Credit for the Rest of Us?
We Americans no longer live in a democratic society. We are instead living in a plutocracy (much more pronounced in the wake of the Citizens United decision), which will continue to sustain and legitimate itself on a dwindling stock of democratic moral capital for as long as it is feasible to do so. It’s not simply that productivity has risen steadily while wages have stagnated, and all the profits have been siphoned upwards, though that certainly is a significant part of the problem. We are living in a nation which has gradually stratified itself, particularly over the last thirty-five years, into a small but tightly-organized overclass of usurious financial creditors, and a large, diffuse underclass of beleaguered debtors. This stratification was painfully highlighted by the great credit crunch and recession of 2007-2009, and heightened and entrenched by the overwhelmingly top-heavy response. We have a two-tiered, unevenly regulated and largely unaccountable privatized system for managing debt. And the quasi-public mechanism—the Federal Reserve—by which the total amount of credit in the economy is regulated, is both opaque, and tailored specifically and intentionally to cater to the interests of the banking elites: a love-match between Hudge and Gudge if ever there was one.But with very few exceptions, the problems of debt and credit, and their economic ramifications for the great mass of Americans, are not being discussed—and this is a shame. The economic system many Americans would like to see—and certainly the vast majority of the readers of The Distributist Review—is one where private productive property and real wealth are expanded in a proportional fashion to as broad a swathe of the populace as possible. This economic outcome will be prohibitively difficult to achieve, however, without significant structural changes to the way we handle debt and credit as a nation.
Public credit from private banks?
A large part of the problem concerns the creation of credit for use in all our public exchanges—what is known as “checkbook money”—by private commercial banks. The way our current system of fractional reserve banking works, whenever a commercial bank makes a loan, it is counted as an asset rather than a liability of the bank, because ostensibly it is still deriving interest from it. But what actually happens is that the credit is created out of thin air, against a “fractional reserve” which is made up of the commercial bank’s deposits (its true liabilities).Now, this phantom checkbook-credit, this credit which is created by the commercial banks, like all forms of money, depends on four things. Money must be legally-enforceable as a representation and a measurement of the exchange value of actual commodities; it must be exchangeable among producers and consumers in a market; and it must be able to earn interest when invested in a productive venture. Generally speaking, any monetary system is dependent on the general acceptance of a given community or polity of the shared risk of using the monetary tokens provided, even if they are only numbers on a monitor. In any commercial transaction, both the buyer and the seller are trusting that the checkbook-credit is actually a reliable representation of the exchange value of the gasoline or tea or milk being traded for it, and that it can be actually exchanged for commodities the receiver wants to buy elsewhere in the future. When banks create checkbook-credit, however, they are socializing this shared risk but privatizing the gains from it, which accrue to the bank on interest. In the words of Wendell Berry, this process was literally “selling a bet on a debt as an asset.”But if, as happened in 2007, debts stop being paid back, banks very quickly call in their debts and refuse to lend any more, and the general economic trust on which the monetary system depended, collapses. The result of the use of checkbook-credit is that privately-run corporate banks can profit on all manner of risky and predatory lending projects right up until the point where they can’t get away with it anymore, and then insulate themselves from any of the consequences when it becomes apparent that the piper has to be paid somewhere (with something that doesn’t actually exist). The Joneses are the only ones who suffer from this collusion of Hudge and Gudge.
