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Capital

by John B. Cobb, Jr.

John B. Cobb, Jr., Ph.D. is Professor of Theology Emeritus at the Claremont School of Theology, Claremont, California, and Co-Director of the Center for Process Studies there. His many books currently in print include: Reclaiming the Church (1997); with Herman Daly, For the Common Good; Becoming a Thinking Christian (1993); Sustainability (1992); Can Christ Become Good News Again? (1991); ed. with Christopher Ives, The Emptying God: a Buddhist-Jewish-Christian Conversation (1990); with Charles Birch, The Liberation of Life; and with David Griffin, Process Theology: An Introductory Exposition (1977). He is a retired minister in the United Methodist Church. His email address is cobbj@cgu.edu.. This paper was written for delivery at a conference in Suzhou, China in January, 2009. Used by permission of the author.


I. Introduction

The word "capital," like most important words, has many possible definitions. In its narrowest or most basic meaning , it refers only to those things that make human labor more productive, such as building, machinery, and infrastructure for industrial production. In a much broader and more popular meaning, it refers to all forms of wealth. Since all forms of wealth enable the holder to procure the means of production, this difference is not always important.

Whereas in Marx’s day, most wealth consisted in land and capital in the narrow sense, today financial wealth , often called financial "capital," dwarfs both of these. Since my concerns in this essay are with the ability to own and control capital in the narrow sense, my understanding of capital includes land and financial capital as well as capital in the strict sense. I am using the term in the broad sense. I am not, however, broadening it to the still more inclusive use in which one speaks of moral capital, political capital, social capital, and human capital. These, too, are of great importance, but I remain focused on the strictly economic aspects of capital.

Some forms of capital are essential to the function of virtually all societies Others are not. These distinctions are important as we undertake to imagine a better economy,. For example, the distinction between land and capital in the narrow sense is important as is that between both of these and financial capital. It would be pointless to oppose capital as such.

However, my essay does not engage in those tasks for which these distinctions are important. It focuses on wealth and how the wealthy gain control not only of the economy but also of society and government. "Capitalism," as I use the term is this domination by the wealthy. In earlier times we called it "plutocracy." I write in hopes that despite the large role China is giving to the market, it will not allow the wealthy to take control to the extent they have done so in the United States. China can have a "socialist market" instead of a capitalist one. To maintain this form of socialism requires that China avoid huge concentrations of wealth and economic power. This essay includes accounts of how plutocracy developed in the United States, to indicate how China can make different choices.

 

II. Descriptive and Normative Approaches

I speak as a Christian theologian rather than as an economist. I lack a vast amount of the information and theory that is learned in graduate programs in economics. However, a theologian may be able to make a different kind of contribution.

Economics as an academic discipline aims to be descriptive and analytic rather than historical and normative. In my opinion, when economists give information to governments, they usually also give, or at least imply, normative advice, but their norms are not critically considered. Many economists take much of the present national and global situation as given and then analyze the role of capital within it. Their evaluations are usually of how well a policy contributes to economic growth. I will not compete with them on this turf.

The angle of vision from which one approaches a topic of such vast complexity and importance as capital makes a large difference. Marxist economists have asked different questions and accordingly come up with different answers. Although I am a Christian theist, and Marx rejected theistic religion, we derive our most basic norms from the same source, the ancient Hebrew prophets. Two and a half millennia ago, the Hebrew prophets, in the name of God, passionately condemned the exploitation of the poor by the rich. Such exploitation has continued through the centuries, and it has evoked both protests against such exploitation and efforts to restrict it. I hope that China will continue to make such efforts. China has a chance to learn from the failure of most of these efforts in the United States.

I believe that those who reflect on the economy should do so from an explicitly normative position that they have considered critically. My position is that the economy should serve the political order, which should, in turn, serve the people and the whole world, including the Earth itself. This is unlikely to happen where economic power is concentrated in a relatively small number of hands.

First, large concentrations of wealth distort the market itself. The ideal of the market is a place where everyone can produce and exchange goods. But when wealth is concentrated in a few hands, it gives these hands the power to shape markets to their own advantage. It destroys the "level playing field" affirmed by economists.

For millennia political power has enabled its possessors to gain wealth and share it with those favored by them, and wealth has given its possessors political power. Princes have bestowed wealth on their favorites, and the wealthy have exerted great influence on rulers. Generally they belong to the same social group and so have more shared values and extensive personal acquaintance. The rich are better able to benefit those in political office than are the poor; so they are more courted by politicians. In most countries they own the media on which most are dependent for their understanding of current events. In countries such as the United States, where running for high office is extremely expensive, and media are very influential, few are elected without support from the rich.

