Renegade Economists Show 587

As broadcast on the 3CR airwaves 6 – 6.30pm on the fourth Wednesday of the month.

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Show Notes
With the corona crash only just beginning economically speaking, we need the best tools available. So we delve back into the archives to this 2012 interview with the late, great Dr Adrian Wrigley. Dr Wrigley looks at how the link between currency creation and land rents is key to a stable economy where reward is based on effort, not privilege. There are important learnings here as more jurisdictions look at local currencies as a recovery tool.

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Deirdre Kent on the Rentenmark
Deirdre on Land-backed domestic currency as a dual currency for New Zealand

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KF: And welcome to the Renegade Economists with your host, Karl Fitzgerald. A huge weekend at the SLF had by us sharing fantastic support from the public, and why not when you hear interviews like this one. Jump in and put your listening ears on. Some interesting revelations about the motivations behind good old World War I.

KF: This week we’re luck to speak to Dr Adrian Wrigley. He’s based in Brittany, France, and he’s involved in a group called the Systemic Fiscal Reform group. They have some innovative angles on how to get the whole land and banking system in order. And as was seen overnight with the latest Greek bailout fiasco, how long will it be, Adrian, do you feel until the Greek debt situation raises its ugly head?

AW: I think it will raise its head pretty much every few weeks until there’s some major event. I think the situation will develop with Portugal and Italy and, I don’t know, further afield as well. That’s an ongoing situation I watch very closely.

KF: Interesting that they actually got the bondholders to write down beyond 50% of the debt, some 53½ percent there, but it’s really only a short-term measure, isn’t it, and there’s the finance minister saying, “Look, the Greek people, all we have to do is work work work,” but yet thousands are booking plane tickets now to leave the country, no doubt, as this onerous debt burden stretches everyone’s pockets, and as we’ve seen, so many public sector worker jobs and wage levels have been cut. What could they be doing to bring about a more realistic sense of change there?
AW: Well that’s a very good question. And it depends on what constraints, what limits they place on it. Because the problems are not very difficult to solve. You just have to accept that debts that can’t be repaid won’t be repaid.

So I think that that default should actually be part of the solution. But the system is wired to blow, Karl, unfortunately, because the debts have been guaranteed through credit default swaps, CDS instruments that have been issued by the top U.S. banks. So if there is a default event, then those come into play, and that will render the U.S. banks insolvent. So I think what’s needed actually is a comprehensive bank holiday, in other words, shutting the banks down not only in Greece but the banks in America and the U.K., and really reestablishing them after netting out the liabilities and obligations. But that’s—I think we’re a long way from that. It really takes it to the complete collapse that’s perhaps on its way.

KF: And one of the big issues is that those CDS swaps are around 30 trillion dollars and the three American banks, the big ones, Citibank, JP Morgan and Bank of America, have 19% each of the total worldwide derivatives market, and it seems like there’s behind the scenes games going on with insuring against these credit default swaps. These guys have backup plans on backup plans. So do you know much about this level of insurance taken out against the Greek debt and whether they’ll default or not and how that relates to the CDS market?

AW: Well, I’m not sure about backup plans on backup plans, that’s news to me, but it’s clear that the major focus in the negotiations is how to arrange for the bondholders to voluntarily agree to not get their money back. And it seems quite perverse that bondholders would voluntarily agree, but the alternative, as I say, is the triggering of these CDSs, and so there’s plenty of motivation on the part of the troika, the powers that be, the banking system, to give the bondholders nothing but not default, which is really a derangement of the words themselves.

KF: Mmm! I know. Isn’t it? And it seems like so much of this battle going on, you know, the International Swaps and Derivatives Association, they’re the ones who actually determine what a default is, and even though they’re writing off more than half the debt owned, that’s not deemed an official default. But some of the reading online we’re seeing is that, you know, there could well be a legal case announced against the ISDA, which of course happens to be owned by and controlled by many of these big U.S. banks, whether some of these private bondholders will take the ISDA to court, because if they could prove that it was in effect a default, they would get their insurance payout on this default.

AW: And it’s been very cleverly constructed, and I think JP Morgan was involved in the design of these systems, having had similar involvement with Argentina. I think JP Morgan was on both sides of the table at various points in time and designed the contract so that they never have to pay, which to my mind is nothing less than fraud. So I think if the association is taken to court, they would lose. It’s a tough one because if the swaps are triggered, then that will trigger more defaults and a cascade. So we live in difficult times, Karl.

