I was in the middle of preparing a post on how early corporate charters included provisions to ensure that corporations would serve the general welfare, but had to deal with a grave medical issue. My doctor sent me to the ER, and for over a week following, I found I was sleeping 12 to 14 hours a day, with little energy to do much else than watch the boob tube. I had intended to return to my post on early corporate charters, but listening to the news yesterday morning on the way to pick up a prescription, decided instead to post one long excerpt from a 1912 dissertation on railroad legislation in Minnesota.

Railroads, of course, had been constructed in the United States decades before the Civil War. So had  some telegraphs. But they were not fully developed into an integrated national system until after the Civil War. There were three problems. Remember, our purpose here is to examine the history of USA economic development, to identify and adduce the proper principles of political economy for a republic. The United States was established as a republic at a point in world history where all other countries were ruled by monarchs and oligarchs. What sets the USA apart as a republic, so far as political economy is concerned, is the Constitutional mandate to promote the general welfare.


What I want to focus on here is the Dartmouth College case of 1819, which unfortunately, as time passed, became a shield behind which corporations tried to escape the regulatory will and intent of state and national governments. But as corporations became ever more powerful, and their activities affected the lives rapidly increasing numbers of people, the first stage of the populist uprising of the late 1800s emerged. This was the National Grange of the Patrons of Husbandry (The Grange), which was formed in the summer of 1867 and grew steadily until the financial crash of May 1873.  As the resulting economic depression wore on, The Grange was surpassed in membership, political activity. and radicalism, by the Farmers Alliances, which had adopted the much more thorough Greenback critique of American capitalism. But it was the members of The Grange that first pushed through significant legislative regulation of corporations in the1870s. These became known as the Granger laws.

One of the principal grievances The Grange, and farmers more generally had, was the railroad companies' practice of giving preferential freight rates and storage rates to larger customers. This is not quite the exact same issue of rate differentials involved in today's debate over net neutrality (in which the internet carriers argue that they should be able to charge more for faster service, thus getting larger data users to pay more for improving and upgrading internet infrastructure), but it is remarkably similar. More important are the principles of political economy that we can adduce from the significant court decisions that resulted when corporations affected by the Granger laws attempted to have those laws declared unconstitutional under the legal precedent of the Dartmouth College case. The most important case was Munn v. Illinois, 94 U.S. 113 (1876). Before we return to the historical narrative, I think an excerpt from the summary of the case will show why it is so important.

1. Under the powers inherent in every sovereignty, a government may regulate the conduct of its citizens toward each other, and, when necessary for the public good, the manner in which each shall use his own property.

2. It has, in the exercise of these powers, been customary in England from time immemorial, and in this country from its first colonization, to regulate ferries, common carriers, hackmen, bakers, millers, wharfingers, innkeepers, &c., and, in so doing, to fix a maximum of charge to be made for services rendered, accommodations furnished, and articles sold.

3. Down to the time of the adoption of the fourteenth amendment of the Constitution of the United States, it was not supposed that statutes regulating the use, or even the price of the use, of private property necessarily deprived an owner of his property without due process of law....

4. When the owner of property devotes it to a use in which the public has an interest, he in effect grants to the public an interest in such use, and must, to the extent of that interest, submit to be controlled by the public, for the common good, as long as he maintains the use. He may withdraw his grant by discontinuing the use....

These republican principals elaborated by the Supreme Court in Munn v. Illinois are, of course, completely at odds with the conservative and libertarian renderings of American economic history, which have been carefully rewritten and misinterpreted to present a view of untrammeled property rights. And I write "carefully rewritten and misinterpret" deliberately, having in view the thousands of shills and propagandists at places such as Club for Growth, American Enterprise Institute, Reason magazine, and the Cato Institute, maintained and funded by the Koch brothers and other conservative and libertarian enemies of the republic.  
 
To return to our historical narrative, here is an extended excerpt from Railroad Legislation in Minnesota, 1849 to 1875, by Rasmus S. Saby, published by the Minnesota Historical Society, in Volume XV of its Historical Collections. The Volkszeitung Company, Saint Paul, Minn. May, 1912.

P 177
Whenever attempts were made to subject the railroads to regulation in the interest of the people, they sought refuge behind the Dartmouth College decision. In this case the United States supreme court had held that the original charter of Dartmouth College constituted a contract between the Crown and the trustees of the college, which was not dissolved by the Revolution, and that an act passed by the state legislature of New Hampshire altering this charter without the consent of the corporation impaired the obligation of the contract and was therefore null and void. (n789) All rights once legally vested in corporations were thus placed beyond the reach of subsequent state legislation. “This decision,” said Chancellor Kent approvingly, “did more than any other single act proceeding from the authority of the United States to throw an impregnable barrier around all rights and franchises derived from the government; to give solidity and inviolability to the literary, charitable, religious, and commercial interests of the country.” (n790) This statement, made in 1826, seems almost prophetic in the light of later developments. The growth of corporate enterprise and the part this decision was to play could not be foreseen, even by such far-sighted men as Marshall and Kent. The doctrine laid down in this decision was followed in later cases in federal and state courts, and it soon came to be regarded as a settled principle of American constitutional law that charters of private corporations were inviolable contracts between the legislature and the corporators, and that the subsequent power of the legislature was restrained by their terms. (n791)

…. different states began almost immediately to guard against the interpretation of future charters as inviolable contracts by expressly reserving to the state legislature the right to alter, amend, or repeal acts incorporating private corporations. (n793) …A third plan was to insert this reservation of power in the state constitution. Beginning with the Delaware constitution as amended by a constitutional convention in 1831, we find that by 1866 this provision is to be found in the constitution of at least fifteen different states. (n796)

From the great amount of legislation and constitutional enactment which it provoked, it is evident that the doctrine promulgated in the Dartmouth College decision was regarded as new and not altogether acceptable by the different states. And as time went on and railroads were built and railroad corporations grew in power, the situation became more and more serious; for the new corporations, though controlling an essential factor in the economic life of the country, claimed exemption from state regulation in the interests of the public they were serving as common carriers, because their charter rights were constitutionally beyond legislative interference….

