lunedì 6 febbraio 2017


By the term “crisis” Hippocrates meant the all-out effort by a sick body to expel the retained toxins that cause illness. Success would spell recovery; failure, death.
The economic body is intoxicated; false diagnoses have suggested false remedies, and the year 2008 has marked the beginning of the crisis. But since the economic body cannot die, a true diagnosis, followed by the expulsion of toxic ideas, would send it on the road to recovery pretty fast.

The Truth of Things
The toxins causing the apparently intractable economic crisis are to be sought in semantic confusion. No diagnosis can be true if the symptoms are equivocally termed; no remedy can work from such a diagnosis. As toxicity and confusion reinforce one another, identifying toxins is akin to sorting out confusions, and vice versa.

Credit v. Money
The perennial scarcity of a medium of exchange, still there from the days of precious metal money, led to using “credit.” Behind the original meaning of credit as “belief, trust, good reputation”, this term hides today a colossal, multiple, toxic fraud.
First fraud: the term “loan” no longer implies renouncing something in order to allow another to use it. Banks renounce nothing; they empower the unsuspecting “borrower” to issue purchasing power created by them out of thin air by printing two figures on the bank ledgers: one as “loan to Mr X” and the other as “deposit from Mr X”. Every time Mr X issues a cheque, new purchasing power enters the economic stream, privately issued and out of any official control. In truth, it is counterfeiting, but legal.
Second fraud: this purchasing power is assimilated to money by assigning to it the same monetary units as the official currency. The result is a permanent confusion between credit and money. But whereas a unit of currency is liquid by definition, in that it moves goods and services for the amount of its nominal value every time it changes hands, credit is not: it moves goods and services once, after which the cheque becomes scrap paper and an army of clerks must be employed to keep track of the exchanges. Those clerks produce nothing. Somehow or other the public is forced to pay for this enormous parasitic activity. In the real world, we get lying plus stealing
Third fraud: the “loan” is granted at interest. What justifies it? With tangible metal or paper money, the lender deprives himself of the amount he loans. There is therefore some justification in demanding compensation for reasons of one of the six theories of interest: fructification, productivity, utility, abstinence, work, or exploitation.[1] But credit’s only tangibility is a few micrograms of ink in the bank’s ledgers. None of the theories of interest applies. Let us call it legal extortion.
Fourth fraud: the “borrower” is empowered to issue the principal, but not the interest. Result: if ten “borrowers” borrow 1000 units each and at the end of the year they owe 11,000 collectively, the extra 1000 units must come either from their increased exertions, or from swindling each other, or from borrowing further in order to pay for the legal extortion euphemistically named interest. Put another way, the system is designed to bankrupt someone sooner or later. The bankrupt borrower must hand over real wealth, i.e. the physical result of his exertion, to the “lender” who has done no more than creating purchasing power at no cost to himself. The “borrower” suffers a double extortion: one of his exertions and another of his “collateral.” 
Fifth fraud: those without “collateral” are denied credit. As such people are invariably in the majority, credit is essentially and unequivocally antidemocratic. Those so deprived have to make do with cash, kept permanently scarce. The ratio cash/credit, in the UK alone, is 57 billion (3%) versus 2,200 billion (97%). There is no need to go further to see this as the main reason behind widespread poverty.
Sixth fraud: credit is “loaned” at compound interest, which grows exponentially according to the formula I = (C + x)n, where I = accrued interest; C = capital invested; x = rate of interest; n = number of years. The formula is visibly unsustainable. Sooner or later, the amount payable is bound to overtake the total amount of means of payment available.
Seventh fraud: every now and then, the financial authorities purport to exercise some degree of control on the economy by raising or lowering the interest rate. Banks do the same but without fanfare. The result is that any economic forecast based on such contradictions is bound to fail, whether by chance or by design is anybody’s guess.
Eighth fraud: the public is led into believing that banks lend the money of their depositors. The reality is that on a minimal basis of cash they issue a gigantic amount of newly created credit. In other words, no bank has the money it says it has. The illusion is kept going by their ability to redeem a cheque in cash, which is true for as long as no more than 10% or so of depositors demand cash. Over the years people have been convinced/cajoled/deceived into using less and less cash, and getting into deeper and deeper debt by recurring to “credit”.
The sum total of these eight frauds is known as the fractional reserve. It has been driving the economy of the world for the past 400 years, since the foundation of the Bank of Amsterdam in 1609.
But starting in 1990 or thereabouts, things have gone awry. In today’s UK 8% of credit, or 176 billion pounds, finance production; 92%, or 2,024 billion pounds, fuel speculation, i.e. the buying and selling of fancy pieces of paper with equally fancy names purporting to be money, all of which inflate a financial bubble of humungous proportions.
Globally, the sum total of “credit”, which financed nothing beyond itself, burst in 2008, marking the end of the line of the scam. No wonder we are in a crisis.
Before proposing remedies, it is imperative first to unravel the double meaning that practically every term in economic use has acquired over these past 400 years. Let us begin with “political economy” and “economics”.

