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Selecting the Principle Target

 
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Richard Glover



Joined: 29 Sep 2008
Posts: 185
Location: Ealing, London, UK

PostPosted: Thu Feb 06, 2014 8:28 am    Post subject: Selecting the Principle Target Reply with quote

Economic reformers include those groups advocating land value taxation, elimination of interest and fractional reserve banking, citizen's income and more. Are there principles common to all these apparently different agendas that all can agree on? Discerning any such unifying principles must strengthen all of these apparently separate arguments.

Explore the question of interest by way of example.

Interest can be defined as a payment for the use of money. The private UK banking system is said to have created virtually all UK money through mortgages, loans and overdraft facilities. The UK money supply is thus "paid" for through a mix of interest charges and fees associated with the money "advances".

A national money supply is of immense value to the nation; the opportunity cost represented by any alternative such as barter is very high indeed. People are prepared to pay for the use of money.

Our value of the money supply enables the dominant suppliers of the money we use (private banks) to charge high interest and fees for its provision. There are real costs associated with the money supply, but perhaps not as high as the payments demanded for it.

It could be argued that interest is usury and should be capped. However, in our present set-up, wouldn't the banks simply raise those associated fees instead? Wouldn't we expect loans to be even more confined to the least risky areas such as property, rather than what we probably consider more worthy but yet risky investment in industry?

Savers and investors also lend money and also require a return on their money. This may be via banks or directly. Even on what may be called legitimate lending such as new infrastructure or production facilities, a return is expected. Is the interest or other return charged essentially different to what is paid to banks for providing the money supply? One could also wonder why there are such concentrations of lend-able money in private hands!

Question: Which of the following is the principle target?
1 - Interest in terms of so many % the real target here?
2 - The private provision of the UK money supply?
3 - The existence of monopoly positions?
4 - The tendency towards large pools of private money?
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Brian Chance



Joined: 09 Nov 2008
Posts: 115
Location: Croydon Surrey U.K.

PostPosted: Sun Feb 09, 2014 9:15 pm    Post subject: Reply with quote

Money

Money is a claim on wealth. Justice requires that the claim and corresponding obligation (credit and debt) arise in the course of serving one another’s needs. This is achieved by freely negotiated exchange, using money as the medium, unless there is direct exchange in the form of barter, which is unusual.

The purpose of money is to record the constantly changing balances on exchange between individual members of the community. The money in circulation (money supply) should therefore be limited to the value of uncompleted exchanges. In the case of large capital projects, exchanges may remain outstanding for a long time until exchange is completed by use. Money created in addition is unsound money and must either deny genuine claims by other holders of money or create unjust obligations to produce additional wealth.

Control of the money supply is therefore vital and must be ultimately the responsibility of the central authority. Normally individual production comes first and money records the claim for completion of exchange but frequently the individual consumption comes before the production needed to complete the exchange. For example there may be a need for an advance to buy a house or a car with repayment from subsequent earnings. These transactions need additional money as credit. This requires individual skilled professional judgement which the central authority cannot provide. It is appropriate to delegate the responsibility to a local authority and banks have developed quite properly for this purpose.

The additional money costs almost nothing to produce but the professional skill required to judge the merits of each application should be paid for by the applicant, together with a risk premium. Banks are entitled to an income from this source and also for managing the clearing of individual transactions. There is no justification or need for interest to be paid as well. Fractional reserve banking works perfectly well provided that the fraction is large enough and the money is created only to produce additional wealth sufficient to repay the advance. Banks that provide the best service while keeping their costs and risk premiums low (but not so low as to cause the bank to fail!) would prosper. Competition would prevent the charging of extra fees.

The banks are acting on behalf of the community who actually provide the goods that are claimed using the bank credit and the overall total of credit has to be monitored and restricted if necessary by the central bank, using adjustments to “narrow” money.

These fundamental rules could be extended to separate communities using different forms of money. Banks acting together could provide foreign exchange facilities which are legitimate when tied to actual transfers of wealth.