P179
….The right of the legislature to control its own creatures, the corporations, was at the time of the granger movement no longer an academic question of political and legal theory; it was a vital question in the economic life of the country, and it had to be faced squarely. Thomas M. Cooley, the eminent jurist, expressed his opinion of the situation in 1873 as follows: “It is under the protection of the decision in the Dartmouth College case that the most enormous and threatening powers in our country have been created; some of the great and wealthy corporations actually having greater influence in the country at large, and upon the legislation of the country, than the States to which they owe their corporate existence. Every privilege granted or right conferred—no matter by what means or on what pretence—being made inviolable by the Constitution [according to this doctrine], the government is frequently found stripped of its authority in very important particulars by unwise, careless, or corrupt legislation; and a clause of the Federal Constitution, whose purpose was to preclude the repudiation of debts and just contracts, protects and perpetuates the evil.” (n799)

In an address in 1873 James A. Garfield criticised the judicial application of the Dartmouth College case, and ventured the opinion that some feature of that opinion as applied to the railway and similar corporations must give way under the new elements which time had added to the problem, and said further: “It will be a disgrace to our age and to us if we do not discover some method by which the public functions of these organizations may be brought into full subordination, and that too without violence and without unjust interference with the rights of private individuals.” (n800 James A. Garfield, "The Future of the Republic: Its Dangers and its Hopes," 5 Legal Gazette Phila 408 9, Dec. 19, 1873)

P180
Railroads had from their first appearance been considered common carriers, both in England and in the United States; (n801) and this being the case, many failed to see why railroads should not like other common carriers be subject to legislative regulation. That railroads, though constructed by private corporations and owned by them, were public highways, had been the doctrine of nearly all the courts since the earliest days of railroad construction. (n802) Because they were public highways for the public benefit, the right of eminent domain had always been given to them; (n803) and courts had frequently held that the public had an interest in such roads, whether they were owned and operated by a private corporation or not. (n804) Because railroads performed public duties and functions and were indispensable to the public interests, the state legislature could rightfully tax or authorize taxation for the purpose of aiding railroads. (n805) The United States supreme court in 1872 expressed this doctrine in the following words: “A railroad built by a state no one claims would be anything else than a public highway, justifying taxation for its construction and maintenance, though it could be no more open to public use than is a road built and owned by a corporation. Yet it is the purpose and the uses of a work which determine its character.” (n806 Alcott vs The Supervisors, 16 Wall., 678, 696)

P181
The granger movement was an attempt on the part of the people to secure control over railroad corporations and to prevent extortionate and discriminating rates by legislation, which according to the usually accepted understanding of the Dartmouth College decision, would be unconstitutional. The granger states were those whose legislatures enacted such laws and provided means for their enforcement. Cases involving the constitutional rights of state legislatures to regulate railroad rates soon came before the United States supreme court from three of the four granger states, namely, Iowa, Wisconsin, and Minnesota. (n809) The railroads contended that state laws fixing maximum rates, or authorizing railroad commissions to do so, were unconstitutional because they impaired the obligation of the charter contract, because they virtually deprived the corporations of property without due process of law, and, finally, because such laws were a regulation of inter-state commerce over which Congress had been given exclusive jurisdiction. (n810) The constitution of the state of Wisconsin reserved to the legislature the right to amend or repeal charters. (n811 Const. of Wis., Art 11, sec 1) The railroad corporations here argued that this reservation clause must be construed in connection with the fourteenth amendment of the federal constitution, for the right to a reasonable compensation for their services was not a franchise or privilege granted by the state, but an inherent right which could not be abridged or impaired by the state,—the question of reasonableness was not for legislative but for judicial determination. (n812)

The supreme court however followed the decision it had just rendered in the case of Munn vs. Illinois. (n813) In this case it had held constitutional an Illinois statute which fixed the maximum charges for the storage of grain in warehouses at Chicago and other places in the state having not less than one hundred thousand inhabitants. The court asserted that, under the powers inherent in every sovereignty, a government may regulate the conduct of its citizens toward each other, and, when necessary for the public good, the manner in which each shall use his property; when the owner of property devotes it to a use in which the public has an interest, he in effect grants to the public an interest in such use, and must, to the extent of such interest, submit to be controlled by the public for the common good as long as he maintains the use; of the propriety of legislative interference within the scope of legislative power, the legislature is the exclusive judge. (n814 Munn v. Illinois, 94 U.S. 113 (1876))

I have already pointed to one the principles of republican political economy we may adduce, which is that property rights are subject to regulation in the interest of the general welfare - the public interest. Saby's quote of Kent reflects another principle: the rights of the people are natural, and exist before and independent of the government, but the rights of corporations are derived from the government. It is a gross mistake to not distinguish between people and corporations, as the Supreme Court notoriously did in Citizens United v. FEC.  

Finally, in view of this history, it should be easy to see that the push to protect the profits of multi-national corporations from the regulations of national governments, as is contained in the Trans-Pacific Partnership and other “free trade” agreements, is a gross violation of the long-standing legal understanding of corporations’ relationship and responsibility to the community in which they operate. These trade agreements establish extrajudicial tribunals to adjudicate "investor-state disputes" in which corporations can sue governments for "lost profits" caused by the regulations of those governments. It should be obvious that the very idea of "investor-state dispute settlement" is an abomination to the principles of a republic, as articulated in Munn v. Illinois.

Try a Google search for "investor-state dispute settlement Munn v. Illinois" and you will see that nothing pertinent comes up. It is amazing that today's critics and opponents of the TPP and other “free trade” agreements have not applied the lessons of history to these latest attempts by corporations to escape their public duty. Proving, once again, that those who forget history are doomed to repeat it.

Eric Lewis on DailyKos pointed to a Guardian article on how the Swiss branch of HSBC "helped wealthy customers dodge taxes and conceal millions of dollars of assets, doling out bundles of untraceable cash and advising clients on how to circumvent domestic tax authorities..."

The Guardian article is based on the latest blockbuster from the International Consortium of Investigative Journalists, Whistleblower? Thief? Hero? Introducing the Source of the Data that Shook HSBC, by Martha M. Hamilton. In turn, Hamilton's article details the secret HSBC data revealed by Hervé Falciani, a computer systems specialist employed by HSBC Private Bank (Suisse).

While Swiss authorities have charged Falciani with data theft from HSBC, Hamilton reports that

Falciani’s HSBC data trove ended up first in the hands of authorities in France, which then indicted London-based HSBC for illegal direct marketing to French nationals, money laundering and facilitating tax fraud.

The French authorities shared the data with other countries, including the U.S., and it is being used in tax probes and attempts to recover evaded taxes all around the world. The French newspaper Le Monde obtained the data as well, and shared it with the International Consortium of Investigative Journalists. 

As usual, however, the liberals and progressives promoting the story of HSBC's latest misdeeds are operating in complete blindness to the long and sordid history of HSBC, which used to be named the Hong Kong and Shanghai Bank Co. The Hong Shang, as old Asia hands in the diplomatic and intelligence communities called it back a quarter century and more ago, has historically been one of the dirtiest banks in the world.

And here's the really crucial part - the Hong Shang has also always been intimately linked to the highest levels of the British oligarchy. Handling dirty money has a long and honorable record at the Hong Shang. It was one of the leading British institutions that directed the opium trade which destroyed and subjugated India and China. In fact, it was established entirely for that purpose. During the Viet Nam war,  Lucien Conein and Ed Lansdale of the CIA used HSBC to launder heroin money. The first time Ghandi was jailed by the British was when he wrote about the role of the Hong Shang in the opium trade. The British accused Ghandi of interfering with the imperial revenues.

Nothing much has changed: just look at the HSBC Board of Directors today. Here's about half of them: keep in mind as you go through this that these are the one percent who control almost all the world's wealth, and wield massive influence with governments around the world.