KF: Really in mainstream analysis you’re not getting any sense of hope that there’s a way forward through this. It’s just more and more rioting pictures and, you know, more and more stories on the size of police riots both here and Melbourne doubling in size over the last couple of weeks, so, you know, where is the preventative economics, you know? Well, where’s the thinking that this can never happen again? But yet all we’re seeing is that the world of derivatives and sovereign debt, private debt, that is the way forward.

And we’ve got you on the show today because you’ve got some innovative takes on a country that, you know, not so many people know about, but in terms of economics, especially down here in Australia I’m talking, you know, the German way of thinking and Bismarck was such an influential force in the development of economics. Can you perhaps take us back in time back to Bismarck, the founder of the German empire, and run through some of the innovative policies he had in place to keep in check the privileged echelons of society?

AW: Well there is a very interesting topic, Karl. I’ve been researching this trying to understand how economic systems have developed, how it is we got to where we are today, and if you go through history you see step by step it seems very reasonable each step which is taken but that the direction overall has been problematic. But I think the occurrence of the world wars was a major change in the system, because before World War I, for example, the world economy was changing quite rapidly. Bismarck, as you say, was a founder of the German empire in 1871, and one of the things he did was create a strong banking system, a central banking system focused on the Reichsbank, which became a note-issuing bank. It could issue bank notes. And private banks associated with that which were only able to issue money backed by gold. There’s a requirement for one-third of the money supply to be backed by gold, and that model held right up until the start of World War I.

But a second thread of what was happening in Germany, in the German Empire, prior to World War I, was the development of property taxes, and in particular land tax and land value tax, really inspired by the writings of Henry George and Sylvio Gessell and so on. They were pioneers in the theory of the field, but Germany was actually implementing it in the municipalities across Germany. The New York Times was writing in 1910 that this is really the secret of a German economic miracle as the towns started implementing what they called “suvachstoya??”” property tax. They were becoming more and more commercially vibrant. And in fact the theory that the land should be owned publicly and not privately was being tested to its fullest in the German colonial concession? of “GowChow,” which people may know now as the ”Singtao.” They have a well-known brand of beer from “Singtao” from the German influence. And the basis of “Singtao” was a trading colony in China which was obtained as a 99-year lease on the Chinese land, though they were prohibited from selling the land in perpetuity, they could only lease the land or rent out the land, and as the colony developed it was obtaining revenue for government services through the ownership of land while allowing free movement of goods and free labor. People could work without paying income tax or anything. So that was a demonstration of the German system in microcosm.

KF: Why I love 3CR. Subscriber drive is on this week, so please support 3CR, support the Renegade Economists, and give us a call here at the station now, 9-419-8377, that’s 9-419-8377. We do need your precious cash to keep the station kicking over. Just a handful of volunteers keeping the front desk running and answering all those e-mails, all that sort of jazz. How many live broadcasts have we done here at 3CR this week? Had a great time at SLF broadcasting there. So thanks to all the team. So, yeah, hopefully you can dig deep into those pockets and support this show, support the station, and yeah we’re going to head back now with the interview with Dr. Adrian Wrigley from the Systemic Fiscal Reform Group, that’s (now defunct).

KF: What were the employment and inflationary aspects when they had some system of rent recycling, that, you know, where the value of the earth is going to go up naturally and that’s what these property taxes do, they capture a share of the land component, which of course is our most prominent natural resource.

AW: Well, the key thing to understand here is that the monetary system for government is backed by the taxation. So taxation gives the root demand for the money, and if the taxation is based on land it effectively means you have a land-based money system, and in Singtao it means that the money supply was growing as the colony grew while avoiding inflation. It gives an ample supply of money for the government.

KF: Germany under Bismarck had these strong banking laws and it developed a property tax. We’re always talking about, you know, having some sort of land tax in place, but the strong banking angle is what I’m interested in. You know, it seems that there was a lot of movement prior to World War I towards this, a more equitable system in Germany where, you know, the banking was encouraged to focus on industrial lending rather than the speculative sort of mindset.
AW: The problem in the modern system is that the money is being issued against land and inflating it, and when you have a gold-backed system that limits the amount of money available for land speculation and without the burden of taxation on transactions or taxation on labor, you can get greater returns from investment in industry versus speculation in land. So it’s really a system which directs the economy to the industry, and of course Germany was very, very strong in developing education at a university level and that powered economic growth up until the start of the war.

