What LVT is and why it is such a good thing

LVT can get us past the current economic crisis. The full article about why other methods will not work is presented with the only method that will!

HOW THE ECONOMY RESPONDS TO GOVERNMENTAL ATTEMPTS TO OVERCOME SLUMPS

1. INTRODUCTION

National economies are continuously undergoing change and are never completely stable. A good indication of the degree of this activity is the paper-value of the total share-holdings that continuously expand or contract in size and is called a bulls or a bears market. But in certain circumstances this fluctuation does not remain small and one particular part of the macroeconomics system has prices that steadily increase. This unstable behaviour cannot last for ever and eventually these prices stop rising and then suddenly collapse. From this catastrophe the shock spreads across the whole system as a depression develops. At the stage being considered here, this failure has recently occurred and an economic slump is in progress. The total value of share-holdings has decreased dramatically and the stock-market trade has significantly shrunk. Reductions in the demand for produce have led to much unemployment and the increased withdrawals of savings have resulted in some bank failures.

In the great slump of 1929, it was first believed that the best governmental policy is to do nothing, because the robust nature of the market economy causes it to quickly right itself. But even after some changes were introduced this recovery took almost 10 years. Today most economists believe that the adverse effects of slumps should be eased by taking suitable measures. However, the choice of which changes to introduce, for creating a beneficial effect on the national economy as a whole, is not so obvious as when in 1936 John Maynard Keynes [1] first began to prescribe them. Experience and deeper analysis of these and other proposals has found that all but two are ineffective, and one of these at best, is remedial for a limited time. The situation is more complex and a change that favours a specific part of the social structure does not necessarily improve all of it. The following analysis shows why Keynes’s proposals are mostly unsatisfactory and determines which action produces better results.

2. DESCRIPTION OF THE SLUMP AND ITS INFLUENCE

The origin of these slumps is due to speculation within the building industry and the dynamics of the supply and prices of building-land. With every other kind of traded item, the ability to use similar but different products avoids the dictatorial influence of a perfect monopoly. (This freedom is expressed in the natural self-regulation of prices, by supply always equalling demand according to Say’s Law. Neither over-production nor under-production results; competition always ensures that the goods are traded close to their optimum price.) However, as Mark Twain proclaimed “Buy land, they’re not making it anymore”, and the number of building-sites is severely limited. Consequently the land-owning cartel is absolute—there is no alternate suitable path that demand for this resource can take.

The ensuing steady rise in the prices of housing reaches a level where the landlords, banks and builders decrease in their participation and eventually stop investing or speculating in land-values. Builders no longer manage to sell their houses before they are completed and the land prices in the real-estate business cease growing sufficiently fast as to attract the speculators seeking short-term gains. Few investors or banks are now funding house-building, although it is not the cost of their construction which has dramatically changed but that of the land. At this stage in the business-cycle the system is ready to collapse and it takes only a small external shock to cause this. It inevitably comes from a different economic source, which has an independent effect on the community.

Recently and as an example, a sharp rise in oil prices causes the speculative value of out-of-town housing to fall, due to the greater cost of motoring to the more densely-populated centres of industry, commerce, learning and recreation. No longer is it desirable to reside where the more expensive travelling adds to the house-keeping bills. The reduced demand for this kind of real-estate lowers its price (and its rent), but existing mortgage payments remain unchanged and cease to be compatible. With the awareness of the speculative loss, a significant number of foreclosures follow and bank insolvencies result. As credit becomes harder to obtain, the recession of the associated economic activity spreads outside of this sector of the community, unemployment grows and many more families are unable to pay their regular fees for the rental or mortgage of their more modest homes.

The news of bank loses from the foreclosures warns the savers, with the result that many of them decide to transfer their money into non-interest paying current accounts or to withdraw it. The use of these sums by the banks is now inhibited, causing a “credit-squeeze” having high interest rates.

With less money being spent, the productive sectors of the macro-economy reduce their prices so as to encourage the purchase of more consumer goods. But this does not overcome the problems of high interest rates on loans nor return the monetary commerce to its former level. Consequently the system enters into a depressed state, with progressively lower degrees of macro-economic activity.