Douglas Flint has been Group Chairman of HSBC Holdings since December 2010. He joined HSBC in 1995, and in February 2010, was made Chief Financial Officer, and - note this - Executive Director Risk and Regulation. from 2005 to 2011, Flint was a non-executive director of BP PLC. That would be British Petroluem, again, a company at the commanding heights of the still-extant British Empire. Note Flint's role in calming the waters before and espeically after the 2007-2008 financial crash:

Chairman of the Financial Reporting Council’s review of the Turnbull Guidance on Internal Control from 2004-2005 and served on the Accounting Standards Board and the Advisory Council of the International Accounting Standards Board from 2001-2004. He also served on the Shipley Working Group on Public Disclosure and co-chaired the Group of Thirty report on Enhancing Public Confidence in Financial Reporting, and the 2008 Report of the CRMPG III, “Containing Systemic Risk: The Road to Reform”.

Jonathan Evans, Lord Evans of Weardale, former Director-General of the British Security Service, the United Kingdom's domestic security and counter-intelligence service. You really think this guy does not know what HSBC is doing under his very nose while he's a director? Evans' presence on the board points to the intimate links between intelligence, drugs, and dirty banking that you're not supposed to talk about openly.

Joachim Faber, CEO of Allianz Global Investors from 2000 to 2012, and chairman of the German Stock Exchange Group since May 2012. Allianz is the world's largest insurance company. In April 2001, Allianz bought 80 per cent of Dresdner Bank, the largest bank in Germany.

Sir Simon Robertson, former Chairman of Kleinwort Benson, which has historically been used by top British elites, particularly for off shore banking.   Kleinwort Benson was a pioneer in privatisation: it was the lead adviser on the privatisation of British Telecom which, at the time in 1981 was the largest public offering ever. In 1995, Kleinwort Benson was bought by Dresdner Bank. Sir Robertson was also President of Goldman Sachs Europe.

Jonathan Symonds, CBE, former Chief Financial Officer of Novartis AG, the Swiss company which is the largest pharmaceutical company in the world based on sales. Symonds was a Partner and Managing Director of Goldman Sachs in 2007-2009.

Janis Rachel Lomax was Deputy Governor of the Bank of England from 2003 to 2008.

Philip D. Ameen, Senior Vice President, Principal Accounting Officer and Controller of General Electric Capital Corporation and General Electric Capital Services, Inc; Vice President and Principal Accounting Officer of General Electric Company until March 15, 2008 and Comptroller of GE from April 1994 to March 15, 2008. According to his HSBC blurb, Ameen  "has extensive experience in accounting standards setting and reporting." What standards, exactly, is he setting? According to the Bloomburg bio, Ameen "is a Member of the Advisory Board of University Business School's Center for Excellence in Accounting and Security Analysis. He serves on the International Financial Interpretations Committee of the International Accounting Standards Board. He was the longest-serving member of the Financial Accounting Standards Board Emerging Issues Task Force."

John Phillip Lipsky, the IMF's representative in Chile beginning 1978, the time when Milton Friedman's "Chicago Boys" were imposing their "shock therapy" on Chile, backed up by Augusto Pinochet's military dictatorship. In 1984 he joined Salomon Brothers, then the largest bond trader in the world. In 1998 Lipsky joined JPMorgan as Chief Economist, and after Morgan merged with Chase Manhattan was appointed Chief Economist and Director of Research, eventually becoming Vice Chairman of JPMorgan Investment Bank. Lipsky is also on the Board of Directors of the National Bureau of Economic Research, the Advisory Board of the Stanford Institute for Economic Policy Research, and the Council on Foreign Relations (you just knew the CFR had to be in there, somewhere, right?).

Rona Fairhead is currently Chairwoman of the BBC Trust, which replaced the BBC's Board of Governors in January 2007. She launched her "business" career in the 1980s at Mitt Romney's Bain and Company, then moved on to Morgan Stanley. In 1996, she became director of planning and acquisitions for Imperial Chemical Industries, historically one of the strategic firms at the top of the British empire. From there, she became chief financial officer of Pearson PLC, again, one of the strategic firms at the top of the British empire, with a particularly crucial role in intelligence gathering and the molding and directing of public opinion through its subsidiary, Financial Times Group, which Fairhead was made CEO of in 2006.

I looked at the Board of Directors of the Hong Shang in the mid-1990s, and it astounds me to find the interlocking relationships with all the same companies again. I really shouldn't be surprised: we have yet to witness a USA President who is serious about confronting the gang of criminals who oversees the world's flows of dirty money. After all, they're such dependable campaign contributors.

So, there you have it: history repeating itself. The British Empire is alive and well, with the same old  junction of oil, chemicals, finance, and intelligence in the City of London. Dirty money flows with direction from the highest levels of British intelligence. There's even the possibility of a lively confrontation between France and Britain.

What is new is the role of a whistle blower revealing the electronic secrets of one of the corporations we most need to wipe off the face of the planet. May God preserve him against our enemies.

The United States was created as a self-governing republic at a time when all other nations and states in the world were ruled by monarchs, aristocrats, and oligarchs. Are there principles of political economy that should distinguish a republic from monarchies and oligarchies?

How history has been rewritten
Interestingly, most of today’s economic textbooks do not even consider the question. In fact, the leading introductory economic text book in use today, Principles of Economics, by H. Gregory Mankiw does not even mention Alexander Hamilton. or George Washington, or Thomas Jefferson. Mankiw does mention Benjamin Franklin, but only once. However, Mankiw discusses Ronald Reagan six times in his book. This is an example of the brazen conservative / neo-liberal bias of Mankiw, who was chairman of the Council of Economic Advisers under George W. Bush Jr., and then economic adviser to Mitt Romney during the 2012 presidential campaign. Yet, somehow, we tolerate conservatives and libertarians asserting that their extreme market fundamentalism is based on the ideas that created the United States. As I will show in this and the next few posts, their assertion is a bald faced lie.

Are there statements and writings by the Framers of the United States that deal with political economy? In fact, there are a great many, and they often involve some discussion of the general welfare and the common good. It should be noted that modern conservatives, neo-liberals, and especially  libertarians openly and explicitly attack the concepts of the general welfare and the common good as a subterfuge for would-be tyrants to impose a “statist” repression of economic liberty. See, for example, Frederick Hayek’s 1944 screed, The Road to Serfdom.

A fixation on "property rights"
The foundation of these conservative / libertarian ideas is that government has no business telling people what to do with their property. But in the United States, we fought a Civil War that was fundamentally caused by these ideas.  The horrifying whipping scene in Twelve Years a Slave, for which actress Lupita Nyong’o won an Academy Award, has one line near the end that captures the enormous cruelty and inhumanity of these conservative / libertarian ideas. When the slave Solomon Northup attempts to warn the slaveholder Epps that his brutal, hate-rage whipping of Patsey is a sin which will be judged, Epps pauses long enough to say, “There is no sin. A man does how he pleases with his property.”




No, in a republic, you cannot do with your property what you want. The crucial concept in the political economy of a republic is that self-interest must be balanced with the public interest. There is a reason the Framers included the term General Welfare, and with prominence, twice in the Constitution.

Franklin's Reflections on the Augmentation of Wages
In 1783, the year after he had helped negotiate a peace treaty with Britain to end the Revolutionary War, Benjamin Franklin wrote an essay “Reflections on the Augmentation of Wages, Which Will Be  Occasioned in Europe by the American Revolution,” which was published in Paris in the Journal d Economie Puplique. It is a deliberate and comprehensive attack on the “free trade” ideas of the house economists of the British East India Co., such as Adam Smith and Thomas Malthus.