There are many wealthy people who care deeply for the well being of the common people and enter the political arena for that reason. But overall, the power conferred by wealth has rarely been used for the common good. It has typically been used to safeguard and increase private wealth at the expense of the poor and powerless. In the United States this has occurred in recent years in an extreme way.

Democratic forms theoretically give equal political power to all citizens, and at times the institutions of democracy do serve to check the control of government by the rich. But any student of history knows that economic inequality is reflected in inequality of political power. My concern is to curb the power of wealth in the United States and to encourage China to avoid following those policies that have produced extreme imbalance in the United States.

The central term of normative Christian thinking in relation to social issues has been "justice." This word has many problems. In some contexts, justice is a matter of rewards and punishments according to the deserts of individuals and nations. In other contexts, the emphasis is on the unbiased application of law. In still others, the focus is on reducing inequality. Other aspects of Christian teaching have checked the pursuit of justice in all these senses, but when one of its meanings, the ideal of equality, is separated from its religious context, it can have destructive consequences. For example, in Europe we point especially to the French Revolution and its aftermath as showing the consequences of pursuing equality in too single-minded a way. The Bolsheviks in the early phases of the Russian Revolution offer another example, and China during the Cultural Revolution also pursued the goal of equality quite intensely. The negative consequences were once again apparent. Unfortunately, it is easier to pull down or kill those who are better off than to raise those who have the least.

The Hebrews tempered the pursuit of these goals with emphases on love and mercy. Their ideal for society was Shalom, which we often translate as peace. It points in somewhat the same direction as the Chinese goal of a "harmonious society." A harmonious society will not emphasize punishment for crimes as much as restoration into community. Nevertheless, in its Hebrew setting, Shalom has a strong sense that the exploitation of the poor and weak by the rich and powerful and the development of excessive inequalities are destructive of peace or harmony. Shalom cannot be separated from justice.

The prophets observed what was happening economically in their day and were shocked and saddened by it. They saw that the concentration of wealth, chiefly in the form of land, tended to increase at the expense of the poor. No doubt much of the expropriation of the land by the rich was legal, but the prophets saw that wealth could corrupt the judgments made in the law courts as well. Corruption followed from the concentration of wealth and exacerbated problems that were built into the system itself.

The prophets developed little theory, but they did influence the legal writings. The Hebrews saw that a very common cause of loss of land was borrowing money at interest on the part of the poor, who gave their land as security. Being unable to pay off the loan with the required interest, they had to surrender their land to the lender. The moral response, built into Hebrew law, was to forbid the taking of interest. Another response was to propose some redistribution every seven years with radical redistribution in the fiftieth, jubilee year. Jesus incorporated ideas of "the jubilee" into his vision of the divine commonwealth (often rendered "Kingdom of God") whose coming he proclaimed.

It is obvious that we cannot find specific answers to our present economic problems in ancient scriptures. Outlawing the charging of interest on debts never worked well in the Christian context. The need to borrow in emergencies or to take advantage of business opportunities is too great. We can, however, appreciate the passion for justice to ordinary people and opposition to concentrating wealth in the hands of a few. We can also agree with the prophets that payment of interest on debts is a major source of growing inequality. The rich make money on their wealth. The poor must pay interest out of the earnings of their labor.

III. Public and Private Property

The normative issues about capital are largely those of who owns or profits from the possession of property. A major question is: what property should belong to the community as a whole, and what should be private? In recent years in the United States, economists have widely supporting the view that the community through "big government" should own or control very little, and that everything that can be privatized should be. In Communist countries, private property has been very limited, with anything that can be used as a means of production belonging to the people through their government.

In democratic countries generally, the tendency has been for government to operate or closely regulate those activities that function best as monopolies, while leaving others in private hands. The police and military forces are almost universally controlled by governments, although private police also exist and even private armies. Nations have postal systems, but private companies now compete with the state system in some of its services. Many countries have national railway systems, although in the United States private companies transport freight. Highway systems are overwhelmingly public, although private highways are now competing with public ones in some places. Almost all nations have public education, although private educational systems are also common. In many countries there are national health care systems, but the United States has emphasized a for-profit medical industry.

On many matters of this sort, the issues are practical. Currently the pressure to privatize has become ideological, and I oppose the libertarian ideology that supports the expansion of private ownership into what should be public realms. This expansion leads overall in directions that are harmful to the poor and destructive of community. In my opinion, the balance between state ownership and private ownership is better in Europe than in the United States. But detailed discussion of such questions is not my purpose. China will find the balance that is best for it.

One thinker who provided a helpful basis for drawing the line between what should be private and what should be public was Henry George. He approached the question with a clear theory that should be widely convincing to those who care about the common good. I am glad that Sun Yat Sen was one of those who agreed with it. According to George, that which is gained through labor, management, entrepreneurship, and investment should belong to those who have invested themselves in it. That which is not a product of human activity should belong to the community represented by the government.