These experiences and the places or kinds of individuals that feel them are described below. The logical arrangement of this dissertation is complicated by the combinations of the various parties involved, together with the different ways that they are affected. The hardships caused by the slump simultaneously influence the macro-economy in four basically different ways.

2.1 Decreased Demand for Goods and Less Employment in Industry
The curtailed programme of house-building, the diminished credit and the reduced purchasing by would-be householders and other consumers, result in less economic activity and smaller demands for many kinds of goods items. The unit cost of their manufacture rises, whilst the available sums for their acquisition shrink and lower outputs are the result. After trying to stimulate the demand by reducing prices, the managers in industry and commerce are reluctant to retain labour with little or nothing to do. So they shorten the length of the working-day, temporally lay-off some of their workers and eventually have to dismiss them. Many manufacturing concerns fail to provide dividends on their shares which fall in value, whilst some companies cannot even manage to stay in business. The level of unemployment grows. Petty crime increases, due to the rising levels of poverty and boredom.

2.2 Smaller Pensions
With pension funds, the process of saving and withdrawing is a continuous one. Some of the out-flowing money comes from contributions by younger subscribers, but much of the funding is taken from the dividends on prior investments made at the stock-exchange. After these have slumped there is less money available for paying regular pensions, even though some of the losses are spread by insurance. The managers of the funds want to avoid disproportionately high withdrawals and the result is that smaller sums are paid out. Consequently the pensioners have less income to meet their needs and they buy smaller quantities of consumer goods and services.

2.3 Bank Insolvency
The multiple-credit structure of the finance-system is now under heavy stress. With slump conditions prevailing, some of the investors and speculators are defaulting in the return of their credit, due to their inability to sell the land and buildings even for the sums at which they were purchased many years before. In parallel with this, due to the reduced level of production and wages, savings are being withdrawn at greater rates, because the reduced average rate of consumption is still more than the reduced average rate of earnings. These effects add to the credit squeeze.

The use of fixed-term savings accounts, where the money is placed in fractional-reserve bank-deposits, provides the banks with credit and it usually circulates at a good rate. Only a small proportion of the savings, from which the banks previously borrowed, are stored in their vaults. The rest is credited to the newer investors (at greater rates of interest than the savers can obtain, which normally enables the banks to become rich). But now the banks have difficulty in calling in sufficient credit for its return to the savers, some of whom have panicked and are pulling out their loans in the form of cash or placing it in current accounts having greater liquidity. These banks are forced to sell their long-term holdings at reduced prices, in order to balance their income with the greater outflow, since they have no-one else from whom to borrow. Money demand can no longer be easily met by its supply and the short-term rate of interest on credit rises. The money starvation at the banks causes some of them to declare insolvency and to become bankrupt, which results in the return of the credit being deferred, if in the closing-down process these savings have not been lost.

The irony is that later when the slump begins to ease, much of the money that is now in the hands of the nervous savers will again need to find investment opportunities and it will be returned to the banks deposit accounts. So the bank crisis is temporary and is partly due to the psychological state of these savers.

2.4 Reduced National Income
Much of the money that is collected for the public purse comes from taxation. However the slump has resulted in less macro-economic activity of the kind from which these taxes are usually raised. Consequently in matters of national finance there is also a shrinking of available funds. The Government badly needs to help itself as well as the whole social system, to escape from the effects of this national depression.

3. DISCUSSION – ATTEMPTS TO OVERCOME THESE FOUR MAJOR DIFFICULTIES

“Business cycles” of this kind are not new to our society. Various suggestions have previously been made about what a Government should do to reduce the adverse effects of slumps. The following proposals and discussions about them are presented from a holistic Finance-Ministry (or Treasury) viewpoint, where the complete system is considered taking into consideration all of the affected parts, as taught by Henry Hazlitt [2]. Various attempts to restore the macro-economy are examined below, passing from what appears to be the obvious remedy, up to some more-complicated solutions.