...If the term wages be taken in its widest signification, it will be found that almost all the citizens of a large state receive and pay wages. I shall confine my remarks, however, to one description of wages, the only one with which government should intermeddle, or which requires its care. I mean the wages of the lowest class, those men without property, without capital, who live solely by the labor of their hands. This is always the most numerous class in a state; and consequently, that community cannot be pronounced happy, in which from the lowness and insufficiency of wages, the laboring class procure so scanty a subsistence, that, barely able to provide for their own necessities, they have not the means of marrying and rearing a family, and are reduced to beggary, whenever employment fails them, or age and sickness oblige them to give up work.

Further, the wages under consideration ought not to be estimated by their amount in money, but by the quantity of provisions, clothing, and other commodities, which the laborer can procure for the money which he receives.

....The horrible maxim, that the people must be poor, in order that they may remain in subjection, is still held by many persons of hard hearts and perverted understanding, with whom it were useless to contend. Others, again, think that the people should be poor, from a regard for the supposed interests of commerce. They believe that to increase the rate of wages would raise the price of the productions of the soil, and especially of industry, which are sold to foreign nations, and thus that exportation and the profits arising from it would be diminished. But this motive is at once cruel and ill founded.

....To desire to keep down the rate of wages, with the view of favoring the exportation of merchandise, is to seek to render the citizens of a state miserable, in order that foreigners may purchase its productions at a cheaper rate; it is, at most, attempting to enrich a few merchants by impoverishing the body of the nation; it is taking the part of the stronger in that contest, already so unequal, between the man who can pay wages, and him who is under the necessity of receiving them; it is, in one word, to forget, that the object of every political society ought to be the happiness of the largest number.

…. High wages attract the most skillful and most industrious workmen. Thus the article is better made; it sells better; and in this way, the employer makes a greater profit, than he could do by diminishing the pay of the workmen. A good workman spoils fewer tools, wastes less material, and works faster, than one of inferior skill; and thus the profits of the manufacturer are increased still more.

The perfection of machinery in all the arts is owing, in a great degree, to the workmen. There is no important manufacture, in which they have not invented some useful process, which saves time and materials, or improves the workmanship. If common articles of manufacture, the only ones worthy to interest the statesman, if woollen, cotton, and even silk stuffs, articles made of iron, steel, copper, skins, leather, and various other things, are generally of better quality, at the same price in England than in other countries, it is because workmen are there better paid.

The low rate of wages, then, is not the real cause of the advantages of commerce between one nation and another; but it is one of the greatest evils of political communities.

.... The rate of wages in Europe will be raised by yet another circumstance, with which it is important to be acquainted. I have already said, that the value of wages ought not to be estimated solely by the amount of money, nor even by the quantity of subsistence, which the workman receives per day, but also by the number of days in which he is employed; for it is by such a calculation alone, that we can find out what he has for each day. Is it not evident, that he who should be paid at the rate of forty pence a day, and should fail of obtaining work half the year, would really have but twenty pence to subsist upon, and that he would be less advantageously situated than the man, who, receiving but thirty pence, could yet be supplied with work every day? Thus the Americans, occasioning in Europe an increased demand and necessity for labor, would also necessarily cause there an augmentation of wages, even supposing the price of the day's work to remain at the same rate.


....Better days may come, when, the true principles of the happiness of nations better understood, there will be some sovereign sufficiently enlightened and just to put them in operation. The causes, which tend continually to accumulate concentrate landed property and wealth in a few hands, may be diminished. The remains of the feudal system may be abolished, or, at least, rendered less oppressive. The mode of taxation may be changed, and its moderated. And, lastly bad commercial regulations may be amended. The tendency of all these improvements will be, to enable the working classes to by the favorable change, which the American Revolution must naturally produce.

The government "should intermeddle"
Some thoughts on Franklin's ideas as they pertain to today:

Note that Franklin explicitly states that the wages of the great mass of people is an issue in which the government "should intermeddle." What else can this mean than direct government interference in the "free workings" of the labor market? Franklin's wisdom was unfortunately lost, and the country suffered thorough what has been called the Lochner Era of the US Supreme Court, when any attempt to protect the interests of workers was ruled by the justices to involve an unconstitutional infringement on the "property rights" of employers. See, for example, how the Court struck down a federally mandated minimum wage for the District of Columbia in Adkins v. Children's Hospital 261 U.S. 525 (1923). Or Hammer v. Dagenhart 247 U.S. 351 (1918), striking down laws prohibiting child labor.

The Lochner Era finally came to an end with the 1937 Supreme Court decision to uphold the minimum wage laws of the state of Washington, West Coast Hotel Co. v. Parrish 300 U.S. 379 (1937). The Parrish ruling at the time was seen to be the Court backing down in the face of President Franklin Roosevelt's plan to "pack the Court." Pundits at the time quickly dubbed the Parrish decision "the switch in time that saved nine." But it is important to remember the wider historical context: the enormous economic and social damage caused by the Great Depression made it impossible to ignore any longer the need for governments to curb the supposed "rights" of speculators, usurers, and exploitative employers. More specifically, there was widespread public outrage and revulsion over the Court's decision just under a year earlier to strike down the minimum wage law of the state of New York, Morehead v. New York Ex Rel. Tipaldo 298 U.S. 587. In his diary Secretary of the Interior Harold Ickes wrote that the Tipaldo ruling was "Positively medieval... The sacred right of liberty of contract again--the right of an immature child or a helpless woman to drive a bargain with a great corporation." The Knickerbocker Press in Albany, NY editorialized that "the law that would jail any laundryman for having an underfed horse should jail him for having an underfed girl employee." The public had had enough: it was clear that the problem was not the Constitution, but the nine old men in robes who insisted government had no power to protect the General Welfare by imposing limitations on the worst abuses and depredations of capitalists and financiers. In a book published a few months later, Storm Over the Constitution, Irving Brant, author of a monumental biography of James Madison, wrote that "A judiciary out of sympathy with the striving of the people for well-being does not constitute a restraint upon the turbulence and follies of democracy. It is a frustration of government; the negation of democracy; a stimulus to fascist or communist revolt." (Jeff Shesol, Supreme Power: Franklin Roosevelt vs. the Supreme Court, pages 221-230.)

Ever since, conservatives, libertarians, and neo-liberals have searched and schemed for ways to restore to the USA legal system the extreme "property rights" doctrines of the Lochner era. On the Heritage Foundation website, conservative propagandists  Economic Liberty and the Constitution: An Introduction, Paul J. Larkin, Jr., David E. Bernstein and others write "modern conservative and libertarian thinkers, especially the originalists among them, have taken great strides toward rebuilding traditional limited-government conservative constitutionalism. Part of that progress has involved recapturing some of the wisdom of pre–New Deal constitutional doctrine." It will be interesting one day to tally the billions of dollars that rich wannabe oligarchs poured into the Heritage Foundation and the other institutions of the conservative and neo-liberal movements such as the Mont Pelerin Society, to research and refine their incessant attacks on the concepts of the General Welfare and the common good.

