.”  The “doctrine” is that as long as a bill or note represents something of “real” value (such as existing inventories of goods or a capital project with a reasonable expectation of paying off) it can be turned into money.

And what about bills and notes that do not represent something of “real” value?  Those are “fictitious bills” and are either speculative or fraudulent, depending on the specific circumstances of their issue.

R.H. Tawney, socialist

Turning “real bills” into money for commerce, industry, and agriculture is what commercial and mercantile banks were invented to do.  This means that if someone has a capital project that needs financing, he or she can “draw a bill” backed by the value of that project (and whatever collateral is demanded) and “offer” it to a bank.  If the bank “accepts” the bill (turning the bill into a “bankers’ acceptance,” a process called “discounting” . . . which can also be done, less conveniently, by an individual or another business, making it a “merchants” or “trade” acceptance), the bank issues a promissory note.

The bank’s promissory note can then be used to back a new issue of banknotes (almost no bank does that these days) or a new demand deposit — in other words, creates money.  The borrower uses the money to finance the new capital formation, puts it into production, makes money, and repays the loan, thereafter using the flow of income from the capital for consumption purposes.

Henri St.-Simon, socialist

The bank takes the repayment and cancels the money because there is nothing behind it now.  The end result is that it is possible to finance new capital formation not by cutting consumption, but by increasing production: the same result, different process.  This is how you shift from “past savings” to “future savings.”

Thus, instead of relying on people to finance widespread capital ownership out of wage income by cutting consumption, it is possible to finance the same thing by making it possible for people to purchase capital that pays for itself out of its own future profits by increasing production.  The income is still withheld from consumption, but instead of the saving taking place before production, the saving takes place after production.  That, in essence, is the proposal called “Capital Homesteading” that could make every child, woman, and man on Earth a capital owner.

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