Political Economy v. Economics
The term “political economy”, in use not too long ago, used to be defined as “the science of production and distribution of wealth”. For whatever reason, in the mid-20th century the term was dropped and changed to “economics”, defined as the “allocation of scarce resources”. Let us analyze the two words.
To understand political economy it is necessary to define “wealth,” a term that has in turn acquired a double meaning.
Frédéric Bastiat (1801-1850) defined wealth simply as “services”. If services are incorporated into objects, such objects become “goods”.
The Penguin Dictionary of Economics defines wealth as “a stock of assets held by any economic unit that yields, or has the potential for yielding, income.”
If by “income” we understand both monetary and non-monetary inflow, the two definitions roughly coincide. If I enter a canebrake and come out with a basket, that object incorporates a service, which can be considered as my income.
The main issue in political economy, however, is not that. It is that whereas the production of wealth is a physical process needing land, labour, and raw materials, its distribution is a moral process, conditioned by how many hands succeed in taking a cut between production and consumption. It offers difficulties of many kinds. Let us register the fact and set it aside, concentrating instead on the term “economics” as defined above.
The “allocation of scarce resources,” wittingly or not introduces not just one but two falsehoods in need of immediate rectification.
First: there are no scarce resources. Every scarcity is artificial, caused by vested interests. I will confine myself to what I consider the most outrageous example. We earthlings are immersed in a cosmic sea of electric charges, or “plasma in dark mode.” More than 100 years ago Nikola Tesla (1856-1943) had found ways and means of conveying these charges into making them perform useful work, with the idea of giving free electricity to the whole world. His Wardenclyffe tower was the first of eight such, but powerful financial and oil interests got the US government into destroying the tower. That is why the world is festooned today with millions of ugly, unnecessary and at times dangerous pylons, millions of miles of wires, transformers, hydroelectric schemes, etc. Had Tesla been heeded, energy would be as free as the air, oil would be a historical curiosity and nuclear energy a scientific hobby.
Second: the term “allocation” hides an innuendo. Who is supposed to “allocate”? In political economy, by applying the principle of subsidiarity, the allocators are heads of families, the self-employed, farmers, owners of small and medium-sized enterprises, and last the State. In economics the allocators are the self-appointed all-knowing, all-powerful bureaucrats, nosing into areas that are none of their business to nose into.
 Money Liquidity v. Credit Liquidity
A paper currency, or cash, is “liquid by definition” as Penguin avers. It means that simply by changing hands, cash moves goods and services by the nominal amount written on it.
Credit, as seen earlier, is not liquid by definition. A certain sum moves from an account to another, once. But there is such a thing as credit liquidity, defined however as the presence, in the market, of buyers and sellers of whatever pieces of credit they buy and sell. For as long as both parties are present, credit is liquid. What has happened after 2008 is that buyers have disappeared, and no amount of “bailout” has succeeded in getting them back. Credit liquidity is at the end of the line.
The term “liquidity” therefore, should always be qualified. To use it indiscriminately can only be due to either unawareness or fraud. Neither is commendable in scientific discourse.