The issue of a minimum wage
Franklin specifies that “wages under consideration ought not to be estimated by their amount in money,
but by the quantity of provisions, clothing, and other commodities” This is the proper way, in a republic with a healthy functioning political economy, to determine issues such as: What should be the minimum wage? (We brush aside as oligarchical panegyrics the answer of many conservatives and libertarians that there should not even be a minimum wage.) This is the essence of statecraft. Politics is the machinations and gyrations required to bring the answers of statecraft to fruition as actual policy.

In March 2011, Wider Opportunities for Women issued a report based on its Basic Economic Security Tables, developed in conjunction with the Center for Social Development at Washington University in St. Louis. Mo. The table below is from WOW's 2012 annual report (pdf).
Income needed, US, by type of household, from Wider Opportunities for Women 2012 annual report.

As New York Times correspondent Motoko Rich summarized the WOW report when it was released:

...a single worker needs an income of $30,012 a year — or just above $14 an hour — to cover basic expenses and save for retirement and emergencies. That is close to three times the 2010 national poverty level of $10,830 for a single person, and nearly twice the federal minimum wage of $7.25 an hour. A single worker with two young children needs an annual income of $57,756, or just over $27 an hour, to attain economic stability, and a family with two working parents and two young children needs to earn $67,920 a year, or about $16 an hour per worker.

Oligarchs' economic rent versus the capital intensity of a republic
We should be troubled that so much of Franklin’s essay can serve as a strong rebuke to U.S. economic and labor policies today – both government and corporate. Most especially, corporate. In February 2007, McKinsey & Co., the world's largest business consulting firm, was surprisingly forthright in a report entitled The new metrics of corporate performance: Profit per employee:

If a company’s capital intensity doesn’t increase, profit per employee is a pretty good proxy for the return on intangibles. The hallmark of financial performance in today’s digital age is an expanded ability to earn “rents” from intangibles. Profit per employee is one measure of these rents. ROIC is another. If a company boosts its profit per employee without increasing its capital intensity, management will increase its rents, just as raising ROIC above the cost of capital would. The difference is that viewing profit per employee as the primary metric puts the emphasis on the return on talent. This approach focuses the minds of managers on increasing profit relative to the number of people a company employs. It suggests that the most valuable use of an organization’s talent is the creation and use of intangibles.

McKinsey's "new" metric is actually just a return to the political economy of the slave- and opium-trading British East India Company. As I will show in a future post, the very notion of "rent" was repudiated by First Secretary of the Treasury Alexander Hamilton. The USA economy as Hamilton designed it, is supposed to become ever more capital intensive. Franklin's vision is the same as Hamilton; recall Franklin writing in the excerpt above: "The perfection of machinery in all the arts is owing, in a great degree, to the workmen." Further on in the his essay, Franklin writes (not quoted in excerpt above), that the "price of labor in the arts, and even in agriculture, is wonderfully diminished by the perfection of the machinery employed in them, by the intelligence and activity of the workmen, and by the judicious division of labor." In the political economy of a republic, the capital intensity of the economy should always be increasing. If it is not, it is a sure sign that usury, speculation, and economic rent-seeking have come to occupy too large a part of the economy. I shall revisit this theme often in future posts.


From Will capex come back? UBS Investment Research, by Andrew Cates, January, 10, 2013, page 3.

Conclusion

It is important to ask: How did we get from Franklin to Epps? Is the calamity and horror of human slavery a direct result of Franklin’s ideas, and actions, in creating the United States? Or is there another force? Another force that intervenes in the course of events to obstruct the flow of Franklin’s humanistic ideas and ideals, and thus prevent the more appealing and generous future Franklin’s essay seems to promise?

I contend there is. And moreover, that malevolent force continues at work today, and has achieved domination over the US  economic and political systems. That force has been open and explicit in attacking the concepts of the general welfare and the common good, and insisting that government is always the problem.

HAWB - Introduction - How America Was Built
The Introduction to this series, HAWB - How America Was Built, is here. The DailyKos version, which includes some good comments, including a preview of how computers were based on the various scientific research programs of the United States during World War Two, is here.

We are, we believe (and hope) nearing completion of a historical chronology of government actions and programs to support and develop the economy of the United States. Our intent is to frontally attack the conservative, libertarian, and neo-liberal interpretations of USA economic history, which are so distorted by their focus on "private property" and "free enterprise" and their hostility to "statism" as to constitute a lie. Everyone is probably familiar with these conservative, libertarian, and neo-liberal memes, which are repeated literally everyday in the mass media:

• The only thing government ever does is tax you
• Government is the problem
• Government never created a single job
• Government workers are useless bureaucrats living high on the hog

The actual history of the USA economy shows that these are all rotten lies. It is not that there was no role played by free enterprise and the private sector: they were just as important as the role of government. It is just that the exclusion and derision of the government role has become so extreme that it becomes a lie in effect of application.

Here is just some of the highlights of the chronology:

• 1783 Benjamin Franklin’s Reflections on the Augmentation of Wages, Which Will Be Occasioned in Europe by the American Revolution
• Jefferson’s Land Ordinance of 1785
• The Constitutional Convention - Bourgin's The Myth of Laissez-Faire in the Early Republic
• The Constitutional mandate to promote the general welfare
• Charles Beard did not write what you think he wrote in An Economic Interpretation of the Constitution
• The Tariff and Tonnage Acts of 1789
• Secretary of the Treasury Alexander Hamilton designs the USA economy
• How early corporations were enjoined by their charters to promote the general welfare
• On the question of aesthetics: L’Enfant’s 1791 Report on the Plan Intended for the Permanent Seat of Government and Jefferson's plans for the state capitol in Richmond and the University of Virginia
• 1794-1816 The federal armories lay the foundation of modern industrial mass production
• 1801–1806 Oliver Evans develops the high-pressure steam engine
• The Coast Survey Act of 1807 and the discovery of a deep water channel into the port of New York City
• 1804-1859 The Army Corps of Topographical Engineers explore and map the West
• 1817 The Erie Canal
• 1802-1835 The US Military Academy at West Point and its role in engineering and education
• McCulloch v. Maryland 1819 - Powers are implied, not enumerated
• The General Survey Act of 1824
• The Rivers and Harbors Act of 1824
• 1833 Associate Justice Joseph Story's Commentaries on the Constitution
• 1835-1852 The Illinois-Michigan Canal and the creation of Chicago
• 1838-1842 United States Exploring Expedition of the US Navy
• 1843 Direct funding to Samuel Morse for development of the telegraph
• 1850s Admiral Benjamin Franklin Isherwood and the development of steam power
• Land Grant Act of 1850
• Steamboat Act of 1852 and the power to regulate private property
• 1859 Brig. Gen. Randolph B. Marcy's Prairie Traveler
• Pacific Railroad Acts of 1861 and 1862
• 1862 Morrill Land-Grant Colleges
• 1862 Abraham Lincoln establishes the Department of Agriculture
• 1867-1872 The United States Geological and Geographical Surveys of the plains and the west
• 1870 Weather Bureau of the United States established
• 1879 United States Geological Survey and the development of mining
• Hatch Act of 1887 creates agricultural experiment stations
• 1890s-1920s The Good Roads movement and government pavement of roads
• 1907 U.S. Forest Service establishes Forest Products Laboratory at University of Wisconsin Madison
• The Air Commerce Act of 1926
• 1928 The National Bureau of Standards and the Cooperative Fuel Research engine
• 1911 US Supreme Court breaks Rockefeller's Standard Oil monopoly
• 1912 USDA botanist and plant pathologist Mark Carleton and the improvement of wheat
• Smith–Lever Act of 1914 establishes a system of agricultural cooperative extension services
• 1915 National Advisory Committee for Aeronautics
• 1917-1919 The US Navy and the development of radio
• 1919 Nebraska State Legislature establishes Tractor Test Laboratory at University of Nebraska
• 1919 Bank of North Dakota established by state legislature after Non-Partisan League sweeps state elections
• 1920 USDA scientists Harry A. Allard and W.W. Garner discover photo-periodicity of plants
• 1924 US Army Industrial College lays the foundation for the Arsenal of Democracy in World War 2
• 1930s The Bonneville Power Authority, the Tennessee Valley Authority and rural electrification
• The Norris-La Guardia Act of 1932 promotes organized labor unions
• 1942 US military develops mass production of penicillin
• 1943 National Resources Planning Board publishes plans for post-war demobilization of military personnel and reorientation of industry
• 1943 Petroleum Administration for War sends Everette Lee DeGolyer to assess oil supplies in the Middle East
• 1948-1965 USDA regional research laboratories and the frozen foods industry
• Servicemen's Readjustment Act of 1944 (the GI Bill)
• 1945 Vannevar Bush's report to Truman Science, The Endless Frontier argues the need for continued government support of science and engineering research and development
• 1940s-1950s The origins of computers: Whirlwind and the SAGE air defense system
• 1952-1957 US Air Force funded Boeing 707 brings us the jet age 