The creation of additional money outside these rules, including for artificial foreign exchange transactions and derivative trading is just a drain on the productive economy and should be banned. Tight control of the money supply as outlined would of itself prevent the accumulation of pools of loose money.

Natural law yields an economic rent of land (ERL) to provide the means of exchange to those who by reason of communal work or inability to work cannot otherwise provide for themselves and their families. Any excess of ERL over these necessary provisions still belongs to the community as a whole and could reasonably be distributed as citizen’s income.

In this ideal system, saving would be understood quite differently. At present there is competition to borrow savings but if banks supplied credit at cost to the limit acceptable to the community as a whole, as set out above, there need be no demand to borrow savings. Saving requires surrender of immediate consumption, which will then be enjoyed by somebody else. When the saver wants to exert the claim later, somebody else will then have to forego the equivalent consumption. Saving is therefore only possible if it is borrowed as credit on terms similar to bank credit. There may then be a chain of grant and repayment of credit, depending on the interval between saving and withdrawal. The goods and services freed when the final credit is repaid will then be available to the saver to honour the claim on withdrawal. Instead of claiming interest, the saver may even be prepared to pay for the savings to be used wisely so that it will be possible to enjoy the benefit later.

Unfortunately, the ideal system as set out above is impossible at present. It is just a dream.
As Richard points out most additional money is used to finance the purchase of land. Banks will continue to do this so long as land has a value, because it is the easiest way to make a profit. The creation of additional money for this purpose is contrary to the fundamental rule that credit should only be given for the creation of wealth. It is a one way flow of claims on wealth from the creators of wealth to land owners who create no wealth in exchange. A similar one way flow results from the annual payment of ERL and interest.

The only way to bring justice to Economics is to work steadily over a generation to bring land towards a nominal value by the progressive introduction of LVT. When banks can no longer lend on security of property, particularly residential property, or act like casinos, banking will revert to being a business like any other, acting on behalf of the community as a whole. Lasting monetary reform is impossible without the implementation of LVT.

The answers to the specific questions are:-

!) There is no justification for interest.
2) The privately owned fractional reserve banking system is well suited to the provision of the U.K. money supply.
3) When banks can no longer make easy money, monopoly is less likely and could be controlled by law as with other monopolies.
4) Private pools of money would have to be dried up. How to achieve this is problematic, but once eliminated the just monetary system outlined would prevent any recurrence.

The basic principle relating to money is that Additional money must be used solely to create additional wealth, the value of which, when put into exchange, must be used to repay the additional money.
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Leonie Humphreys



Joined: 23 Sep 2008
Posts: 216
Location: West Dorset, UK

PostPosted: Fri Feb 14, 2014 1:16 pm    Post subject: Reply with quote

Dear Richard,

You ask about principles in common to reformers. Therefore the first need is to back track and ask the question:

What is the principle aim of each reform group?

You have probably made the assumption ‘justice’ or ‘justice and sustainability’ but it needs to be stated I think. So, for my own ‘vision’ for the future, the aims of reforms would be towards social equity and environmental sustainability.

Starting from that point I would suggest some principles to move towards those aims without rocking the boat (ie the status quo) so much that it makes things more difficult for the most vulnerable during the process of transition.

But first I would like to point out a couple of other assumptions in your discussion on interest.

You wrote:

Quote:
Our value of the money supply enables the dominant suppliers of the money we use (private banks) to charge high interest and fees for its provision.


I would argue that it is not really our ‘value of the money supply’ that enables the suppliers of money to charge high interest etc, rather it is the fact that there is no alternative. BUT if we get the principles right this problem would come out in the wash, but it is important to note this as it is a very important point and crippling under the present system.

You wrote:

Quote:
Savers and investors also lend money and also require a return on their money.


Again I would argue that 'savers and investors' do not ‘require’ a ‘return on their money’ but they can get it currently (although reduced at the moment due to the 2008 banking crisis) for the same reasons that banks can charge high interest under the present system. But again this is an important point yet is a problem (in my opinion) that would also come out in the wash if we get the principles right.

