Money and Monetary Reform
Henry George’s Concept of Money and Its Application to 21st Century Monetary Reform -- Part Two
We are pleased to present the second part of an essay by Stephen Zarlenga of the American Monetary Institute. Zarlenga considers American economist Henry George's views on money and their modern implications. Part One is available here.
For further information, visit the American Monetary Institute web site at www.monetary.org
GEORGE RESPECTED THE FACTS
While he clearly came to enjoy economic theorizing, Henry George had an ingrained respect for observation - an overriding respect for the facts.
“Bring the question to the test of facts” wrote George in Progress and Poverty in considering whether wages were drawn from capital or not. (P&P, 60)
In considering Malthus ideas on population, George noted:
“To the supreme and final test of facts we can easily bring this theory.” (P&P, 140)
Supreme and final test conveys that however appealing or seductive a theory may sound, the final arbiter of theories for Henry George, is the reality of the facts. This may seem obvious, but it is especially important in monetary thought, and is quite often ignored by political economists.
For example, regarding Malthus’ population pressure theory George observed:
“What I say is this: that nowhere is there any instance which will support this theory; that nowhere can be properly attributed to the pressure of population …that everywhere the vice and misery attributed to overpopulation can be traced to the warfare, tyranny, and oppression which prevent knowledge from being utilized and deny the security essential to production.” (P&P, 122)
A negative example: the political economists intuitively assumed or jumped to the conclusion that the value of gold and silver as money, was determined by the cost of mining and the available supplies of the two metals. However Alexander Del Mar points out that there is no evidence that they ever bothered to check on the costs of production. His research for the 1876 US Monetary Commission found that such mining was often done at a loss. Nor do I believe that the political economists examined the available evidence (the facts) on the metal’s supplies. For these facts do not support their assumptions either. George specifically warned about such jumping to conclusions.
GEORGE’S MAJOR THEMES
Henry George’s primary discovery, that poverty amidst plenty resulted from treating the land as private property was sparked not by theory, but arose from his direct observation of the existence of the most abject poverty and hopelessness side by side with the greatest concentrations of wealth.
“Where population is densest, wealth greatest, and the machinery of production and exchange most highly developed - we find the deepest poverty, the sharpest struggle for existence and the most enforced idleness.”
“In the progress of new settlements to the conditions of older communities it may clearly be seen that material progress does not merely fail to relieve poverty - it actually produces it.” (P&P, 6, 9; also see 224; also see The Crime Of Poverty )
In 1790 - US cities contained 3.3% of the nation’s population. By 1880 it was 22.5%. George had directly observed this process in its early stages in San Francisco when the city was only 30 years old, where the underlying elements were perhaps more clearly distinguishable. He had also observed its later stages more fully developed in New York City. Add one insightful flash or vision (not yet an “official” ingredient of the “Scientific Method”) and he was able to make the logical linkages which explained the observations from his experience:
“I well recall the day when checking my horse on a rise that overlooks San Francisco Bay, the commonplace reply of a passing teamster to a common place question, crystallized, as by lightning-flash my brooding thoughts into coherency, and I there and then recognized the natural order - one of those experiences that make those who have had them feel thereafter that they can vaguely appreciate what mystics and poets have called the ‘‘ecstatic vision’”. (SPE, 163)
Later using theoretical reasoning, his further analysis was able to conclude (or deduce) that rent would automatically rise to levels that kept labor on the edge of subsistence.
GEORGE’S CONCLUSION AND SOLUTION
George’s inescapable conclusion was plainly stated:
“Our boasted freedom necessarily involves slavery so long as we recognize private property in land. Until that is abolished, Declarations of Independence and Acts of Emancipation are in vain.” (P&P, 357)
But he also offered a solution:
“… it is not necessary to confiscate land; it is only necessary to confiscate rent…the simple yet sovereign remedy, which…(will) afford free scope to human powers, lessen crime, elevate morals, and taste, and intelligence, purify government and carry civilization to yet nobler heights, is - to appropriate rent by taxation… (and) to abolish all taxation save that upon land values.” (P&P, 404-406)
This became known as George’s Single tax proposal; considered a fair and painless tax since the increasing value of land itself (not including improvements) results from social causes such as population increase, and not from the work of the “owner”.