Each one of the historical economic landmarks listed above will eventually become a separate blog posting. Each will have the title "HAWB year - blank - How America Was Built" so that people can search for "HAWB" or  "How America Was Built" and find the entire series of posts up to that time. Our intent is that anyone so interested can quickly access this historical record and arm themselves with the truth to counter the landslide of lies propagated by zealots who would rather destroy the government, than allow its powers be used to promote the general welfare over private interests. At the same time, we plan to publish e-books that people may buy so that they can support our research and writing. There will also be PowerPoint presentations available, which we can email to people so that they may present these ideas to local groups.

We will use the year of the event in the title, instead of attempting to sequentially number each post. This will allow us to jump to a certain event in the chronology that may be pertinent to some current event. It will also allow us to include other events we may have overlooked in the first edition of the chronology. We fondly hope that our effort will attract enough attention that readers will begin suggesting other events to include that we have overlooked.

This historical chronology of the role of government in economic development is  the first part of a three-part program that we hope will come to dominate political debate going into the USA 2016 election. The second part reviews the USA economy since Reagan in a series of graphs, which dramatically show how the Reagan presidency was a disastrous turning point: the USA has been financialized, deindustrialized, decapitalized. Emphasis on that last word: decapitalized - with the explosive growth of financial market speculation, usury, and economic rent seeking since Reagan, the USA has become less capitalistic.

The third part presents a $100 trillion program for a rebuilding of the world’s economy to stop, and even reverse climate change.We have the technology, what we need is the political will to smash the usurers and speculators of Wall Street, the Chicago futures pits, and the City of London. Or, as The Onion wryly observed: "At press time, representatives from the world’s leading economies had signaled that they would continue to heavily rely on fossil fuels until they had something more than an overwhelming scientific consensus to go on."


We use the $100 trillion number for three reasons. First, and most importantly, it is what scientists and technology experts have calculated is required. It is their number, not ours. But it will become our number, because we will publicize it far and wide. We will ceaselessly agitate for adoption of a $100 trillion program until we succeed in making it the policy of this republic.

Second, $100 trillion program is an easy number to remember.

Third, it instantly establishes a litmus test with which to judge the ideas and beliefs of others, especially those who aspire to govern us. The 2008 USA stimulus program was $700 billion, and has been shown to be historically inadequate by the painfully slow climb out of the Great Recession. With a $100 trillion standard, the 2008 stimulus would have been immediately and clearly seen to be laughably inadequate. Again, it is our scientists and technology experts who have calculated that $100 trillion is required. Any politician who talks about a few billion or even a few hundred billion dollars in programs is clearly not serious about solving the immense problems we face.

Fourth, the inevitable question is asked: Is this a $100 trillion government program? Is the government going to spend $100 trillion? This question forces an examination of the interaction between government and the private sector in a national economy. No, this is not solely a government program. No, the government is not going to spend $100 trillion. But the government must create a regime of incentives and punishments that makes usury, speculation, and rent seeking behavior unattractive, if not entirely illegal, while making actual investment in the new technologies, new industries, and new companies required to go globally green the surest and easiest way to make a profit. In other words, government must give direction to the economy, then allow private initiative and free enterprise to pursue what ever profit opportunities are to be found in that new direction. This probably means imposing some level of transaction tax on all transactions in the financial markets, swiftly enforced and swiftly punished. It probably also means that requiring companies to conduct activities that promote the general welfare – a desideratum of early American business culture that was so strong that it did not have to be written into law – will have to be codified. At this point in the fight to save Spaceship Earth, any  conservative, libertarian, or neo-liberal who argues against the idea of government (of the people, by the people, for the people) setting a direction for national economic development should be understood and treated as a swinish and seditious enemy of democratic government. The massive scale of the $100 trillion program forces us to ask: How do we do it? Is socialism the best way? Or central planning? Or how does capitalism have to be controlled and regulated in such a way that the efforts of private enterprise are directed toward the general welfare?

Fifth, the $100 trillion number grabs attention. It jars the sensibilities, because it is so far removed from normal political discourse up to this time. And once a citizen begins to accept it, and the need for it, he or she is inevitably forced to confront a crucial economic issue: How is money and credit created and allocated? This requires a ruthless examination of Wall Street and the financial and banking systems.

Sixth, a $100 trillion program to entirely rebuild the world economy on a sustainable basis forces people to look at the real economy. Can we actually do it? Can we actually manufacture and build what is required? This demands a close look at the state of our manufacturing industries, the skills and aptitudes of our labor force, and how workers and employees are treated, trained, compensated, and cared for.