KF: And so how strong were they on fractional reserve banking? Was that encouraged?

AW: Well, it was permitted. I wouldn’t say it was encouraged. The requirement is to have one-third of outstanding debt backed by gold. So that places a limit, provided the bankers are genuinely honest to apply that.

KF: Can you compare that to the modern-day situation?

AW: Modern banking has either very low reserves or in fact just no reserves at all. But behind that there’s a question of what are bank balance sheets in reality? Are they telling us the truth? Are they putting the assets they hold at the true market value or are they using mark-to-model accounting where they have a financial model of what the assets ought to be worth, or even what people call mark-to-fantasy model.

KF: Let’s break that down a little bit. So we’re saying that in the modern era we have this speculative mentality that booms the price of land and then banks set their balance sheets and their fractional reserve lending against this hyperinflated price of land?

AW: That’s right. The bank balance sheet has debts on one side and assets on the other. The assets would represent the mortgages, fixed assets and so on. But the debts of the bank are the private depositors’ money. So if they can falsify the assets, if they can inflate the value of the assets, they can also inflate the value of their deposits.
KF: We’ve seen, you know, much of the mainstream analysis blaming this global credit crunch on the derivatives market and sort of what we’ve played through here is the fact that derivatives are an insurance policy against this speculative heat in the market. Are the derivatives a cause or are they sort of second or third down the chain?
AW: Well I would say they’re second or third down the chain, that the original problem was with mortgages that—of course, we saw the mortgage crisis in the 1980s with the U.S. savings and loans crisis, and that wasn’t heavily derivatives based, as I’m aware, but the banks like to issue new money against land assets or housing assets because they can be so easily repossessed if necessary and the owner has an income stream generally to pay for them. So the innovation was with the mortgage-backed securities, that the first level of derivatives that really allowed the risks to be passed on from the banks onto third parties, and that really is a very hazardous, it’s full of moral hazard, allowing the people responsible for generating the loans not to be responsible if they go wrong. And I think the high-level derivatives of CDSs come on top of that, and of course there’s the general futures market, futures markets in precious metals and so on which are another layer of central instability.

KF: We had Sun Yat Sen trying to build the new geo-capitalist Republic of China around 1911, Canada, Australia and New Zealand all had land tax programs at various levels of government back in that sort of era, Germany taking land tax nationwide, the People’s Budget of 1909 in Great Britain leading to the House of Commons passing it very quickly and the House of Landlords, the upper house in the Westminster system in that period of time, locking down that debate and forestalling it for 18-odd months in the longest debate ever in the House of Lords, and one of your articles here you write that Mexican land reform was taking place around that time too, so what on earth went wrong? How have we gone from that sort of phenomenon to, you know, this situation today where it’s property speculators who are the ones who are getting all the subsidies and all the bailout?

AW: Yes, you raise a catalog of issues before the First World War relating to the introduction of land taxation, and it really does fit a very wide pattern. You mentioned Australia, of course, but even China moving from the imperial system to a capitalist republic, which of course was failed with the Communist revolution, but that would open a huge land mass to a capitalist system, and in the end the Republic of China became just Taiwan as the government fled the mainland. So the picture here is that land taxation was taking off everywhere right across the world and that was posing a grave threat to the powers that be, what the Occupiers would call the 1%—in fact it’s probably more like the 0.1%—because their landed income was being threatened by democratic government, and the solution was the Federal Reserve system and World War I. World War I, of course, created a massive amount of debt, and that debt had to be paid back somehow. We had the reparations against Germany from the Treaty of Versailles. Those were to be paid in gold, 1½ billion ounces of gold if I calculate it right. But these gold reparations were really to bail out England and France, who had gone into debt with the United States government and with the Federal Reserve bank system. So the money was going around in a loop or a chain from Germany through England and France to America.