This means that the profits from productive enterprises should belong to those who have earned them. George fully approved of private business and thought that government should give it considerable freedom. Taxes should not take away the fruits of labor. Also the profits of legitimate investment should be respected. On the other hand, the profits from controlling that which is not created by human labor or ingenuity, that which is given by nature or created by the community, should belong to the community.

For George the major form of community property is land. The private ownership of land gives enormous power to a few. The price of the land is often determined by movements of population or by public expenditures on infrastructure. These social expenditures give great additional wealth to land owners. Having inside knowledge of political decisions that will affect population movements and land use gives opportunities for windfall profits for corrupt individuals. This possibility often corrupts local politics. All the profit from land ownership should belong to the community as a whole. Land speculation has been the cause of most depressions. It is of great importance that profits from land ownership belong to the community rather than being appropriated by private citizens.

Herman Daly has persuaded me that the same principle should apply to "virtual wealth," which is now an immensely important part of the economy as a whole. Its creation and management constitute what is known as the "financial industry." One third of the jobs in New York City belong to this "industry." It is a superstructure erected on the "real economy," the one that produces goods and provides services. In recent decades finance has come to dominate the real economy, that is, the production of goods and services. This shift greatly exacerbates the problem of inequality of wealth and power.

In the United States money is created as privately owned banks make loans on which interest must be paid. This gives great power and wealth to the private banks and burdens the government and the population as a whole with large interest payment. The power to create money should belong to the government and be debt free. China should avoid following the United States toward privatization in this area. This topic is even less understood and discussed in the United States than land ownership, and I will return to it below.

There are two basic institutions grounding most of the virtual economy. They are banks and stock exchanges. The former lend money, the latter sell shares of corporations. After discussing the rise of corporations in the next section I will take up the question of financial institutions. I will conclude with a section on local economies.

IV Taming Corporations

Robert A. G. Monks, in a recent book, entitled Corpocracy, (Hoboken, NJ: John Wiley, 2008) writes about "the reality that corporate power has become dominant in the United States and CEO power has become dominant in corporations." (p. xiv) He shows how corporations organized themselves in the early seventies to assert their power, and he is happy about their success. He shows also how the CEO’s organized themselves in the Business Round Table in 1972 and gained greater control of their corporations. He is distressed that CEOs are now using corporations for their private advantage rather than that of stockholders. This does seem to be carrying the principle of "economic rationality" so far that its positive functions disappear. It also concentrates power as well as wealth in fewer and fewer hands. This is capitalism gone mad.

Today the CEOs of transnational corporations are able to control political action in most of the world’s nations. This is one of the most serious problems humanity faces. To consider how businesses can operate and perform their entrepreneurial functions without generating these mammoth corporations, I will briefly review the history of corporations in the United States. (I am following the account of Lawrence E. Mitchell, who published The Speculation Economy: How Finance Triumphed over Industry. Berrett-Koehler, 2007.) As we consider the steps by which corporations transformed themselves in the United States from servants of society into its masters, we may also see ways of avoiding a similar development in China.

The early corporations were chiefly for the construction of public infrastructure such as toll roads and canals. The distinctive feature of corporations was that they gave their owners limited liability. This socialized the risks of investors. If the corporation went bankrupt, the stockholders were not personally liable to repay its creditors. As long as these corporations were performing public services, it made sense for taxpayers to share in the risks.

 

Incorporation required getting a charter from the state legislature. This authorized particular activities and strictly limited the corporation to those specified. It also specified limits to the capitalization of the corporation. Holding property in another state was often restricted. The idea was to limit the size of corporations especially to prevent them from becoming monopolies. Further, the corporation could not own stock in another corporation or merge with it.

After the Civil War there was an explosion of railway building, and much of this was financed by borrowing money. The stock owners felt it was safe for the corporation to borrow huge sums since they risked only their investment. Although industries generally were local and financed by their owners, they found some advantages in incorporating. This was especially true of the ability of the corporation to survive the death of various owners. Gradually, they also began to borrow extensively, benefiting from the limited liability.

Many corporations wanted to expand their activities into related fields, and the courts generally allowed them to do so. Some states began to allow corporations to purchase stock in other corporations. This opened the way to close coordination among corporations. To earn money for the state treasury, New Jersey broke ranks and allowed corporations chartered there to merge with other corporations. It also allowed them to buy other corporations using stock instead of money. This made such purchases far easier. Finally, it allowed the formation of holding companies whose only function was to own other companies.

These changes resulted in the development of mammoth corporations. They also introduced the custom of buying and selling companies. Profits could be made by buying and selling companies without being directly involved in any industrial or productive activity at all.

The size of the new corporations was such that state regulation was impractical. Accordingly, national regulation was proposed. One possibility would have been to require that corporations apply for charters from the national government instead of states. For various reasons, including the desire of corporations not to be effectively regulated, national charters were never adopted.