3.1 Call for Price Reductions and Price Controls
Usually there is a delay until the depression is recognized by the Government. The reasons for this are purely political, but as soon as it is official the first Government response is to call for a reduction in the prices of commodities. This is followed by the imposition of price controls to fix the amount charged for the more basic consumer goods, with some of them being subsidised. In fact, many of these prices have already been cut, due to the reduced demand and the need for the smaller businesses to compete and remain viable. Some of the monopolistic concerns, particularly those partly owned or controlled by the Government, need to receive formal notice before their bureaucratic systems of organization can make these changes. The effect of the lower prices is to increase the quantity of goods being consumed, which has a small positive effect on the employment figures. But for this type of commerce, the amount of money in circulation scarcely increases, so this change does not directly result in a significant improvement in the value of goods traded within the macro-economic system.

Lower prices do ease the pensioner’s problem to a degree, although nothing more is done for them and much harm may yet be caused to their savings.

3.2 Direct Attempts to Increase National Income or to Reduce the National Expenditure
The Government wants to enact new statutes to give direct benefit to the ailing parts of the system be they pensioners, industrial concerns, workers or banks. However, to achieve this aim the Government must first increase its own income (which has recently declined) and reduce its spending (which has recently increased, due to the greater numbers of unemployed workers being paid doles, or subsidies). The proposed ways for reaching this preliminary objective are to:

#1 borrow from the public and raise the National Deficit,
#2 change the amount of taxation,
#3 reduce the Governmental expenditure and
#4 deliberately inflate the currency, by printing more money.

With the exception of deliberate inflation, these changes are regarded as being temporary and their effects can be stopped or reversed after the slump has passed. These four methods of modifying the distribution of the national finances are described in more detail below.

3.2.1 To Borrow from the Public and Raise the National Deficit
The National Bank with the cooperation of the Treasury offer for sale some new national bonds, as well as the continuing re-issue of recently redeemed ones. These bonds, which are guaranteed Governmental loans, can be purchased like the preference shares of a new public company and they are traded similarly, until their duration has been reached and their face-value is redeemed. The new low-interest paying bonds are presently regarded as being safer than other kinds of share-investment and they attract clients who otherwise prefer to hold their savings in current “mattress” accounts. The psychological pressure from this offer assures and encourages these nervous savers to re-invest. The interest on this loan is borne by the Government and tax-payers.

The expanded National Deficit enables the Government to pay for the execution of additional public works, thereby providing the employment which the building trade can no longer sustain. This also has a significant indirect effect, to be described in a later part of this work.

Alternatively the Government can use these sums to relieve the banks from their risk of bankruptcy. It returns to them some liquidity and allows them to weather the storm of heavy cash withdrawal. The recipient banks pay a normal or sometimes a high rate of interest for this special loan, so the Government and tax-payers are not penalized by the interest on the credit from issuing the bonds, whilst the favoured banks are obliged to service their loans. This action avoids the personal losses suffered by its remaining clients, after the faltering bank otherwise would have to declare bankruptcy.

Providing that these loans are obtained neither by greater taxation nor by inflation, they do not seriously damage the macro-economy, although it does slow down until the debts are cleared. It allows the banks to get past the difficult period, but if they default on their interest or fail to return their loans as arranged, then the public purse is raided once again. When the slump is past its worst point, confidence returns and the savers re-invest in shares. Then the greater flow of money through the banks allows them to return what they borrowed from the Government, which subsequently reduces the magnitude of the National Debt.

In the situation where big industrial concerns receive similar help from the Government, these companies may be aiming only to continue their operations–to employ large numbers, whilst still remaining inefficient and ineffective in their production. This is unacceptable and before this bale-out is executed the industry must show that it is not taking the credit merely to postpone its financial failure. Also it must present realistic plans about how it aims to become a stable and viable concern. This loan delays the alternate beneficial effects that would occur elsewhere in the system, although the situation may not be so critical there as within the specific industry that is being helped. Consequently this action and its overall result is worthwhile to a limited degree.

