Responses to Michael Hudson
on Money Issues

Edward J. Dodson

[19 May 2015]

What follows are observations made by Michael Hudson in response to a posting by Robert Keall (New Zealand). As the full list of people copied were not likely to be very interested in my responses I provided them directly to Michael, copying in several other people I thought would have an interest.

The issues you raised are more appropriate the subject for a roundtable exchange than an email in which many people are copied without any expression of interest. Bob Keall in New Zealand is obviously quite frustrated because the world system is coming unglued and no one is listening to his calls for activism. Clearly, he fully embraces Henry George's analysis and sees no reason for continuous debate or pragmatic compromises.

What is unfair of you, I submit, is your tendency to lump everyone who has been in some way involved with the Georgist community (whatever "movement" there was did not survive very long after the First World War) as of one mind. You state: "From the outset, George's followers have been bedeviled by bad theorizing about money and credit." As you know, Henry George argued (Social Problems, 1883): "it is the business of government to issue money." (p.178) He explains his reasoning:

"To leave it to every one who chose to do so to issue money would be to entail general inconvenience and loss, to offer many temptations to roguery, and to put the poorer classes of society at a great disadvantage."

He observed first-hand the problems of bank-issued currencies. Yet, in none of his writings can I find that he read and absorbed Adam Smith's description of the operation of the Bank of Amsterdam during that period when it functioned as a deposit bank issuing receipt money. Henry George's basic position on the money questions is revealed in an 1894 article he wrote in response to the call for the coinage of silver by Westerners:

"The Greenbackers of the West (or, to call them by a name that they would now more generally recognize, the "money reformers") overestimate the importance of the money question, as indeed do the orthodox writers. Money has served, and does yet serve, most important functions in exchange. But there were men before money, and the further progress of our civilization is steadily to lessen the use and minimize the importance of money. Money is really a mere medium of exchange: a mere counter of value, and its kind or quality is as little essential as the kind or quality of a poker chip is to the game."

As you note: "For many decades, Oscar Johansson and Robert Andelson (supported by Lowell Harriss) imposed von-Misian "hard money" approaches on the American Georgist institutions. Today, there is still a dominant tendency of Georgism to follow "Austrian" theory." This brief quote from an article Johansson wrote I 1969 puts his views in their appropriate context:

"But governments will interfere. Even if they stopped inflating their currencies when the free market was established, such a halt would only be temporary, because any nation, particularly if it is a great power, will suffer economic and social disturbances sooner or later if it treats land as though it were private property. Poverty, unemployment and busts will be the order of the day. The one palliative which is invariably adopted to alleviate such conditions is inflation of the money supply, for it usually does work temporarily. But this causes the exchange rate of such a nation's currency to drop. Politics being what it is, those in control wish to disguise that fact and so intervene in one way or another; ergo, the free market disappears. Therefore until the day arrives when men see the obvious - that they are living on and from the land, and that access to the land must always be freely available - monetary crisis will follow monetary crisis no matter what are created to prevent them."

The lesson of history seems to be that without solving the land question, the money question will continue to plague societies regardless of whether the currency is issued by government directly, by the bank-controlled central bank, or by each bank individually. When one compares how global commerce operated under different monetary structures, the deposit bank seems to have far more virtues than vices. This conclusion is supported by Quinn and Roberds (2005):

"Our argument is that the Bank of Amsterdam, called the Wisselbank in Dutch, was ultimately successful in its goal [to prevent debasement of coinage]. As a consequence, the Dutch Republic was able to maintain a stable system of coinage for roughly 150 years, and Wisselbank money became the foundation of European commerce and finance. As late as 1776, Adam Smith in The Wealth of Nations praised the money of the Wisselbank for its intrinsic superiority to currency."

Tighter regulation and independent auditing might have prevented the Bank from departing from its charter and acting as a lending institution. It was a simple step from there to the chartering of the Bank of England under conditions that guaranteed monetary expansion and inflation. The global monetary system went from receipt money to ostensibly redeemable bank notes to today's promises to pay nothing in particular.

It is the case that many in the Georgist community find reason to embrace local currency systems, although I am not sure this comes out a libertarian ideology. The reason is pragmatic, for much the same reason as community land trusts are promoted. Both initiatives are pragmatic ways to mitigate the economic hardships experienced by those left behind by corporate and financial capitalism. If anything, these strategies are best described as "counterculture." There is a fundamental element of democratic socialism ingrained in these strategies. But this is a socialism that is decentralized and apart from the top-down dictates of the State, which is the socialism Henry George found disagreeable to individual initiative.