The courts, which all along have been sympathetic with corporations, eventually gave them the legal status of "persons." To them were applied the privileges listed in the constitutional amendments originally intended to protect newly freed slaves. For example, corporations have freedom of speech, and this includes the freedom to donate to the campaigns of politicians. Their extensive control over Congress is protected by these legal decisions.

There is some antitrust legislation designed to prevent monopolies and ensure that there be competition. However, we are now told that since there is a global economy, competition requires huge size since it is primarily with other global corporations rather that with other American ones. Accordingly, there is little use of antitrust laws to prevent acquisitions and mergers.

The growth of corporations was accompanied by the growth of stock exchanges. Their period of great importance in the United States may be associated with the re-opening of the New York Stock Exchange in 1914. Since then it became the central institution for the financialization of the American economy. The success of corporations is judged by the valuation of their shares on this stock market, and many decisions by corporations are geared to effecting this valuation rather than to improving the long-term health of the corporation.

There is, of course, some regulation through the Security and Exchange Commission, but the ability of these governmental organizations to control financial corporations is modest. And there is one class of financial institutions, commonly called hedge funds, that is officially free from SEC restrictions. The argument is that since these funds invest only the money of the super-rich, there is no need to protect investors.

The buying and selling of corporations has led to the emergence of another kind of financial corporation specializing in this practice. These are "private equity" companies. They specialize in buying up the stock of corporations they believe to be undervalued. They then restructure the company in ways that make it at least appear more profitable. Sometimes they significantly improve the structure and functioning of the business. But sometimes the "improvement" is cosmetic and may even reduce the long-term prospects. The private-equity company then sells shares in the restructured company. This is called "leveraged buyout," since most of the money used to buy up the stock originally is borrowed. The money is repaid from the new business, so that those who invest in the "private equity" company do not have to put up more than a small percentage of the cost.

These are simple examples of activity at the level of finance that may be highly profitable even on occasions when they do not improve actual production. Many of the brightest and best people in the world of business now figure out new ways to make money without investing in any productive activity. Some of the investment vehicles they devise, called derivatives, are so complex that even many bankers do not understand them. Most of the supposed economic growth of recent decades is in the derivative market, which grew to five times the size of all the stock exchanges. This market can increase vastly in size and generate enormous wealth without making any significant contribution to the real economy. Much of the financial world is thus parasitical upon the productive economy. Nevertheless, its mistakes are likely to be costly to the real economy as well. It has become an immensely powerful force in national and international life.

In the United States individual large corporations have become "too large to fail." This is especially true of the great financial empires. The government now accepts the responsibility to bail them out. This frees the banks to speculate wildly, confident that if their gambles don’t work out, the government will save them. This great advantage of large size is but one of the costs of allowing huge concentrations of wealth.

This sketch suggests the possibility that China can have corporations but still avoid capitalism in the sense of having capital control governments. China could allow the development of corporations but require that they either operate only in the province in which they are chartered or be chartered by the national government. This would be meaningful if the corporations were required to serve the public good, and if there were serious evaluation at the time that the corporation sought renewal of its charter. China could also forbid the purchase by corporations of stock in other corporations, and it could forbid interlocking boards, that is, officers of one corporation sitting on the boards of other corporations. These restrictions could be combined with strong anti-trust laws. Together such rules would ensure that corporations existed for socially useful purposes and were numerous.

None of this would interfere with the market in goods and services. Indeed, that market would be, in many ways, freer than in a world dominated by a few giant corporations. They would allow a great deal of entrepreneurial activity, giving large scope to the keen business sense found among so many Chinese, while reducing the concentration of wealth, which leads to the corruption of government.

A more drastic step is possible without undercutting the freedom of the market. We noted that the attraction of the corporation as a way of doing business stemmed chiefly from the limited liability of those who owned it. This is crucial to the current system of ownership, but it separates ownership from responsibility, reducing the interest of most owners to some combination of rising stock prices and income from dividends. Corporations owned by persons and institutions whose only concerns are of this sort inevitably move in the direction of treating profit, sometimes very short-run profits, as the primary goal. If immediate profits and prospects are good, the value of the stock is likely to rise. Most of the owners have no knowledge of the long-term effects of the decisions that are made to secure short-term profits. They are even less interested in the wellbeing of workers, the contribution of the business to the communities in which it operates, or its effects on its natural environment. Hence, even CEOs who personally care about these matters are under pressure to subordinate them to the near-term bottom line.

When owners are personally liable for the effects of what the business does, and for paying the debts the business incurs, their relation to the business are much closer. No business is likely to have more than a few such owners. Stock is not likely to be publicly traded. This would generally limit the size of businesses even more drastically than the earlier suggestions. However, family businesses, even quite large ones, could still flourish.