Goldbuggery and the fallacy of “intrinsic value”
Given the manifest problems with fractional reserve banking and the ex nihilo creation of checkbook-credit described above, which allow the private commercial banks to rig the system of credit like an elaborate casino where the house wins either way, one increasingly common (and, under the circumstances, understandable) temptation is to return to an older system of “hard money” or “sound money.” In particular, the libertarian economists of the Austrian school tend to believe that full reserve banking backed by a gold standard, rather than fractional reserve banking, is the silver bullet (er, so to speak) for our nation’s economic woes.The argument goes that the boom-and-bust cycle described above is due to artificial government manipulations of the value of money. Instead of using tokens or numbers on a monitor, which are valuable only because the government says they are, money should instead have the “intrinsic value” which inheres in a precious metal such as gold. The money supply would be fixed to the total worth of the nation’s reserves of gold—and even though in the short-run unemployment and inflation would both run rampant, this would be but the prelude to an economic setup wherein prices would be stable over the long term. The price stability would be guaranteed because the value of the money would inhere in a commodity that everyone could agree was valuable, independent of a government promise.This entire argument breaks down, however, when one considers that it rests on two interrelated fallacies. The first is in what rightly constitutes intrinsic value. A house has intrinsic value: as a place of shelter, security and membership in a real community of people, a house contributes very significantly to human life and flourishing. Gasoline has intrinsic value, because burning it generates mechanical or electrical power to operate various devices—to travel great distances at speed, to brew a pot of tea, or to write an essay on a laptop. Tea has intrinsic value, because drinking it affords pleasure and chemically stimulates the human brain. Milk has intrinsic value, because it nourishes and sustains human life—and that is the common thread. The Victorian art critic John Ruskin put the general principle most pithily in his book Unto this Last: “there is no wealth but life.”By this measure, can gold have intrinsic value? Sure, why on earth not? As the cross given to a baby at her baptism it has intrinsic value. As leaf on an icon of the Blessed Ever-Virgin Mary it has intrinsic value. As a necklace gracing the nape of a pulchritudinous woman it has intrinsic value. If you are a Christian, beauty is every bit as much a necessity to human life as air or water.But money, qua money, does not have intrinsic value. Its right purpose is to represent, to measure and therefore to be exchanged for, commodities which have intrinsic value, and it is not imbued with this purpose by any inherent quality of its own. Money is a medium of exchange. Even if you are using gold as that medium, its worth as a commodity becomes completely irrelevant when you use it as money, but rather you are depending on its usefulness in further exchanges—the exact same way you would do with banknotes or checkbook-credit! If that level of social trust isn’t there (say, in a Mad Max anarchist apocalypse), in the end even gold would not be useful as a valid medium of exchange. It might be a glib truism to say that you can’t eat gold, but it does happen to be apt.
A predatory species of insect
This is the first and conceptual fallacy of the goldbugs. The second fallacy is evident in an examination of American history. Because money is rightly ordered as a public convention reliant on social trust and, in the last instance, the enforcement of a court of law, there can be only one reason to make the money supply dependent upon a highly-valued commodity. And that is simply to artificially restrict the quantity of money in circulation. This was how the gold standard was used historically—again by private commercial banks.In the late great Lawrence Goodwyn’s book The Populist Moment, he describes how the Union government left the gold standard during the Civil War in order to pay off its quickly-mounting war obligations, and instead paid off its creditors with treasury notes—“greenbacks”—and government bonds. The United States Treasury ended up issuing $450 million in greenbacks, which contributed significantly to a general depreciation of the dollar. But once the war was over, northeastern bankers (who held most of the nation’s bonds) began clamoring for the resumption of the gold standard, on the grounds that they could get both the government—meaning the nation’s taxpayers—and their own private debtors to shell out pre-war prices on the debt they owed against the devalued currency. As Goodwyn put it, “though the Civil War had been fought in fifty-cent dollars, the cost would be paid [back to the bankers] in one-hundred-cent dollars.” The banking class of the time made the case in the same purely moralistic language that their Austrian imitators do today, that hard money was “ethical” money while fiat currency was “corrupt,” but their motives for advocating for a contracted currency were base and rapacious. The goldbug of the 1870s was, if I may be allowed the feeble pun, a purely predatory species of insect.Naturally, this made the productive classes (the worker, the smallholding farmer, the dry-goods grocer) all implacable enemies of the cause to resume the gold standard—which was then in reality every bit as much a mechanism for the upward redistribution of capital as the financialization of the economy during the 1980s was. The contraction that accompanied the gold standard hit the farmers in particular with a “cruel and exploitative” double whammy. On the one hand, just as they were beginning to recover economically from the ravages of civil war, a contracting currency meant reduced prices on their crops, which in turn meant either losing the family farm or going into debt to keep it running. On the other hand, it meant skyrocketing interest rates on productive debt: having bought their farm with the fifty-cent devalued currency, farmers would be forced to repay their loans in full one-hundred-cent dollars.