To return to the principles then I would propose the following framework for economics which I have called ‘Environment & Equity Framework’, and have presented below:

Environment & Equity Framework

Three main principles for transformation towards social equity and environmental sustainability are proposed to ‘frame’ market economics:

Benign wealth creation: LAW/regulation at all levels

human creativity appropriately applied to natural world
eg based upon precautionary principle & harmony with nature process

Benign public revenue: COMMUNITY

taxation to encourage sustainable production & equity (not monopoly power), derived from unearned income or ‘rent’ (eg through Land Value Taxation - LVT) – currently within ‘supernormal profits’.

Benign money & credit: DYNAMIC/FLOW

used as a ‘catalyst’ for economic activity and a means of exchange, but conditions should discourage accumulation of money as a claim to wealth.


The current imbalance in capitalism as it has played out with the emphasis on rewarding ownership over effort has led to the following vicious cycle of effects:

Pressure on labour and the margin (small/new business)

Tax on employment & production and payable before breakeven – eg PAYE, NI & VAT (since included in nett wage required to live)

Wages reduced to ‘least acceptable’ (now ‘zero-hours’ contracts)

Unemployment ‘pool’

Rent – private – claims from owners of land/natural resources – derived from nature &/or location = unearned income

Money loans/credit – private – banks at usurious interest rates
97% of money created as debt by private banks

Pressure on government for social welfare programmes leading to national debt and huge interest charges

Inflation caused by privatisation of ‘rent’ & debt based economy (interest)


A shift in the incidence of taxation from employment & production to ‘rent’ would lead to transformation and a virtuous cycle of effects, including the following:

Reduces pressure on employment

Release of the ‘margin’ of production (eg new/small business):

discourages holding out of use buildings & land (as tax charged on premises with business class use whether occupied or not)....

encourages premises to become available at market value ....

encourages new, small business

Incentivises employment instead of capital intensive production methods

Wages no longer suppressed – rise to ‘full product’ of labour without causing inflation

Potential for full employment

Potential to ‘save’ for home or to set up in business....

new/small (‘marginal’) entrepreneurs/craftsmanship encouraged

less risky – encourages direct investment

High (usurious) interest rates competed away (due to less risk in economy)

Rewards effort, not ownership

Encourages sustainable production and consumption patterns (more labour, less capital intensive) and investment in sustainable products

Government expenditure reduced (eg social services, health) – therefore reduced deficit/interest

Takes inflation out of the economy to a great extent (balanced economy)

Transparent source for taxation (can’t put it in your pocket & say you haven’t got it!)


To return to your points about high interest rates and a ‘return’ on money ‘savings’ I hope you can see how these would come out in the wash, since high interest rates would be competed away as well as discouraged due to an alternative way of raising money, at least for new and small business development, through the ability the new system would create to retain some ‘income’ and/or ‘normal profit’ for this purpose. The ‘savings’ aspect also becomes obsolete as the risk in the economy so prevalent and destructive within the system as it is now, would also be dissipated so that people would be empowered to invest in their relatives and friends businesses whilst families would be empowered to take care of their own young, old and those with health difficulties.

In other words getting the principles right would create conditions for families to flourish as well as small local communities, whilst protecting the environment.

Hope this makes some sense!

Best wishes, Leonie
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Richard Glover



Joined: 29 Sep 2008
Posts: 185
Location: Ealing, London, UK

PostPosted: Mon Mar 31, 2014 7:25 am    Post subject: Reply with quote

Leonie,

You are quite right; there was an underlying assumption along the lines of "economics with justice" or as you phrased it "social equity and environmental sustainability". However, what anyone understands these phrases to signify is another matter. Even single words give us trouble; an excellent example is "interest" which I hope to open as a new topic shortly.

On the specific points you raise:

Our value of money: Money is virtually indispensable (your "no alternative"); so perhaps "invaluable" is a better term. Its significant value to the community at large was intended to be conveyed. Obviously no charge could be made if it had no value. Seeing this value clearly may lead on to an understanding of this value arising from the community as a whole, and not from any one player in it. Hence the common ground with the land vale tax advocates.