. Of course, family businesses can be brutally indifferent to the welfare of their employees. Pressure to behave ruthlessly can be exercised by family members or by those who lend them money. Nevertheless, on the whole, owners of family businesses are more likely to have human relations with their workers and some care for their welfare than are those who invest in the stock market simply for the hope of monetary gain. They are more likely to be concerned for the long-term health and reputation of their business and to understand that these are improved by good relations with employees and the community. In short, quite apart from whether these owners are, as persons, more virtuous than CEOs of corporations owned by those who purchase stock simply for profit, they are more likely to act in socially constructive ways.

It is useless to seek for perfection. Indeed, holding standards that are unrealistically high often results in structures of power and modes of implementation that are oppressive. Every system is subject to corruption. The goal should be a system that generally supports socially-constructive action and discourages socially-destructive actions while leaving basic decisions for the society in the hands of a government that is concerned for and responsive to its people. A system of local markets with many participants, playing by rules established by the community, does this better than a global market dominated by a few players who set their own rules.

V. Taming Banks

We have seen how financial institutions have come to dominate industrial ones. Both Marx and the founders of capitalist theory did their work during the industrial revolution, when the question was whether industry should be controlled by private investors or by the state. The reality today is that both industry and most governments are largely controlled by financial institutions. Industrial capitalism required servicing by financial institutions, and banks have always played a central and powerful role. Nevertheless, today’s financial capitalism calls for fresh thinking.

Private commercial banks have always provided practical services, but they have also always been parasitical. Today the parasitic role dominates both in the United States and globally. I hope that China understands the importance of resisting pressures to integrate into the international financial system.

One major weapon of financial institutions in keeping the people, and even governments subservient is obfuscation. Much about money and finance is counter- intuitive, and those in power make few efforts to provide the public with a clear understanding. I will describe the situation in the United States. It may be that these matters are better understood in China.

  1. Most Americans suppose that money is a positive asset.
  2. They suppose that this asset is created by the government when it manufactures currency.
  3. They suppose that the Federal Reserve is an agency of the U.S. government.
  4. They suppose that, like individual households, the government should spend only what it takes in.
  5. They suppose that when the government manufactures currency to pay its bills it causes inflation.
  6. Accordingly, they suppose that ideally the government should pay its debts out of its income. Taxes should equal expenditures.

The reality is very different, and until this reality is widely appreciated, the parasitic work of the commercial banks will not be ended. The situation I am describing does not obtain equally in all countries – perhaps very little in China. Yet even in China there are pressures to enter the global system, and these can be best resisted if that system is understood. I will consider the six points above, giving central attention to the creation of money.

  1. The common idea of money is largely derived from coins and paper money. These are definite assets. We generalize this to bank accounts and then to stocks and bonds. However, it does not take much reflection to see that most money in this extended sense is not like wheat or real estate or precious metals. For me to own a bond is for someone to owe me money. This may be a corporation or it may be the United States government. When I deposit money in the bank, the bank owes me money. The way that the money supply is increased is by the increase of borrowing, that is, debt. It is better to think of most money as debt.
  2. The main way money is now put into circulation is to lend it. If no one borrows money, there will be little of it. If lots of people borrow money, there will be lots of it. This is counter-intuitive because we suppose that the bank can lend only what depositors have placed there. But commercial banks operate on the principle of fractional reserves. As long as they keep a reasonable amount of currency on hand to pay depositors what they want to withdraw, they can lend the remainder repeatedly. Of course, they cannot hand out the currency you have deposited repeatedly, but they can credit the account of many borrowers. Lending is a paper, or electronic, transaction in which cash plays a very small role. When banks lend money based on fractional reserves, they thereby create money that did not previously exist. This is especially counter-intuitive.

How can a bank lend the same money more that once? To simplify, imagine that there is a community in which there is only one bank. Suppose this bank has one million dollars in deposits. Suppose that it keeps $100,000 on hand in reserve to pay to any depositors who want their money. It can then lend $900,000 to applicant A. Applicant A does not want to walk around with all this money; so the bank credits it to A’s account. A can spend the money by writing checks on it. Suppose A buys a fine home from B. B does not want $900,000 in cash; so this sum is added to B’s account. The bank adds $90,000 to its reserves and is ready to lend $810,000 to another customer. As this process continues, the bank adds $9,000,000 to the money supply. Of course in the real world, different customers deposit what they borrow in different banks: so that the creation of money is a collective act. Also, the banks do not pocket the money they create. It is eventually cancelled as the debt is repaid. However, the banks collect interest not just on the first $900,000 note, but on all the additional notes. This is how they profit from their creation of money.