These solutions ease the effects of the slump only amongst certain industrialist’s, worker’s, and banker’s critical states. The Government should balance the distribution of these relieving effects throughout all of the system, other parts of which also badly need its support.

3.2.2 To Change the Amount of Taxation
Often it is thought that a reduction in the amount of taxation on earnings and purchases can stimulate the demand for produce and its consumption, thereby encouraging more employment. However this view is only part of the whole picture, because it simultaneously reduces the Government income and decreases the public expenditure elsewhere. In a reciprocal manner, the effect of greater taxation on personal income and consumption is that the demand for these goods is reduced. But instead of the sales income mostly going to the production sector, more of it would pass through the Government to its various ministries and newly installed employment sources. Thus for either kind of change, the distribution of the work output is modified but the total sum used for payment of its wages has not. Comparing both of these opposing policies, the altered demand for goods must be balanced against the modified supply of social services and public utilities. Hence, neither policy can stimulate (nor retard) the current overall rate of macro-economic activity; all that it achieves is a re-distribution of what each participant does.

3.2.3 To Reduce the Governmental Expenditure
The outlay of public money to the Government ministries is not a waste. Apart from tax-collection, these departments and offices provide a variety of necessary services, such as those for education, public health and various emergencies, without which the average citizen would not manage properly. He/she would need to pay more for the service than what the national (social) insurance covers. As implied by the above description, a new frugal approach on the part of Government does not change the total amount of money flowing around the system. It has about the same overall effect as that obtained when reducing the taxes and the progress of the national economy as a whole is no different. It is only the distribution of activity within certain of its sectors, which is affected.

3.2.4 To Deliberately Inflate the Currency
The national economy may be regulated in more than one way by this action. During normal times when only small changes to the rate of progress of the system are required, they are obtained by adjusting the National Deficit. Then some money either is withdrawn or is made available, the choice normally following the degree to which the national budget has been met. In years of prosperity, larger amounts of taxes are collected and there is a budget-surplus. Then this extra money can be withdrawn from circulation, with the cooperation of the National Bank who store (or destroy) the bank-notes, having reduced the National Deficit by selling back to the Government some bonds or Treasury Bills. However when there is reduced economic activity and the lower amount of tax collected results in a failure to meet the budget, the deficit is made up by the issue of new bonds or Treasury Bills in exchange for the stored money (or by printing new bank-notes). Here its influence enables the banks to increase their amount of credit for investment, thereby encouraging industry to be more productive. Normally these budget surpluses and deficits are a relatively small proportion of the gross domestic product (under 5% of the total) and when taken over many years, the average of the various resulting inflating and deflating effects is small.

However, when a slump prevails, the printing and distribution of larger amounts of new money also can be used for the courser regulation of the macro-economy. Then the Government directly spends this money to stimulate the level of macro-economic activity, without intending to introduce any later deflation to counter the effects. (Even after conditions improve, this opposing action would be likely to cause another slump.) There is reluctance to use this kind of monetary instrument, due to the scale of the correction being much greater than when adjustments to the budget are being made, as described above. The effect of the inflation on the system no longer remains small and it is a dishonest way for the Government to temporally obtain greater spending-power and lower debt.

Inflation effectively taxes savers by reducing their long-term purchasing-power and spoils the amount of real interest that fixed-rate savings yield. It also cheapens money that is already owed, so the Government, mortgagees and other creditors benefit after the inflation has caused the prices and wages to rise. (This applies to most forms of credit, unless the loan was linked to the cost of living or to a more stable currency.) The inflated prices also reduce trade with foreign countries making it harder to sell goods abroad, whilst the cheaper local money makes it easier to import them. This effect on international trade worsens the production situation at home, until the exchange rate of the local currency is eventually devalued and the amount of trading returns to its previous level.