You write: "This led George not to criticize the charging of interest - because, as he explained in a letter to Michael Flurscheim, he couldn't figure out how to tax interest in the same way he taxed land." The issue we struggle with today is the use of the term "interest" to describe both earned wealth and fees paid and receipt for the temporary use of another party's purchasing power. Is it your position that if I transfer my purchasing power to someone else that I should do so without expectation of receiving a fee that reflects (i.e., prices for) the risks and compensates me for the time during which I am not able to use these funds for consumption or investment?

You write: "The solution, of course, would have been public banking. But this ran against George's individualistic, increasingly anti-socialist politics." Given the events that occurred after his death, I suspect that Henry George would have come to embrace the concept of public banking. His major issue seems to have been the power to issue currency as the responsibility of the national government.

You write: "Georgism has blocked itself from the mainstream by taking a land-tax out of the political context, and from the context of how the overall economy works as a system." Henry George and his key supporters made many strategic mistakes as they worked for change in law. Their crusade should have been carried out as a moral crusade against privilege in all its forms. When the front door would not open, they tried the side doors (a progressive income tax), then the back doors (local property taxes). What they ran into in the United States and other countries where land markets thrived was the entrenched instinct of people to speculate in land as the path to personal wealth. As Jackson Turner Main wrote back in the 1960s, by the time of the mid-1700s most of the wealth held by leading colonials was inherited. How to overcome such a deeply-entrenched system of privilege that people accepted as a birthright? Not even Thomas Paine could stir them from their eagerness to play the game.

I believe you overstate the case when you say: "The key perception should be that land rent has been turned into a flow of interest paid to banks and bondholders. The same has occurred with natural resource rent and monopoly rent." Banks both benefit by and are exposed to risk by the distribution of wealth flowing to rentiers. Rentiers take in far more income than they spend on consumption; so, they "invest" this surplus income to build portfolios that yield some interest and dividend income, but also yield unrealized gains in resale value. Far more banks end up closing their doors when their lending and investment portfolios under-perform than members of the rentier elite ever file for bankruptcy.

You write: "The public at large recognizes that today's crisis is largely financial, and has become a debt crisis. This debt crisis centers on the real estate bubble, because 80% of bank loans are mortgage loans. This bank credit has determined what real estate prices are (namely, whatever a bank will lend), and hence land prices." I certainly concur. As I have written elsewhere, the decision by Fannie and Freddie annually to increase maximum loan limits fueled the upward spiral of land prices. This was done to maintain market share, but the side-effect was bank retaliation against the incursion into what had been the "jumbo" mortgage market. And this, sparked the banks to greatly increase their role in securitizing sub-prime mortgage loans, which turned out to be the straw that broke the camel's back.

You write: "Without framing the land-tax issue in this financial setting, Georgists will not get a hearing, because they miss the context and the system-wide approach." I concur here as well. What Henry George provided was the basis for accurate forecasting of the boom-to-bust cycle. The real shame is that none of the professors of economics who grasped the significance of land markets in this equation made an effort to build a think-tank devoted to this task.

You write: "But they oppose such an approach because of the political antagonism toward government, and especially to taxes. This leads them (in the United States) to a kinship to the Tea Party. There simply is no way that Tea Partiers ever will agree to higher land taxation, so it is a blind alley. This is what has made Georgism so sectarian, seeking to appeal only to the right, not to the left, including the Marxists (who also have not spoken much about finance, as socialist and labor parties throughout the world have applauded austerity and balanced budgets)." More of the "Georgists" I know personally have a kinship to the Greens than to the Tea Party people. Yes, there are some very rigid libertarians within the Georgist community, but there presence is hardly dominating (even if they once were predominant among the New York contingent). I have been arguing the case for a truly progressive individual income tax to capture rents at the high end of incomes. So far, no one has suggested I am a closet socialist or am betraying Henry George's legacy.

You write: "So to succeed in promoting land taxation, it IS necessary to talk about banking, finance and money. But neither from the Austrian/Misian OR the local-currency "interest-free" approach. The problem is not interest as such, but bad debts that need to be annulled if property is not to become highly concentrated in financial hands." Which raises the questions of which "bad debts." Certainly, contracts for debt incurred that involved coercion and/or fraud should be declared void. However, as you know with real estate speculation, there have been many willing parties to the fraud, buyers who fully expected to flip the property at a huge gain and satisfy any mortgage debt within a short period of time. The real crime is that our government has failed to aggressively pursue, indict and prosecute those who perpetrated the financial crimes.