Seventh, we deliberately pose the $100 trillion program as a means of seizing and controlling the terms of political debate going into the 2016 USA election. We simply cannot afford  a national campaign that is again solely a contest between, on the one hand, a hopelessly anachronistic and pro-usury Republican Party not just blind, but openly hostile, to the need for wide-spread cooperative solutions to wide-spread problems that  affect every last living person, and on the other hand, a Democratic Party dominated by its corporatist rump, willing to mouth populist dissatisfaction but unwilling to confront the economic and financial powers that have transformed the United States from a republic to an oligarchy. Just as there was no hope of ever dissuading the southern slave-holders from their catastrophic policies of the 1850s, there is no hope of dissuading modern Republicans from their catastrophic policies of today. Indeed, too many Republicans, like Rich Perry, are so stupid and so venal as to actively harbor and promote neo-confederate ideas today. They should be understood and treated as swinish and seditious enemies of democratic government. But the possibility to transform the Democratic Party for the better still exists, especially at the local and state level. Which is quite unlike the Republican Party, which more likely to be pushed in an ever more reactionary direction by the Tea Party fanatics and extremists at the local and state level.

This three-part presentation is designed to educate activists, office-seekers, and office-holders. More importantly, it is designed to enable people like you, our readers, to present these ideas to others, to educate them, and to thus help begin to shape the terms of political discussion in this country. In this, we are deliberately setting out to replicate the system of lecturers the populist movement of the 1870s through 1890s used to build and strengthen itself. Many of the economic landmarks listed above came about only because of the political muscle of the populist movement. And never forget that most of the policies adopted during Franklin Roosevelt's New Deal were first developed and elaborated by the populist movement.

The lecturing system of the populists resulted in a painfully slow and laborious gestation of two decades from which populism emerged. We do not have the luxury of two decades time today. But we do have the internet, and we cannot conceive of an instrument more perfectly suited for the rapid dissemination and assimilation of political and economic ideas.

Two days ago, I posted on DailyKos a summary of the very important article on money creation that Jon had featured. Jon asked me to also post my DailyKos summary here, which I am happy to do.

But I also want to draw your attention to some of the comments my DailyKos posting attracted, because they are a wonderful example of the "trained incapacity" Veblen analyzed in in his 1914 book, The Instinct of Workmanship and the Industrial Arts. As regular readers of this blog know, Jon and I have had more than one occasion to invoke "trained incapacity" in trying to understand the absurdity and inanity of political and economic positions, ideas, and arguments of people who otherwise appear to be smart. Jon has a number of posts on the subject of trained incapacity here - just scroll down until you see the phrase on the left.

There were at least three commenters to my DailyKos post who simply refused to accept the fact that banks create money out of nothing. They insisted that the banks would later have to meet reserve requirements, or that the borrower was the actual source of the money created because the borrower signs a pledge to pay back the money. One pointed to the Basel requirements regarding banks' T1 capital, a strong sign that that person is professionally involved in banking and finance. Yet another objected that it is the property pledged as security for the loan that is actually the money which I mistakenly believe (according to them) was created out of thin air. Another snidely argued that if banks can create money out of nothing, no bank would ever go bankrupt, so why "not lend to everyone under the sun, without expectation of repayment?" Then added, trying to dismiss the idea that banks create money out of nothing as the fantasy of some wild-eyed radical, "That may be in fact be what the diarist is driving at: what a wonderful world that would be to live in!" This person either did not see or deliberately failed to mention Jon's observation, which I quoted near the beginning of my posting, "don't create money will-nilly—only create money to pay for things that make the society richer."

When I asked a couple commenters, "Then please explain how the amount of money (measured as M2) grew from $1.28 billion in 1867, to $11,654.3 billion now. Where did the $11.653 trillion come from? Which accounts was it withdrawn from? Who created $11.653 trillion in money, and how, over the past 148 years?" one of my interlocutors could only reply, "economic growth." 

Now, I also want to point out that these people objecting to the idea that banks create money out of thin air, are supposedly "on our side." These are not knuckle-dragging conservatives or Republicans; they are liberals and progressives who regularly follow and contribute to one of the leading openly partisan Democratic Party websites on the tubez. With friends like these, who needs enemies?!? Are these people serious about addressing the problem of climate change? If they are, then I feel it is their duty to us, and to humanity in general, to explain what solutions they propose, and how to fund them. If they are not serious, I feel they should be candid and forthright, and express their rejection that climate change is the problem almost all scientists contend it is - a problem that threatens the very survival of our existence as a species.

Alternatively, they can be candid and forthright in informing us they are willing to allow the planet be burnt and rendered uninhabitable, rather than accept economic paradigms that are contrary to their beliefs of what reality is.

The other alternative, of course, is they are just being stupid by clinging to their belief of how money is created. In which case, we come back to Veblen's analysis of trained incapacity. As John Kenneth Galbraith once noted, "The process by which banks create money is so simple that the mind is repelled."

The thing to understand is that the real political fight in the USA, and the rest of the world, is not Democrat versus Republican, or liberal versus conservative, or left versus right. As Jon has pointed out numerous times, the real fight is the Producer Class versus the Predator Class (the Leisure Class as Veblen named it). What makes the prospect of a Hillary Clinton presidency so distasteful to many people who conservatives and Republicans stupidly believe are lefties and therefore Hillary's hardcore base? It is the fact that the Clintons sold out to, and became part of, the Predator Class many, many, many years ago, and the policies they support and espouse will do serious material harm to the members of the Producer Class. So go through the comments, and see for yourself the taint of the Predator Class within our own ranks.

As one of the Predator commenters wrote: "The real issue is that a faction here hates banks and wants to undermine the system somehow." That's exactly what we want to do, and that's what the Predator Class is terrified of.

He or she was exposed by another commenter.

Creating money out of thin air

...it can now be said with confidence for the first time – possibly in the 5000 years' history of banking - that it has been empirically demonstrated that each individual bank creates credit and money out of nothing, when it extends what is called a ‘bank loan’. The bank does not loan any existing money, but instead creates new money. The money supply is created as ‘fairy dust’ produced by the banks out of thin air. The implications are far-reaching.

That's the conclusion of a December 2014 article, by Richard A. Werner, in the scholarly journal International Review of Financial Analysis, entitled Can banks individually create money out of nothing? — The theories and the empirical evidence. I don't know what I can write to convince you how important this article is. The implications for economic and financial policies of government the world over are staggering - and in a good way. A very good way. Because anyone who looks at the simple evidence presented in this scholarly paper can reach no other conclusion than

• we really don't need banks,
• we don't need bankers,
• we don't have to borrow money to fund government programs,
• we don't have to cut social programs to balance government budgets,

A big tip of the hat is due to Jon Larson, at Real Economics, for highlighting Dr. Werner's article at RE. This is important material, because the cost of stopping climate change has been pegged by experts at $100 trillion, as I wrote a few weeks ago. And, as Larson explains:

...if guys like Tony and I are going to run around telling folks that their only hope for survival lies in spending $100 trillion for infrastructure upgrades, we owe it to them to explain where all that money will come from.

Actually, the source of that money is blindingly obvious—we will get those funds the same way modern society always gets those funds. We will create them out of thin air. But, scream the monetary Puritans, if you just create money willy-nilly out of thin air, what will stop us from becoming Zimbabwe with runaway inflation? Again the answer is obvious—don't create money will-nilly—only create money to pay for things that make the society richer.