Interest v. Usury
The “principle” according to which money begets money is evidently pragmatic, i.e. imposed by law. It is not a natural principle. Only living things beget living things after their own kind.
The first attempt at defining the two was made by Pope Benedict XIV in his 1745 Encyclical Vix Pervenit.  It defines interest as the fee that a lender may legitimately charge for his service, and usury as the price of money seen as a commodity. The distinction is useful and legitimate, but not conclusive. In any case it is not accepted by the world of economics.
Silvio Gesell (1862-1930) was the first to define usury as the tribute that he who needs money as a medium of exchange must pay to the one who hoards it as a store of value. He located the origin of usury in the function as store of value begun with the monetization of precious metals, and retained by paper money. Usury therefore appears at the exchanges and only secondarily at the loans. Removing the function of store of value would get rid of both usury and interest, thus rendering the distinction unnecessary.

Investment in Production v. “Investment” in Speculation
Penguin defines “investment” as “real capital formation”, later adding “the physical change in stocks”. The result is that a character spending days before an array of computer screens speculating on “changes in stocks” is called an “investor” at par with the one who has made his calculations on how to organize an agricultural or industrial concern.
Speculation, whether in money or in commodities, is a canker that should be extirpated from the economy without compunction, starting by calling it by its real name: thieving by proxy, where the proxy is the computer screen.

Work, Employment (Jobs) and Economic Freedom
None of the above terms gets defined either by old-fashioned Political Economy or by modern Economics. It is important, however, to do so if we truly desire to get rid of semantic hurdles, especially confusion.
·         Work is any human activity that produces wealth as defined earlier.
·         A job is a paid activity, which may, or may not, produce wealth.
·         Economic freedom is the choice between working independently and for an employer.
With the above terms undefined, the distinction between work and employment is not made. Economists routinely consider employment as the only admissible form of work. Penguin has an entry Employment, full defined as “a situation in which everyone in the labour force who is willing to work at the market rate for his type of labour has a job.” Independents are styled “self-employed”, which statistics tell us have increased (in the UK) from 1.9 (1979) to 3.4 (1990) to 4.1 million (2011).
This trend is not seen as positive. Columnists put it this way:
“Soaring unemployment is forcing many workers who lose their job to become self-employed”.[2]
 “It may well be [that] some, having lost their jobs, categorize themselves as self-employed but really are unemployed or at least under-employed”.[3]
 “I do not think there has been a sudden surge of entrepreneurial zeal. This is people who cannot get a job picking up bits and pieces of work. It is a sign of economic weakness, rather than strength”.[4]
“The jump is likely to reflect people resorting to working for themselves”.[5]
 “The latest figures show some signs that the labour market is stabilizing, but the increase in unemployment is ‘unwelcome”.[6]
The priorities could not be clearer. The common innuendo is that no one in his sane mind would opt for self-employment given the choice. To have a “job” is seen in all cases preferable to working independently.  But a perceptive reader remarks:
“The only way you can go self employed or start a business these days is if you have money. The only way you can have money is if you steal it, win it or have it left. Try talking to your bank about a start up loan even if you have a good business plan and see where it gets you.”[7]
The cat is out of the bag. “Credit” is denied to those who would rather work for themselves. The road to freedom is blocked. Work = employment and that is that.
This view is so embedded in everybody’s mind, would-be reformers included, as to propose, as the only way out, to institutionalize beggary by handing out what they call Citizen’s dividends.[8] The argument runs that modern advances in technology have made unemployment structural, and therefore inevitable. What people therefore need is an income, regardless of whether they work for it or not.
No “expert” stops to think that what has forced people out of running small concerns like farming or artisanship has not been “progress” but artificial strictures on cash liquidity. The artisan cannot sell the products of his labour “on credit”. He needs cash on delivery to buy raw materials and pay the wages of his few dependants and apprentices.  Ditto for a farmer: he cannot afford to travel miles to cash “cheques”.
The conclusion, once again, is that “credit” is more like a spanner in the works than a help for a healthy economy and full employment. We shall harp on the same subject later.