The main problem for the banks is that at any time this beautiful money-making machine can be destroyed by a "panic." Fractional reserve banking assumes that depositors are confident that their money is secure and therefore only withdraw occasionally. If confidence is lost, many will demand that their deposits be returned. But only a small part of these is actually available. Accordingly, the bank collapses. To reduce the danger of such collapse, banks seek governmental assistance. In the United States most accounts are insured by the government; so few depositors fear for the loss of their deposits, and a run on a bank is less likely.

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3) Money can be created in two ways. As I have described above, it can be loaned into existence by banks operating on the fractional reserve system. This creates an economy in which most money is debt. Interest payments on this debt grow faster than the economy as a whole.

On the other hand, money can also be spent into existence by a sovereign government. In American history, this method was used by many of the colonies, by the Continental Congress during the Revolutionary War, and by Abraham Lincoln in the Civil War. Following this method, the government contracts no debt and requires few taxes. However, the banks have opposed this method and succeeded in getting complete control over the money supply, excluding the government from any role. Roosevelt eschewed this method in spending the United States out of the Great Depression and financing World War II. He raised taxes and borrowed from the banks instead. Subsequent administrations have followed his example. This has increased the national debt enormously. The debt need not be paid, but the interest, which is paid, is becoming an ever-larger percentage of the budget. This growth of interest payments is not sustainable.

Like other countries, the United States has a "central bank." Central banks have special prerogatives and responsibilities assigned them by national governments. In some countries the central banks are agencies of the government. Even in these countries these banks are typically run by bankers and often operate largely in the interest of bankers. In the United States, the Federal Reserve Bank is owned by the leading commercial banks.

The American Congress was tricked into creating a privately owned Federal Reserve Bank in 1913. Woodrow Wilson signed the legislation, but in later years expressed his regret in strong language.

Although Franklin Roosevelt insisted that the president should appoint the members of the Federal Reserve Board, the bank continues to be owned, and basically operated, by bankers in the interest of banks. All our currency is now issued by this bank. This means that instead of creating money to pay its expenses, the government must borrow money, much of it from the banks, and pay interest on most of it.

The Federal Reserve sells U.S. bonds to commercial banks. Since it is assumed that these are equivalent to cash in terms of safety and that the government will pay only interest on them in perpetuity, they count as reserves. Thus buying U. S. treasury bonds from Federal Reserve Bank enables the local bank to receive interest on its reserves.

4, 5, and 6) I will consider these together. The financial system I have described requires infusions of new money in order to survive. A loan provides only part of the money that is needed to pay it back, because in addition to the principle, the borrower must pay interest. The money to pay the interest is not available unless additional money is pumped into the system. This can be done by increasing the quantity of debt or by government spending interest-free money into existence. In the United States, only the first method is employed.

Normally government debt is repeatedly rolled over and new debt is acquired. This puts money into the system. If the government actually began to pay off its debt, the system could function only by greatly increased lending by the banks.

Increasing the money supply is not inherently inflationary although the long term tendency is relatively slow inflation. Inflation occurs when the money supply grows more rapidly than business activity. Introducing new money into the money supply is not inflationary when it is used for increasing production. In particular, if it leads to using productive idle facilities and labor more fully, it is not inflationary. If the money supply is increased without sufficient goods, labor, and services available for purchase, this increase will be inflationary. This often occurs in wartime. When money is spent into existence, less of the money supply will require repayment with interest; so pressure to increase it will be reduced.

What then is the objection to the present American system? The objection is that it transfers wealth from the public to the banks and it concentrates wealth and power in fewer and fewer hands. The privatization of the power to create money inherently works in this way. Also, a government that cannot create money cannot provide the services people need without either high taxes or borrowing. A government that retains the power to create money can supply the people with needed services without such high taxes. Once this power is turned over to the banks, they gain immense political power as well. That makes the reversal of this privatization of profit from the creation of money extremely difficult.

China has the great advantage that it has not privatized its central bank. Hence, my account of the disastrous effects of such privatization is intended as a warning. If private banking on the fractional reserve system becomes an important factor in China, China must beware of a "slippery slope." Every increase in the ability of private banks to create money reduces the ability of the government to do so without inflationary consequences. Further, every increase in the concentration of wealth in private banks makes them more influential in government circles. Since China will also be under pressure from international financial institutions to conform increasingly to their patterns, this pressure from without and within may well erode the government’s ability to create money. At that point the claim to be a "socialist" market economy will lose most of its meaning.

Even if the Chinese government maintains and even monopolizes the ability to create money, it is in danger from concentrations of capital, foreign and domestic. The existence of a stock exchange provides opportunities for those with large resources to play an unduly influential role in the economy. Unless the stock exchange is tightly regulated, it is vulnerable to centers of economic power that can drive prices up and down at will. This is especially true when purchases can be made on margin, that is, by putting up only a small part of the total cost. It is my impression that China is seeking to control its stock markets, preventing excessive ownership of stock by foreigners and restricting marginal purchases. My concern is that the more wealth is concentrated, the more powerful become its possessors, and the more concessions they are able to gain from governments. May China learn from the mistakes of others!