An early distributist credit movement
The gold standard and its creditor-advocates were resisted and fought bitterly by a cross-class (but largely Midwestern) “greenback” movement led by dry-goods wholesaler and economist Edward Kellogg, and supported by the farmers of the National Grange, by the Knights of Labor under Irish Catholic unionist Terence Powderly, and by New York industrialist Peter Cooper. A half-generation later, the “greenback” cause was taken up by the Farmers’ Alliance and the People’s Party, which mobilized poor indebted farmers en masse in a cooperative movement across the rural South and throughout the Plains states.These movements may at first look as though they were based on the arcane intricacies of monetary politics, but they had the firm goal of fighting for a system of credit that would be made available at an affordable cost to as broad a swathe of the productive classes as possible. Moreover, the monetary system advocated by Edward Kellogg, the Safety Fund, would be as decentralized as possible. Local, public credit unions would issue their own currencies at their own discretion, and make loans at nominal interest directly to the people of their communities. At the same time, these credit unions would be held accountable by the federal government through the Safety Fund, a national monetary regulator who would ensure through a fixed interest rate that local currencies were fungible, mutually exchangeable and equivalent.The Safety Fund credit system would later be readapted for a primarily Southern, overwhelmingly rural constituency by Farmers’ Alliance leader Charles Macune, as the Subtreasury Plan. Though he adopted this Plan largely to avoid a political radicalization of the Farmers’ Alliance, the Plan itself was a wide-reaching answer to earlier attempts at organizing producer and consumer cooperatives throughout the South, which were unsuccessful not so much due to their members’ lack of enthusiasm as to under-capitalization. In brief, Macune’s Plan would allow farmers to circumvent the cruel and usurious lending practices of the furnishing merchants by borrowing nationally-regulated bonds against their own crop or against future crops, again at nominal interest, through locally-managed cooperative storehouses. The Plan was adopted in the People’s Party platform in 1892.
What is to be done now?
Unfortunately, the Subtreasury Plan was never implemented. The People’s Party lapsed into a fusionist political strategy which left its organizers politically hamstrung by their own candidates for office. After the election of 1896 they faded from national relevance, as third parties sadly too often do. Instead, Woodrow Wilson gave us the Federal Reserve in 1913, whose structure was ostensibly similar to the national banking systems advocated by Kellogg and Macune, but whose purpose could not possibly be further opposite. The bankers established the Fed, consisting of twelve commercial banks located throughout the country, for the bankers, and to protect the interests of the bankers. It is on account of the Fed that we have our current system of a public currency being furnished out of nothing by private commercial banks.I can agree with the Austrian economists that the current system is broken. The Fed suffers from a lack of accountability and a lack of transparency. It is a private cartel responsible for administering a public good. And considering the management of the money market, it’s practically a textbook example of the principal-agent dilemma. But I cannot agree with the Austrian economists either on their diagnosis of the underlying problems, or with their prescriptions. With so many Americans already deep in consumer or property-based debt, the experience of the 19th century hints that a reversion to a hard-money standard would only further exacerbate the concentration of wealth at the top, and further entrench the servility of the American public to the same financial powers which already control the Fed. Instead, it may well be time to dust off Kellogg’s old Safety Fund, or Macune’s Subtreasury Plan—or at least begin to look in that direction for inspiration. Distributists may well eagerly consider a localized patchwork of community currencies, stitched together on a national level by a single, publicly accountable regulation on interest rates.