The Government can use this income in the four direct ways for relieving the effects of the slump. These are for subsidizing pensions and/or production and keeping low the price of certain basic goods, for national projects by hiring building-constructional and other unemployed workers (their incomes minus taxes to exceed their previous doles), for keeping its ministries at full strength or for lending to the banks. The new money is injected at a steady rate and on a scale where it regularly covers the losses from some or all of the hardships listed above. Unless the effects of all four of the problems are restored in a uniform manner to their former conditions, the slump will not be fully relieved. Even so, the adverse and unstable effects of the inflation itself remain to be tackled. After the inflation has ceased, the additional money in circulation eventually causes the prices and wages to catch up. Consequently, this form of slump relief will not endure without it creating further distress.

3.2.5 Comments and Summary of the Direct Methods
By using of any of these four straight-forward techniques, the Keynesian School of economics claims that the resulting initial increase in demand causes more macro-economic activity to follow. There is supposed to be a multiplier-effect on growth, so that in the case of reduced taxation and greater personal income, it is thought that the consumers have more money to spend or invest and that consequently the total demand grows. These claims do not consider the need to take money from one part of the system in order to supply it to another. The newly increased demand and its opportunities are balanced by the smaller number of jobs that the Government now continues to maintain. Reduced taxation of the productive process cannot affect the total numbers employed.

The producer/worker/consumer/saver model on which Keynesian Theory is based is over-simplified and limited in its scope. It fails to properly represent the whole social system and also (incidentally) the implied time interval of this model is uncertain. With the inclusion of the negative multiplier-effect of the lost Government jobs, the overall benefit is zero. The writer (and others) has built a more comprehensive simulation-model of the system, where the overall multiplier is a few percent per annum and not the few hundred that was originally reckoned. Thus the Keynesian Theory does not work in practice.

The same situation arises when the Government borrows money from the public. Some of the money that the investors lend would otherwise be available for use in industry. With the new bonds issue, the industrialists do not obtain the same encouragement for their activity as when the investor’s choice was limited to the stock-market. The Government investment results in more employment there, but this advantage is in one place only and there is an equivalent reduction of investment and employment in the rest of industry.

Credit having been obtained by a bonds issue, the Government necessarily returns the interest to the investors on an annual basis, until the bonds are redeemed. Although the prime-rate of this interest is now reduced (see below), the coverage of this deficit raises the tax burden unless the money is loaned to the banks with the return of interest. The national budget must be balanced and the Treasury should explain where and how its new income is being spent. Money that is used for providing the new jobs cannot also be taken for servicing the loan.

Governmental short-sighted policies of creating new jobs do not consider the corresponding loss of work places elsewhere. Once Governments cease taking this myopic attitude, they will find that the overall effect is no different than without this policy being applied. The only way that jobs can really be created is by making available greater opportunities to produce and to earn (see below).

Even with the deliberate introduction of inflation and Governmental spending, the overall result is similar. In a remedial manner inflation weakens the monetary strength of certain parts of the system in order to strengthen others. After summing the total influence on both credits and savings, the true effect can be seen, although it now includes some time-dependency. The early effective gains by the creditors equal the later losses by the savers. Thus inflation does not help the whole system to regain strength over the long-term, although it defers some of the adverse effects of the slump to a time when recovery has hopefully begun. And it achieves this by a socially unjust redistribution of the purchasing-power.

A more-remote observer of the macro-economy at large would find that it has a natural means of autonomous control, where the real factor of influence in its operation is the value of goods being produced and traded and not the face-value of the money itself. Money is a medium of exchange that represents value, whilst intrinsically having none. After credit is given, it must subsequently be returned. With deliberate inflation, the purchasing-power of the cheapening money being circulated first rises and then falls back, whilst the overall rate of progress of the whole macro-economy is better maintained with a smaller short-term fluctuation resulting from the first shock of the collapse.

Consequently, after giving due consideration to a comprehensive model of the whole system, the direct methods are found to be incapable of overcoming the problems caused by the slump. This is with the exception of inflation, which is temporally effective, but it results in an unethical means of delaying some of the adverse consequences.

3.4 Indirect Ways of Helping the Macro-Economy
To have some lasting effect here a more profound Governmental policy is needed, of which the following are possible methods (with the comments being included here):

#1 to control the reserve-ratio of cash deposits held in banks,
#2 to reduce the prime rate of interest and
#3 to stimulate production by the proper use of the land.