Another threat to nations from concentrations of economic power is to their currencies. China is under pressure to float its currency. To do so is to make it highly vulnerable to manipulation. I am glad to see that, so far, China has not succumbed to these pressures.

VI. A Decentralized Economy

Critics of the global system have long been asserting that undirected economic growth on a planet with finite resources and sinks is unsustainable. In the early 1970s a book called Limits to Growth was published. It projected a variety of scenarios that all led to a collapse around 2020. It foresaw rapid growth up until nearly that date, followed by abrupt decline. The powers that be have paid little attention to this danger. As long as growth continued, they have laid their plans on the assumption that it could continue indefinitely.

Very recently, however, the public is beginning to take seriously the threat that the many ways in which humanity tries to deal with its problems will fail. Consider the problem of "peak oil." If in the 1970s we had begun a program of efficient use and switching gradually to other sources of energy, "peak oil" would remain quite far in the future and there might still be some chance to reduce global warming. But despite the predictability of problems, the world has moved ahead, adopting forms of urbanization, agriculture, manufacturing, and transportation that increased the demand for oil.

The major response to the growing awareness that production of oil will soon cease to increase has been to use farmland to produce substitute fuel. The result is that for the first time the global demand for food is exceeding supply. Hence the cost of food rises not only because the cost of the petroleum on which agriculture is based has increased but because food, now, like oil, is globally in short supply. The problem is exacerbated by the globalization of food production, which means that most food must be shipped great distances at increased cost. Hunger and starvation are on the rise.

Meanwhile the continuing use of fossil fuels has caused changes in global weather patterns. These make agricultural production more uncertain. Since overall the changes heat the Earth, the glaciers from which major rivers flow are melting. North China will be among the most hard-hit regions. Since water tables almost everywhere are falling as agriculture has turned to irrigation, much farming will have to return to dependence on the now less predictable rainfall. Some propose that we desalinate ocean water, and this is an important solution for some coastal areas. But the energy required to pump water long distances into the interior is not in sight. The melting of the arctic ice and the Greenland glaciers along with the warming of the ocean will raise sea levels and flood some of the world’s most populous and fertile regions, the deltas of the great rivers.

The environmental refugees from flooded deltas and new deserts are unlikely to be welcomed into already densely populated areas struggling for sufficient food. The resulting violence will add to the difficulties of feeding the global population. Struggles between nations over water supplies will become more violent. Already-scarce resources will be used for mutual slaughter.

I will not pursue these depressing scenarios. I certainly do not know just how all this will work out. But the beginning of the end of the economic globalization project is already visible. A major feature of this project is that agriculture ceases to be used for the feeding of local people and is directed instead to production for export. I have been strongly opposed to this from the beginning, but as long as it was economically profitable, and those who suffered were not politically powerful, it was extended by the World Trade Organization and other international economic organizations working together with huge agricultural corporations and the American government.

Abruptly, now, the predictions of its critics are being realized. Facing the threat of hunger, some countries are refusing further export of what is edible. Those elsewhere who are dependent on importing these foods will suffer. Of course, harvests may be better next year, and pressures to change may ease. But the long-run prospect will have become clearer, and nations will no longer trust the global system of distribution. They will work instead for greater self-sufficiency in essentials. In any case, as transportation costs rise, even narrowly economic calculations will cease to count in favor of the present globalized system. The slogan "Food First" will no longer seem to be the cry of a marginal group.

I believe that for these and other reasons the days of the global economy are numbered, and I rejoice in its anticipated demise. It has done the world great harm. A major function of economic globalization has been to support the vast financial systems that are parasitical on the real economy. It has also speeded up the ecological devastation of the planet and the exhaustion of the resources needed by the real economy. Humanly, it has led to vast movements of peoples in ways that have been culturally and socially destabilizing. Economic globalization has created class societies with differences in wealth and power as great as those against which Marx protested. It is, of course, the extreme extension of capitalism.

Some suppose that without a global market there will be no trade. But the alternative to the global market is not the end of trade but an international market. A global economy denies to national governments the right to shape their own national economies. An international economy consists of national economies that are free to trade or not to tade. China has rightly resisted this surrender of its national prerogatives. It has taken advantage of the globalization of much the world’s economy. This imbalance causes resentment in its trading partners and is unsustainable.