Savers and investors do require a return on their money, in the sense that they demand it in the present mental framework. We have to at least accept this is how things are. The main point being made is that it is not just banks at the point of issuing new money, but anyone at all on lending money.

Your use of the word benign is a good one. I suspect that one test of getting the principles right is that the effects are benign rather than harmful.
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Richard Glover



Joined: 29 Sep 2008
Posts: 185
Location: Ealing, London, UK

PostPosted: Mon Mar 31, 2014 7:41 am    Post subject: Reply with quote

Brian,

To pick up on the specific answers:

1) There is no justification for interest.
I feel this is not an easy statement to justify. Perhaps this can be deferred to another topic.

2) The privately owned fractional reserve banking system is well suited to the provision of the U.K. money supply.
Although central bank money is a small fraction (~10%?) of broad money, I wonder if it is accurate to call it a fractional reserve system as this implies a money multiplier means of control which is certainly not a dominant factor. In some ways, the UK money supply runs on an "endogenous" basis; it increases with the demands of the economy (including financial transactions). The system as is has its good points. As you are aware, there are recent excellent descriptions of how it works on the Bank of England website. The 2 supporting videos on money creation and money in the modern economy are really good.
http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx

3) When banks can no longer make easy money, monopoly is less likely and could be controlled by law as with other monopolies.
I am not sure about the line of causality here. Perhaps banks will continue to "make easy money" until their monopolistic powers were exercised with appropriate obligations to the community at large, either voluntarily or through appropriate regulation.

4) Private pools of money would have to be dried up. How to achieve this is problematic, but once eliminated the just monetary system outlined would prevent any recurrence.
If there was a will, then perhaps not so problematic. It would be good to continue this point further at some time.
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Brian Chance



Joined: 09 Nov 2008
Posts: 115
Location: Croydon Surrey U.K.

PostPosted: Thu Apr 10, 2014 2:39 pm    Post subject: Reply with quote

Richard

Interest
There could be a useful debate about interest and I look forward to that. Meanwhile –
there is no justification for interest.

Fractional Reserve Banking System and easy money
I agree that the present system has its good points and the statements by the Bank of England are good, but I believe that it is the granting of credit that must first be considered.
Credit is given by individual members of the community. Individuals, by their work on land, supply the needs of the debtor, both work and personal, until such time as he can provide wealth in the form of goods and services in return. In the common example of ship building, a great many people provide wealth in return for a partly built ship until it is finally commissioned and put to use. Money is created as tokens to represent the credit that has been given. This money represents genuine claims to future wealth which it is hoped that the ship will yield.
In a large community, who controls this process? The immediate answer is that banks create the tokens and are therefore commonly assumed to have given the credit, overlooking the fact that they are only acting as agents for the community. The question is how to control the activities of the banks in the credit process. Richard Werner’s excellent book stresses the difficulty and I prefer the solution of “window guidance” by the central bank, provided that those giving guidance know what they are doing. Banks must first be stopped from giving credit for the purchase of land. The practical way to prevent this opportunity of easy money is by steadily reducing the sale price of land by gradually returning the annual economic rent to the community. Banks would not lend if the value of the collateral security was going steadily lower.
Furthermore, the community should not be expected to give credit for the so-called financial industry which is largely parasitical to the productive economy. Given the necessary will, banking transactions could be limited to services directly related to actual productive transactions.
When banks had to return to the hard graft of judging whether or not requests for credit were justified by the likely outcome, the privately owned banking system could work well and the fractional reserve system would be a simple tool for enforcing the will of the central bank governor.
It would be the duty of a democratically elected government to appoint the governor and this is how the government would fulfil its duty to control the money supply.
I agree that all this depends on bankers recognizing their obligations to the community.
Pools of Money
Credit needs its own thread on the Forum even more than interest. If the world’s debts, created by the wanton giving of credit, cannot be repaid, the corresponding claims are worthless and this needs to be considered.
With the guidance offered by Richard Werner I hope to make a start. Pools of money may feature.
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