ADAM SMITH’S “SELFISH” ERROR
George’s analysis of Smith’s great error is a refreshing change from the continued lionization of Adam Smith, with its centuries of negative impact on mankind. Frederich Liszt informs us that the British Prime Minister William Pitt used to promote Smith’s book and usually carried a copy under his arm. But George’s moral approach is in stark contrast to Smith’s system. Following Buckles lead, George identified the underlying false axiom on which Adam Smith’s Wealth of Nation’s thesis is based:
“Buckles understanding of Political Economy was that it eliminated every other feeling than selfishness.” Wherein Smith ‘generalizes the laws of wealth, not from the phenomena of wealth, nor from statistical statements, but from the phenomena of selfishness; thus making a deductive application of one set of mental principles to the whole set of economical facts. He everywhere assumes that the great moving power of all men, all interests and all classes, in all ages and in all countries is selfishness… here (in the Wealth Of Nations) he makes men naturally selfish; formerly, he made them naturally sympathetic…indeed Adam Smith will hardly admit common humanity into his theory of motives.’” (SPE, 89, 90)
When Buckle says formerly he made them “sympathetic”, he is referring to Smith’s only other book, published earlier, the Theory of Moral Sentiments in which Buckle concluded that Smith had done the opposite - there he excluded selfishness!
THE “FORCE OF FORCES”
George substituted a very different concept for Smith’s destructive error:
“The fundamental principle of human action … is that men seek to gratify their desires with the least exertion.”(P&P, 203)
“It is not selfishness that enriches the annals of every people with heroes and saints… that on every page of the world’s history bursts out in sudden splendor…that turned Gautama’s back to his royal home or bade the Maid of Orleans lift the sword from the altar; that held the Three Hundred in the Pass of Thermopylae, or gathered into Winkelreid’s bosom the sheaf of spears…Call it religion, patriotism, or the love of God - give it what name you will; there is yet a force which overcomes and drives out selfishness; a force which is the electricity of the moral universe; a force beside which all others are weak…I call this force destiny toward human nature - a higher, nobler nature than we generally manifest…And this force of forces - that now goes to waste or assumes perverted forms - we may use for the strengthening, and building up, and ennobling of society, if we but will…”(P&P, 463)
Consider the negative impact on humanity of Smith’s selfishness assumption: Supporters of his doctrine argue that it is merely in harmony with the nature of humanity. But clearly, if Man is defined in such a base manner and systems of laws with their rewards and punishments are enforced along those lines, then over time, they will tend to create a form of humanity in “harmony” with their initial false conception of an economic mankind.
Finally, even Max Weber’s harsh judgment will apply:
“Specialists without spirit, sensualists without heart; this nullity imagines that it has attained a level of civilization never before attained.”
This de-evolutionary process, encouraging a lower form of humanity has been ongoing especially in the English speaking world for well over 2 centuries. The work of great English novelists such as Charles Dickens may have slowed it, but couldn’t stop it. Henry George saw exactly where it would lead:
“nor can we abstract from man all but selfish qualities in order to make as the object of our thought on economic matters what has been called ‘economic man’, without getting what is really a monster, not a man.” (SPE, 99) Ecco Homo - circa 2000!