3.4.1 The Control of the Reserve-Ratio of Cash Deposits Held in Banks
It is easy to blame the banks for allowing their reserves to become so low and (as collaborators with the land-owning investors and speculators) for being unable to determine when the land-value bubble is about to burst. Had the analysis been done properly and the degree of lending curtailed in enough time, the damage due to bank insolvency would not have occurred and the recession not progressed far beyond the real-estate business. But banks are too close to the action to be able to see the full picture. Their chief business-aim is to provide the investors with as much credit as possible without raising their reserves very far above the minimum, so it is difficult for them to decide how much money to store at any particular time. Some banks even find ways to disregard the minimum sum that they should be storing in their vaults and they are in big trouble at slump time. But even when the banks conform to this proportion, a “run on the bank” can still cause them financial embarrassment.

The National Bank has the power to supply credit to the banks at the “window of last resort”, when their individual reserves are running low. This facility is provided because the banks are obliged to return money to the savers at the end of its duration, without it necessarily being re-invested. But, there is a limit to how much of this kind of credit can be provided. The effect of the slump can easily cause this greater degree of reserve to be exceeded and the window closes.

The reserve-ratio on deposit accounts is normally set by the Finance Ministry (Treasury), who should be able to anticipate when the stock-market is close to a sudden large drop in value. Unfortunately, the simulation methods for macro-economic forecasting have not achieved much success in showing when the land-market price-failure is about to occur (and as described above, its cause being due to a small random shock after a steady rise). The only method of slump anticipation which seems to work is to base them on an 18 year cycle, as claimed by the Georgist organizations, who understand better about how land-values vary [3]. However, neither the banks nor the Government are convinced of this and in common with other forecasters they cannot yet determine how big the effect of a particular slump will be.

The Treasury could instruct the banks on the necessary adjustments to be made to the reserve-ratio, but this is difficult to administer due to the technical problem of not knowing exactly the amount being held in the money reserves and the various sums and durations of the very short-term credits that the bank often use. Also, due to other smaller macro-economic regressions, it is hard to anticipate and identify which one is likely to be significant and how to frame the necessary legalisation.

3.4.2 The Reduction of the Prime-Rate of Interest
The theory behind this applies to the current group of national bond-holders (and indirectly to other savers too). After their effective interest rates have been cut, it becomes less worth-while for this group to invest in the Government bonds and they will be more inclined either to put the money into durable capital goods through the stock-market or to spend more on consumption, which are helpful in strengthening the demand and raising the amount of economic activity. Since the bonds for the National Debt are continuously being returned and re-issued, the effect of making a reduction in the rate of interest is likely to felt quite fast. The other group of investors, previously described as nervous, is encouraged to withdraw their liquid assets (see above) due to the greater security offered by the low-interest bonds. However, three aspects in adopting this policy are of significance.

Firstly, it relieves some of the Government’s (and tax-payer’s) burden in servicing the national debt, thereby helping to balance the loss of national income due to the lower production activity. The Treasury wants to have as low a prime-rate of interest as possible, in order to reduce the interest leaking from its income. It can exploit the advantage of the greater security that the bonds offer compared to the average rate of yield obtainable by alternative investment. In times of slump the level of confidence of the investor in the stock-market is low, as well as the average obtainable yield. Consequently, even without the above considerations the prime-rate can be cut back. With investor nervousness being felt, this rate can be reduced to even smaller levels.

(In times of prosperity the opposite applies and the prime-rate is raised to be as high as the stock-market average yield or even better, in order to successfully compete with it. Due to the need to maintain the National Debt, most governments favour a slow rate of inflation, to reduce its effective magnitude whilst avoiding the alternative of regular deficit budgeting.)

Secondly, it indirectly influences and reduces the amount of interest being paid on new mortgages and on other loans, thereby easing the borrower’s difficulties, helping to avoid the risk of defaulting and encouraging the entrepreneur’s efforts. It reduces the degree of his/her competition with the banks for savings and investment money. The low interest may cause the banks to reduce the rate they take on steady mortgages and what they offer on new ones too, after they realise what the greater interest rates do to the general investment situation and to their own struggling mortgagees.