KF: And these were extortionate debts, weren’t they, that the American banks were asking. You know, the history of the French-American rupture really came through in this era because of course the French had lent the Americans a lot of money in their war of independence against the UK and dropped a lot of those debts in that time, but of course when it came to World War I America didn’t, you know, had selective memory and didn’t do the sort of reciprocal rights that the French were expecting.

AW: Yes, and of course it was France that was instrumental in the final collapse of the gold standard under Nixon, because the French central bank was demanding the gold back which was stored, I believe it was stored in, supposed to be stored in Fort Knox, and under the gold exchange standard France had a right to get the gold. But it became obvious that the U.S. couldn’t supply gold for all the dollars that it had created, and so effectively the U.S. defaulted and dropped us out of the gold standard entirely. But going back to the time following the First World War, France was trying to pay its debts to the U.S. banking system then and it was the reparations of gold under the Treaty of Versailles which was the only means that it had to repay those effectively, so what it did was it left the German economy in tatters. Having had the war, having had the loss of human capital and the loss of financial capital, Germany was unable to pay the debts, and this of course was well understood by John Maynard Keynes, who wrote about it in his book that Germany would be unable to repay the debts under the Treaty of Versailles. And of course the consequence of unrepayable debt is a currency collapse.

KF: We’re listening to Dr. Adrian Wrigley from Systemic Fiscal Reform Group. Remember why I love 3CR, all you podcasters out there, please, tune into the website, website, and flick us some coin. Come on, support the Renegade Economists! Love to hear from all you podcasters, as always.

So we’re hearing about the weight of debt following World War I, and yes of course that led to a radical nature with Hitler coming through. But before that there were some very interesting banking innovations in the 1920s. Have a listen to this.

AW: We talked about the Bismarck banking system based on the gold standard and based on a government-owned central bank, the Reichsbank. The gold standard was dropped, of course, during the First World War as they effectively switched to a paper standard, but after the Treaty of Versailles, the money system really no longer had its backing. It didn’t have sufficient taxation to support the values at the old gold standard level, so this exposed the German currency to a speculative attack. In fact it was, I think it was in 1922 that Germany was forced to privatize the central bank, and that really triggered an escalation of the inflation, because the Reichsbank could now print money for profit based on private debts that were taken out. So the Reichsbank was printing money heavily. But also there were emergency issues of money called the “notgelt” by the municipalities, because they would be running out of money as the inflation took hold. They’d print their own notes and then exchange them for money later. And even the railway company, the nationalized railway company, was issuing its own money system. So we have a situation where you’ve got several different money issuers competing to print as much as they could, and by the summer of 1923 it was taking, you know, the proverbial wheelbarrows of money to buy the loaf of bread. But still the government wasn’t acting to influence a solution. And the solution really only came about when the economy was in complete collapse, and the solution was to ban the Reichsbank from involvement in currency issue completely.

The government created a new central bank called the Rentenbank, and the new central bank was to issue its own new currency, the Rentenmark, and that was issued on the 15th of November, 1923, as a paper-backed currency or a paper-based currency that was backed by mortgages on the entirety of the property of Germany including industrial property and farmland and so on. The mortgages gave a root demand for the money, which was to be paid in twice annually, I think in April and October, and that really stopped the hyperinflation completely. It took a matter of weeks for the financial problems to, I wouldn’t say be cured, but the inflation stopped and people began getting back to work under the Rentenmark.

In fact the Rentenmark was so successful, it was called The Miracle of the Rentenmark, and that survived until 1924, the following year, when an American banker, Charles Dawes, brought in the Dawes Plan as a plan to bail out the financial system to switch out of the Rentenmark. The Rentenmark was a danger, or a danger to the status quo, because the system was backed by mortgages and not backed by income tax or customs or excise taxes, and so it had the effect of being a land-backed currency, and that’s what the ruling classes want to avoid. It was interesting because it was just so rapidly successful. People talk about the current situation and say it will take 10 years for the Greek problem to be solved. It’s taken more than 20 years for the Japanese problem to work through and it’s still not concluded. But the Rentenmark was an immediate success. And the reason the Rentenmark was an immediate success is that it was based on the sound principle of collecting the money through the land and issuing it from the government. It creates a flow through the economy which is stable and effective rather than having it issued privately and then collecting it through income tax, for example.