THE IDENTIFICATION OF EVIL
George takes the unusual step of identifying evil in his early work. First he identified the law of progress:
“Thus association in equality is the law of progress. Association frees mental power for expenditure in improvement, and equality, or justice or freedom - for the terms here signify the same thing, the recognition of the moral law” (P&P, 508)
And evil is that which acts to block such progress:
“…to trace the force which stops progress, would…go far to the solution of …the problem of the genesis of evil” (P&P, 515) Interfering with human progress is evil, because: “The law of human progress, what is it but the moral law?” (P&P, 526)
George addresses the question of evil again in his last work:
“Both good and evil pass on as waves pass on. Yet I cannot but think that in the long run, good outlives evil. For as to the normal constitution of the human mind, evil must bring the wider and more permanent pain, the impulse to its perpetuation must meet the greater friction.” (SPE, 510)
THE CORRUPTION OF ECONOMICS
An important recurring theme in George is the purposeful corruption of the science of economics in order to serve and apologize for wealthy special interests. As a self trained economist, the academics preferred to ignore the uncomfortable realities George’s work exposed. But he did not ignore them. One of the enjoyments of reading George is his use of plain, powerful language. He didn’t allow the several forms of economic oppression to hide behind obtuse theories and never hesitated to openly identify them as slavery. He regularly stripped away the veneer of academic respectability from those serving injustice:
“Even the intellectually courageous have shrunk from laying stress upon principles which might threaten great vested interests; while others, less scrupulous, have exercised their ingenuity in eliminating from the science everything which could offend those interests. …a science which…seems but to justify injustice, to canonize selfishness by throwing around it the halo of utility…” “…colleges and universities and similar institutions …are especially precluded under present conditions from faithful and adequate treatment of (political economy)…
…whoever accepts from them a chair of political economy must do so under the implied stipulation that he shall not really find what it is his professional business to look for.” (SPE, xl, xli)
“It is evident that…a powerful class whose incomes could not fail to be endangered by a recognition…that what makes them…wealthy is not any part of the wealth of society, but only robbery, must from the beginning …have beset (political Economy’s) primary step, the determination of what the wealth of society consists of…especially after it had been taken charge of by the colleges and universities, which…must be peculiarly susceptible to the influence of the wealthy classes.” (SPE, 140; also see SPE: xxxviii; xxxix; 134, and 138)
In the four major themes above, George was able to bring a substantial degree of observation and factual back-up to his conceptualizations. His three important themes described below were more theoretically based.
LABOR CREATES ITS OWN VALUE
One of the most remarkable concepts pioneered in Progress and Poverty is that labor always pays its own way, creating its own value.
“That wages, instead of being drawn from Capital, are in reality drawn from the product of the labor for which they are paid.” (P&P, 23)
“…in every case in which labor is exchanged for commodities, production really preceded enjoyment; that wages are the earnings - that is to say, the makings of labor - not the advances of capital, and that the laborer who receives his wages in money (coined or printed, it may be, before his labor commenced) really receives in return for the addition his labor has made to the general stock of wealth, a draft upon that general stock, which he may utilize in any particular form of wealth what will best satisfy his desires; and that neither the money, which is but the draft, nor the particular form of wealth which he uses it to call for, represents advances of capital for his maintenance, but on the contrary represents the wealth, or a portion of the wealth, his labor has already added to the general stock.” (P&P, 28-29)
This theme holds great unrecognized latent power, should it ever be wisely combined with the realization of money’s nature as an abstract legal institution of society.
THE INTEREST THEME
For George, interest is the share of production that goes to the owner of capital. George thought the “reason and justification of Interest” arose from “the active power of nature; the principle of growth, of reproduction, which everywhere characterizes (life)…is the cause of interest…” (P&P, 181)
Thus a loan would help employ nature to gain a surplus yield to the farmer and interest was the lenders share. Then George used this natural growth phenomena to justify interest in non productive lending:
“Now the interchangeability of wealth necessarily involves an average between all the species of wealth…And so in any circle of exchange, the power of increase which the productive or vital force of nature gives to some species of capital must average with all….” (P&P, 182)
“It is this general averaging, or as we may say, ‘pooling’ of advantages, which necessarily takes place…which gives to the possession of wealth incapable in itself of increase an advantage similar to that which attaches to wealth used in such a way as to gain from the element of time.” (P&P,185)
But it can be questioned whether George was too easy in extending this “justification” to all forms of taking interest. Rather than his usual approach of carefully discerning between economic activities, in this case he lumped them together. For example the Scholastics carefully distinguished between different forms of earning interest, which were always permissible, and usury, which was not. In effect properly charging interest on some loans becomes a cover for improper loan sharking, for example as practiced today by credit card companies, or the IMF, to take an extreme case.
In all George’s works read for this study, the word usury came up only once . George’s avoiding the usury issue, in a morally based work, may have stemmed from his faith in freedom of trade; in this case emphasizing the freedom portion of his two part formula; and de-emphasizing the responsibility portion of it as regards the kind of lending activities that are permissible within a framework of justice. It seems the moral work of the Scholastics had been as much censored from George’s view, as his ideas have now been kept from present day students of economics.