There are three basic hypotheses of money creation that professional economists recognize. First, and probably the most widely accepted among professional economists today, is the financial intermediation theory of banking. This idea is that banks are merely intermediaries between savers and borrowers: the banks take in deposits, then when someone needs a loan, the banks lend them some of the money they have collected as deposits. Thus banks do not really create money, they just aggregate it and distribute it. Moreover, since any other institution can do pretty much the same thing - General Motors Acceptance Corp, for example, or General Electric's GE Capital, or even your local chain of grocery stores, then banks are really not that special, and all those fancy models of how the economy works can pretty safely ignore the existence of banks. Uh huh. Well, that's their theory, and they're sticking to it, even though it has, cough, cough, some difficulty in explaining why what happened in 2007-2008, uh, happened.

The second basic hypothesis is the fractional reserve theory of banking. This was the predominant hypothesis in economics from the 1930s to the late 1960s. In this view, banks are financial intermediaries, just like in the first view, but the banks as an aggregate system can create money by lending out some fraction above and beyond what they actually hold in deposits. For example, say a bank has $100 million in deposits. It can lend out $90 million and hold a reserve of $10 million. The borrower of the $90 million then deposits it in another bank, which in turn can now lend out $81 million while holding a reserve of $9 million. The borrower of the $81 million then deposits it in yet another bank, which, in turn, can now lend out $71.9 million while holding $8.1 million in reserve. And so on and so on, to the final iteration. In this way, the banking system as a whole can create new money, while any one individual bank cannot. Bank regulators can adjust the "reserve requirement" to either increase or decrease the amount of new money the banking system as a whole can create and lend out.

The third basic hypothesis of money creation is the credit creation theory of banking, and it holds that banks create money out of nothing when they grant a loan. The key to understanding why all this arcane banking stuff is so important is to realize that if the credit creation theory of banking is correct, then why does it necessarily have to be banks that do the creating? Why can't it be governments also? Interestingly, most professional economists - including Keynes - dismiss the credit creation theory of banking as the work of a lunatic fringe. But the credit creation theory of banking has been gaining adherents since the financial crashes of 2007-2008, as people like you and me have turned our attention to these matters that were previously the lonely province of professional economists. Or as Dr, Werner puts it:

Since the American and European banking crisis of 2007–8, the role of banks in the economy has increasingly attracted interest within and outside the disciplines of banking, finance and economics.

As the credit creation theory of banking has fought for acceptance, the debate has been rather furious at times: recall the controversy a few years ago over the idea of the U.S. national government erasing its budget deficit by minting a special coin with a face value of $1 trillion, and depositing it with the Federal Reserve. The thing is, as Dr. Werner dryly notes in his paper:

Surprisingly, despite the longstanding controversy, until now no empirical study has tested the theories.

So what Dr. Werner, a German-born economist at the University of Southampton in Britain, and some colleagues set out to do was to borrow a large sum of money from a bank, and track what actually happens in the bank's internal accounting and management systems.

The simplest possible test design is to examine a bank's internal accounting during the process of granting a bank loan. When all the necessary bank credit procedures have been undertaken (starting from ‘know-your-customer’ and anti-money laundering regulations to credit analysis, risk rating to the negotiation of the details of the loan contract) and signatures are exchanged on the bank loan, the borrower's current account will be credited with the amount of the loan. The key question is whether as a prerequisite of this accounting operation of booking the borrower's loan principal into their bank account the bank actually withdraws this amount from another account, resulting in a reduction of equal value in the balance of another entity — either drawing down reserves (as the fractional reserve theory maintains) or other funds (as the financial intermediation theory maintains). Should it be found that the bank is able to credit the borrower's account with the loan principal without having withdrawn money from any other internal or external account, or without transferring the money from any other source internally or externally, this would constitute prima facie evidence that the bank was able to create the loan principal out of nothing. In that case, the credit creation theory would be supported and the theory that the individual bank acts as an intermediary that needs to obtain savings or funds first, before being able to extend credit (whether in conformity with the fractional reserve theory or the financial intermediation theory), would be rejected.

Dr. Werner and his colleagues approached a number of banks in Europe, but all the big banks they asked declined to be involved in the experiment. All the big banks gave two basic reasons for their refusal: they were unwilling to risk compromising their internal management and IT systems, and the amount of money the team wanted to borrow - 200,000 Euros - was too small. I quote: "... the transactions volumes of the banks were so large that the planned test would be very difficult to conduct..." OK, then.

It was therefore decided to approach smaller banks, of which there are many in Germany (there are approximately 1700 local, mostly small banks in Germany). Each owns a full banking license and engages in universal banking, offering all major banking services, including stock trading and currencies, to the general public. A local bank with a balance sheet of approximately €3 billion was approached, as well as a bank with a balance sheet of about €700 million. Both declined on the same grounds as the larger banks, but one suggested that a much smaller bank might be able to oblige, pointing out the advantage that there would be fewer transactions booked during the day, allowing a clearer identification of the empirical test transaction. At the same time the empirical information value would not diminish with bank size, since all banks in the EU conform to identical European bank regulations.

Thus an introduction to Raiffeisenbank Wildenberg e.G., located in a small town in the district of Lower Bavaria was made....

It was agreed that the researcher would personally borrow €200,000 from the bank. The transaction was undertaken on 7 August 2013 in the offices of the bank in Wildenberg in Bavaria. Apart from the two (sole) directors, also the head (and sole staff) of the credit department, Mr. Ludwig Keil was present. The directors were bystanders not engaging in any action. Mr. Keil was the only bank representative involved in processing the loan from the start of the customer documentation, to the signing of the loan contract and finally paying out the loan into the borrower's account. The entire transaction, including the manual entries made by Mr. Keil, was filmed. The screens of the bank's internal IT terminal were also photographed. Moreover, a team from the BBC was present and filmed the central part of the empirical bank credit experiment (Reporter Alistair Fee and a cameraman).

Dr. Werner presents the full results in his article, including

• a numbered sequence of the steps the bank took in reviewing and granting the loan, then crediting the loan amount to the researcher's account;
• the bank's balance sheet the day before the loan was made, and the balance sheet the day after the loan;
• the key asset positions of the bank the day before the loan, and the key asset positions the day after;
• the key liability positions for the same periods;
• the account summary table for the new account of the borrower;
• a standard T-account of the transaction from the borrower's perspective.

The critical question is: where did Raiffeisenbank Wildenberg e.G. obtain the funds from that the borrower (researcher) was credited with?

Well, you can probably guess the result of this very, very interesting experiment. It turns out that the bank neither took the €200,000 from the funds it already had as deposits, nor did it obtain €200,000 from a regional or national banking authority, or from the European Central Bank. The €200,000 was simply credited to the borrower's account. Period. The €200,000, in other words, was, created out of thin air. I will close by quoting from the U.S. Constitution.

Article I, Section 8, Clause 5: The Congress shall have Power…To coin Money, [and] regulate the Value thereof...

Aargh... if only the Framers had used the word "create" instead of "coin"! Then it would be much more difficult for the oligarchs who now control the creation and allocation of money and credit, to convince the chowderheads on the right that "government has to live within its means" is our big problem, instead of what our big problem really is: the creation and allocation of money and credit is being misused and abused by oligarchs who speculate and arbitrage with that new money and credit, instead of using it for something economically productive.