KF: And so there we have, that’s Dr. Adrian Wrigley. Going to have to cut that short. Podcasters you will get a special extended interview and, yes, regular listeners tune into the 3CR website to hear the last six minutes of this fascinating conversation with Dr. Adrian Wrigley as we delve through the history. You know, this is why economic history is being removed from the curriculum. We need to reinstate the classical economics. This is back when the people were aware of the power of monopoly, and that’s why we’re here each and every week on the Renegade Economists. My name’s Karl Fitzgerald. I’ll look forward to being with you next week. Check out, that’s…

KF: How on earth did Dawes manage to fly in and you know, this U.S. banker come in and axe this program and replace it with what, some sort of gold-backed system?

AW: Well, I think it was obvious to the U.S. bankers that Germany was again moving towards the land-backed system, and the Rentenmark wasn’t internationally tradable. It was effectively a local currency for the whole of Germany. So under the Dawes plan, which in Germany is known as the Dawes Loan, the U.S. came in with a very large sum of money to buy up German industry and to form cartels. The cartels in Germany were modelled on Standard Oil, the Rockefeller outfit, and also the J.P. Morgan cartels which had been so successful for the ruling classes in the U.S. So that created in Germany I believe it was three major cartels. They had an electrical cartel, which we know as AEG, there was an oil and steel cartel, and there was a chemicals cartel known as I.G. Farben. So these major cartels were established really with the backing of Wall Street with U.S. money in order to allow the German business to develop to collect economic rent from the German economy and to make payments of reparations and debt to the U.S.
KF: What can we take out of this for the Greek situation now?

AW: Well, what we see is that currencies have to be backed by taxation, at least government-issued currencies do, and the type of taxation you choose is critical to the operation of the system. The optimal form of taxation is through land values, and we’ve seen that in Germany through the Rentenmark. We’ve also seen it through Hong Kong, which is very successful because of its avoidance of the capitalist system. It uses what I like to call a geocapitalist system where the land is owned by the government or the land is taxed by the government, and so in Greece what we need to see is a currency which is land-backed. Now ideally that could perhaps be done across the entire European Union, but the difficulty with this is that it would require a fiscal policy to be set across the union, and it’s only the monetary policy which is set across the union and not the tax policy. So in November last year we saw a simulation by the Greek government of a, what is in fact a new currency. They call it a voucher; the Greek government would be issuing vouchers for 50% of pensions, 50% of wages, and so on. Well, this would allow it to halve its wages in Euros but prop it up with these vouchers. And the vouchers would be redeemable against tax. And in particular the vouchers could be redeemed against the new property tax that they developed. So will this be seen as a drastic emergency measure in Greece, it would be in fact quite closely modelled on the Rentenmark, which was very successful. So I think this is the way forward for Greece if they can persuade the people in charge to permit it, a system based on government issue of vouchers and then redemption against taxation.

KF: How then does that actually create an income flow, because wouldn’t one be canceling out the other?

AW: Well they wouldn’t be going into debt, deeper and deeper into debt, because of this, so you avoid the problem that the Greek government is running out of Euros. They can issue any quantity of vouchers, provided that they withdraw them at the same rate against the tax obligations and the property. And I think that’s sufficient to create a stable flow of currency in a system.

KF: Adrian, fantastic stuff. If there is anything you wanted to just add in closing?

AW: Well, we’ve been working on this in the Systemic Fiscal Reform Group for three or four years now, and we find that you need to look through history very carefully to see how things are structured, and why they succeeded or why they failed, but what we see at the moment is that all this expertise that can be drawn from history, all this understanding, is completely lost, and it’s what some people call the corruption of economics. Economics now seems to be more cheerleading for the status quo than a sound science based on the theory of flows of economic value. One of the things we have developed in the Systemic Fiscal Reform Group is a system of converting the current financial system into a land-backed system, which we call the Location Value Covenant, and we’ve got some information on our website, which is, which explains the Location Value Covenant as a voluntary tax reform similar to what perhaps your group is pushing in the land value tax but without the need for compulsion.
KF: Yes, we need a diversity of tactics, and Dr. Adrian Wrigley, it’s fantastic to have you on the show. I wish we had more time to really get stuck into this, but we will have to get you back in the coming months to discuss that in more detail.

AW: Thank you very much, Karl. It was a pleasure.