THE FREE TRADE THEME
Unfortunately following this theme nearly destroyed Georgism, and that is the main reason it is discussed here. This time the pendulum swung far over to the freedom portion of the formula in George’s most theoretical work, Protection Or Free Trade, published in 1886. The stated purpose of the book on page xiii, is to demonstrate that “free trade better accords with the interests of labor.” But it turned out just as futile to make that case for implementing free trade in 1886, as it would be today. The problems stem primarily from methodological and judgment factors; determining how and when logic may validly be applied to particular circumstances; working with weak analogies, and not fully appreciating there can be a difference between what happens between the axioms and propositions of a theory, and what happens in the reality that those propositions are only imperfectly describing.
For example on page 30:
“I began to realize that these propositions, if true, must be universally true, and that not only should every nation shut itself out from every other nation; not only should the various sections of every large country institute tariffs of their own to shelter their industries…(but that it) must apply as well to the family.”
The ideological side of George’s personality, (not the same thing as his high ideals) got the best of him here, and he makes the political economist’s error of equating nation, with business interests, with family. Another example is on page 44 where he accords to sociology the exactness, one could say perfection, then thought to exist in the physical sciences: “Social laws, like physical laws, must apply to the molecule as well as to the aggregate.”
Today its easy to realize that even the physical sciences as presently developed, don’t offer such universality. Perhaps just a tiny bit of modesty regarding the effective power of his thought processes and methods, would have served George well in this book. His old habit of bringing it to a test of the facts, might also have been helpful, had he done more of that in this largely theoretical work.
The free trade theme is a potential danger for Georgists; in my view continuing to test whether their concern will be more with ideologically advancing a lifeless theory, or with heeding the glaring need for economic justice for a financially besieged people. For the concern for “free trade” comes from a different part of the person or soul, than the concern for justice in land (and monetary) reform.
THE IRISH FAMINE
Much of George’s American support arose out of the problem of Irish - English relations; especially the famine which was mercilessly inflicted on Ireland. A part of the early support which launched George at his triumphal “Return from Ireland Dinner” in New York resulted from his having been arrested in England, and the mistaken perception that he was Irish.
The horrific 1845 famine where out of an 8 million population, 1,029,000 children, women and men starved to death, would forever define English/Irish relations. George showed that the starvation was unnecessary and a direct result of the land question: “Even during the famine, grain and meat and butter and cheese were carted for exportation along roads lined with the starving and past trenches into which the dead were piled.” (P&P, 125)
George responded to the smear that the Irish starved because they were stupid:
“For it was not the imprudence ‘of Irish peasants’ as English economists coldly say, which induced them to make the potato the staple of their food…They lived on the potato because rackrents stripped everything else from them.” (P&P, 125)
There was also an underlying monetary system cause of the famine, traceable to the way the Bank of England, rather than the English nation, had created money of thin air for warfare, since the Bank’s founding in 1694. George may not have been fully aware of this but it is of interest to this study. As described by Christopher Hollis in his book The Two Nations:
“These exports of food (enough to feed for a year four times the number who starved)…went out to some extent, to pay the rents to absentee landlords, but, mainly, to pay the interest on the mortgages in English bank-manufactured money, which the Irish landlords, like the English landlords, had raised in order to pay the taxation required to meet the interest on the Napoleonic War Debt.”
“…(In Ireland) the capital wealth was in the hands of people, whose cultural and political sympathies were with their creditors rather than with the country in which they lived.”
Had the English Government created its own money, or had the Bank of England been government owned, the money that was created for a century of warfare would not have been a government debt, and there would have been no interest payments for it.
(This historic example points out a conflict between the money power, which has generally benefited from warfare finance; and the landlords, who were easier to tax to pay the interest on it.)
Next week: Henry George's Activities as a Public Figure
Stephen Zarlenga has published 20 books on banking, politics and philosophy. In 1996 he helped to found the American Monetary Institute dedicated to the independent study of monetary history, theory and reform. His newest book is The Lost Science Of Money.
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