Taxing Value-added v. Taxing Value-subtracted
It is obvious that governments need money to cover their expenditure. But there are two ways of going about it.
In the juridico-positivist framework, in which legal = morally binding, the State arbitrarily chooses the tax base, the rate of tax and the amount, demanding it from the taxpayer without consulting him. Like a god of the marketplace, the State has rights, but no duties.
In the juridico-naturalist framework, however, the State has well-defined duties, to finance which it needs money. The duties are: government, the administration of justice, law and order, defence, representation abroad and finance, including issuing a means of payment for people to pay taxes. Only this last duty is under scrutiny here.
As things stand, the modern State does not fulfil this duty. Instead, and without consulting the public, the State borrows credit issued by private banks, and taxes value added by people’s work to pay the interest demanded. In so doing, the State institutionalizes seven of the eight frauds mentioned earlier. The mathematically certain result of this practice is that the total debt will sooner or later overtake the amount of money available, eventually killing the goose that lays the golden egg.
The State extorts what is due to people’s labour to give it to some who write on a piece of paper “You owe me so much,” with the only toil of hitting a few keys on a computer keyboard.
Such extortion occurs in four tried and true ways that suck blood out of the economy of production to convey it to unproductive elements, a number of them with power of arrest and detention over those who feel unjustly squeezed of their due. Not surprisingly, those who can, defend themselves by ingeniously evading tax. The four ways of State extortion are:
1.                 Income Tax, which hits production;
2.                 Indirect taxation, which hits consumption;
3.                 Customs and Excise, which hits international trade;
4.                 And VAT, which hits domestic trade, and of which below.
 That VAT is the most absurd and counterproductive of all taxes was known in 16th century Spain, where it was called alcabala. It quickly became clear that compliance costs exceeded the revenue, and so it was scrapped, given the evident hurt to the economy.
This remains true, but the modern State bypasses the problem by imposing the compliance costs on the economic operators, without paying them. In other words it re-introduces slavery, which surreptitiously returns through the window after having been shown the door during the previous millennium. VAT further cripples the economy of production, since the economic operators are forced to divert their attention from their work to carry out the tasks imposed on them by the Revenue Authority. As James Robertson (1928-) put it:
“After paradise lost, you can almost imagine Satan sitting down with Beelzebub, Moloch, Belial and the rest of his cabinet, to design the most damaging tax system they could persuade the human race to adopt. Could they have done much better than what we have now?[9]
Let us now ask: is it possible to innovate taxation:
·         According to justice, i.e. that gives everyone, including the State, one’s due?
·         Cheaply, i.e. without having to employ an army of non-productive bureaucrats?
·         Efficiently to the point of enticing the taxpayers into paying without even considering evasion?
As a working hypothesis, let us imagine shifting the tax base from value added by human exertion to value subtracted from the country’s natural resources, and therefore from State sovereignty. Let me explain.
Such natural or common resources are land, water, air, the electromagnetic spectrum and airspace. I shall consider land only.
The owner of a car parked in a central zone pays for the right to occupy a surface area of about 10 square metres. At £1/h, eight hours of occupation would cost £8/day, or 80 pence/m2 x day.
It is a just tax. The quid pro quo is immediate and obvious. The motorist does not own the 10m2; he temporarily occupies them. And whether he parks a Rolls Royce or a jalopy near to scrapping, he pays his 80 pence/m2 x day.
Suppose now that the same zone sported 10km2 of commercial buildings, each assimilable to a permanently parked car. At the same rate, these buildings would contribute £80 million/day to the municipal coffers.
The important point is not the figures but the principle. The ground rent, regardless of what stands on it, is brought into existence not by the motorist, but by the exertions of those who work around the area, i.e. by population. Justice demands, therefore, that 100% of the fruits of labour should go to those who labour, and 100% of the ground rent should be taxed and returned to the community that has created it.
This is the solution of Henry George (1839-1897) going back 130 years and reaffirmed by Silvio Gesell (1862-1930) in his Natural Economic Order at the beginning of last century.
The all round advantages of such taxation would be huge:
·         There would be a return to collectively bargained taxation, which was normal before the revolutionary State overturned it;
·         It would be infinitely easier and cheaper to collect tax from a few thousand municipalities than having to rummage into the pockets of millions of taxpayers;
·         Evasion would be impossible: land cannot be hidden;
·         Ditto for speculation. The occupiers of an empty plot would be forced to develop it so as not to pay in vain, or would cede it, but at cost;
·         Recalcitrant landlords would be punished simply by withdrawing protection from their occupied areas and by denying them bureaucratic public services;
·         The fiscal unit: square metre in town, hectare or acre in the countryside or even square kilometre in uninhabited wasteland, would turn the entire national territory into a fiscally productive area;
·         The rent would be minimal and perfectly adjustable to public expenditure, given the size of the tax base;
·         Two equal surfaces in the same area would pay the same amount, so that the more wealth one produced the less tax one would pay proportionally.
·         And the four forms of extortion that usurp the name of “tax” could easily be scrapped.
Value subtracted by hoarding could also be taxed, as was famously done in 1932-33 by the mayor of Wörgl, the little Alpine town that flaunted stability of prices and prosperity in the face of the Great Depression. The locally issued Work Certificates were free of debt, for being issued by the municipality, and free of interest, for having zero store of value and thus being a pure medium of exchange.