If China boards the sinking ship of globalization, it will share in the impending catastrophes. But because China has moved only partially in that direction, it has the best chance of any major nation of avoiding great suffering as a result of the coming collapse of the global economy. Instead of succumbing to pressures from the World Trade Organization, it is still free, without terrible turmoil, to develop a relatively self-sufficient national economy. Instead of offering its skilled and disciplined but inexpensive labor to work for foreigners, it can re-direct its production from the primacy of export to the primacy of meeting the needs of its own people. In its current commitment to the development of its rural population, it can place emphasis on "Food First."

China is already moving in this direction. The Chinese government should continue to raise minimum wages for workers—quite substantially within a few years. This will make China less competitive in the global market, but Chinese workers will be able to buy more of the products of Chinese factories. Similarly, if the development of West China follows a path of making peasants there more prosperous rather than displacing them from their homes by "modernizing" agriculture just when petroleum- based agriculture is collapsing worldwide, rural China can become a vast market for industrial goods. An export-oriented economy condemns West China to the status of an economic hinterland, but industrialization oriented to Chinese consumption can be far less concentrated on the coast.

Actually I presuppose some of this shift in all my previous suggestions. If China is tied more and more fully into the global system, it will be drawn into the current patterns of financial capitalism. In that case, success in restraining the dominance of those Chinese and foreigners who control capital will be very unlikely. On the other hand, if the Chinese economy is largely independent of the global market, China can experiment with its own form of socially-controlled market economy. Such an economy can, of course, trade with others, but this trade need not involve surrendering control of the national economy to either domestic or foreign capitalists.

Today’s global capitalism, dominated by immense, and immensely powerful, transnational corporations, especially financial ones, can be checked by national economies, and this lecture has dealt with this possibility. However, some of the forces that are already beginning to undermine the global market will threaten the national market in large countries as well. For example, the rise in immediate cost of transportation, in a context where its indirect effects on speeding the melting of the glaciers are recognized, will almost certainly favor local production of food. Further, in times of crisis, the most sustainable economies are those that are closest to the land and the people. Accordingly, experiments in local economies are very much in order.

Local economies require local capital. But in comparison with global corporations and their vast concentrations of capital, the required capital will be on a small scale. Because today the dependence of most local economies on the national and global ones is so great, failure at the larger level is disruptive of local economies as well. The more independent a local economy, the more easily will it sustain itself through global and national crises.

In a healthy local rural economy, money coming in from outside circulates for some time before leaving the locality. For example, if the local economy gets some income from selling agricultural products to other markets, that money will be used for local products and services. It will be used to buy locally-produced food, for example. The recipient of the money will pay a local doctor for needed care. The doctor will buy clothing in a local store. The merchant will buy goods that are locally produced, and so forth. In this case a small amount of export will support considerable useful economic activity locally.

In an unhealthy local rural economy, the money received for the surplus agricultural products will be taken to a store in the nearest city and spent on imported goods. The only member of the local community to benefit will be the one who receives these foreign goods. Much larger exports will be required for the people of the community to get what they need.

Some of the proposals about corporations discussed above could encourage local economies. Another method of encouraging a strong local economy is the use of local currency. This currency will have no use except as a medium of exchange. It will serve in this capacity only locally. But the more it is used the healthier will be the local economy. It will encourage local people to supply goods and services that have previously been brought in from outside. If inflation or other disaster strikes the national currency, the local currency may still function to facilitate the exchange of goods and services.

The discipline of economics in the West is the study of how to make the economy grow. Growth is defined primarily as increasing market activity. A natural, even inevitable, criticism of many of my suggestions is that they will slow economic growth. Until economists accept the idea that the economy should serve social and ecological goals and that increase of market activity is not in itself a suitable goal, it will continue to be very difficult to make genuine progress in rural areas.

Indeed, policies designed to speed economic growth are not neutral with respect to major social goals. They typically increase the rate of consuming scarce resources and polluting the environment. They disrupt existing communities and increase the disparity of wealth. These are the wrong directions for society. Until we can persuade economists to study how the economy can be made to serve society instead of destroying it, we in the West remain in serious trouble.

I fear that in China today many of the problems that beset the West, and especially the United States, are being repeated on a large scale. The greater the concentrations of capital, the more difficult it becomes to maintain political control. Governments become servants of capital. Chinese cities and even provinces are already threatened by this fate.

Perhaps, nevertheless, China can lead in showing another way. China has experimented with various forms of Marxism and found practical problems in their implementation. But the Chinese government has not given up on the idea that the economy should serve society. I hope there are many economists in China who are prepared to bring their technical expertise to bear on the problem of giving freedom to the market, including, of course, to capitalists, while checking the concentration of capital in a few hands and redirecting the flow of capital into socially useful investments. I hope there are many Chinese economists who understand banking and the creation of money far better than I and will help to steer China away from international banks. It is my hope that some of the suggestions I have made in this paper may stimulate thinking about alternative approaches to that task.


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