One-Size-fits-All v. Monetary Flexibility
The Eurozone crisis is a laughable example of the consequences of the Procrustean principle applied to monetary policy.
In times when people were freer to think and to act, they had realized that no currency could possibly attain stability at once with domestic prices and with foreign exchange rates. They had therefore devised multiple currency systems: In France, for instance, the king’s money, made of precious metal and accepted in payment of taxes, was supplemented by many types of méreaux made of leather, glass, lead and other non-precious metals to serve the local markets.
Between 1865 and 1915 a more practical method was resorted to. Five European countries: France, Belgium, Italy, Switzerland and Greece formed the Latin Currency Union. Alongside their national currencies, they adopted a single five-franc silver piece as legal tender, used exclusively for foreign transactions among themselves. The five-franc piece accounted for about 40% of the monetary mass in each country. Excess or defect of the piece indicated a trade imbalance, to be corrected by adjusting prices so as to restore the balance. The Great War caused the Union to collapse.
Silvio Gesell (1862-1930) mentions the Union in his Natural Economic Order (1906), where he points out that the function of the five-franc piece was not due to its being made of silver, as the accepted superstition believed, and that it could have functioned just as well had it been made of paper. He proposed an International Valuta Association working on the same principle.[10]
At Bretton Woods John Maynard Keynes (1883-1946) resurrected the idea, calling the international currency Bancor. As is well known the idea was shot down, and the US dollar was imposed on the world as reserve currency. The results are before our eyes.
In 2001 the Euro was similarly imposed on a number of European countries, which have increased to 17 to date. The structural impossibility of its performing the two functions has remained, and again the results are before our eyes.
The question is: why not re-apply the principle of the Latin Currency Union with the Euro as the five-franc piece alongside each country’s national currency? The solution worked for 50 years. What destroyed it was the war, not intrinsic defects. Why wouldn’t that be possible?
The problem is that “possible” does not mean “feasible”. Vested interests of all kinds would oppose not only just taxation, but also the much needed reforms mooted above and listed below:
1.      Extirpate bank credit, giving back to “credit” its time-honoured meaning;
2.      Tax value subtracted from natural resources;
3.      Issue double currency: domestic currency free of debt and of interest and trade currency at least free of debt.
As Lord Acton (1834-1902) said when Lord Chief Justice of England, 1875:
The issue which has swept down the centuries and which will have to be fought sooner or later is The People vs. The Banks.
The proposed remedies would mark the victory of the people. Applying anything else would mark that of the banks.
Silvano Borruso

20th January 2012

[1] Listed in the same order as in Gesell’s Natural Economic Order Part Five.
[2] Becky Barrow, Daily Mail 15th December 2011.
[3] Michael Saunders, of investment bank Citigroup.
[4] John Philpott, of the Chartered Institute of Personnel and Development.
[5] Vicky Redwood, chief UK economist at the consultancy Capital Economics.
[6] Chris Grayling, employment Minister, UK.
[7] Daily Mail website 15th December 2011.
[8] The first to propose this was C.H.Douglas (1879-1952).
[9] The Alternative Mansion House Speech, 4th September 2000.
[10] Part Four Chapter 8