However and thirdly, there are limits between which this policy may be applied. For very small reductions in the prime-rate the effect on the tax-payer is of little significance, but if the reduction is too great or if it is introduced in large announced steps, it will drive the investors into taking their money aboard, where the interest rates may not (yet) have diminished to such a large extent.

3.4.3 To Stimulate Production by the Proper Use of the Land
Since the macro-economy eventually will recover from the effects of the slump, it is instructive to ask how this comes about and to take steps to speed up the process. This enquiry also brings us back to questioning the initial cause of the slump. As described above, the slump originates from speculation in land-values, where the inflated prices inhibit its sale and proper use. After the slump develops, the smaller sums of money still available for investment are attracted by the reduced land prices, which are all that the landlords (and banks) can now obtain. The indirect effect of the Keynesian initiative for new public-works is to make the land more productive and valuable, thereby encouraging land-speculation once again. As the prospects slowly improve, these two effects enable the building trade to gradually recover. The depleted prices of the land begin to grow during the new business-cycle, although in practice this process is protracted.

To better stimulate the recovery, the Government should progressively introduce a tax based on the value of the land. This tax drives out any speculation in the land and steadily lowers its price. The taxed sum grows more slowly as this value falls. No longer does it become worthwhile for a land-owner to continue to hold onto unused land for speculation in its value. Either he/she brings it into proper use or rents or sells it to somebody else who can. This easily defined tax disregards whether the land is built-on or undeveloped, nor does it depend on the use that the site in question is currently providing. Then the land-value ceases to be speculative and it self-adjusts downwards until the competitive costs for its ownership and use are stable. Thus land-value tax is an incentive which gives the entrepreneurs opportunities for producing goods at reduced costs. The numbers of unemployed workers reduces as the land monopolies are steadily eliminated.

Simultaneously, the national income rises due to this tax. After the financial conditions improve sufficiently and the Government income is partly restored, it is possible for it to reduce all the other kinds of production-based taxes on earnings, consumption and capital gains. These beneficial changes greatly stimulate the demand for goods and investment within the macro-economy, enabling it to overcome the adverse effects of the slump far more quickly than if it was left to recover by itself.
Whilst some of the other proposals to overcome the slump will have beneficial effects, they are of a secondary magnitude compared to this proposal, which is unique because it rapidly removes the effect of the slump and also attacks the cause of it, inhibiting the possibility of its recurrence.

[1] “General Theory of Employment, Interest and Money” by John Maynard Keynes,
Palgrave Macmillan, 1936.

[2] “Economics in One Lesson” by Henry Hazlitt, Harper and Brothers,1946.

[3] “The Power in the Land” by Fred Harrison, Shepheard Walwyn (Publishers) Ltd., 1983.

One thought on “What LVT is and why it is such a good thing”

David Chester says:

March 1, 2009 at 9:19 am

LVT can get us past the current economic crisis. The full article about why other methods will not work is presented with the only method that will!

HOW THE ECONOMY RESPONDS TO GOVERNMENTAL ATTEMPTS TO OVERCOME SLUMPS

1. INTRODUCTION

National economies are continuously undergoing change and are never completely stable. A good indication of the degree of this activity is the paper-value of the total share-holdings that continuously expand or contract in size and is called a bulls or a bears market. But in certain circumstances this fluctuation does not remain small and one particular part of the macroeconomics system has prices that steadily increase. This unstable behaviour cannot last for ever and eventually these prices stop rising and then suddenly collapse. From this catastrophe the shock spreads across the whole system as a depression develops. At the stage being considered here, this failure has recently occurred and an economic slump is in progress. The total value of share-holdings has decreased dramatically and the stock-market trade has significantly shrunk. Reductions in the demand for produce have led to much unemployment and the increased withdrawals of savings have resulted in some bank failures.

In the great slump of 1929, it was first believed that the best governmental policy is to do nothing, because the robust nature of the market economy causes it to quickly right itself. But even after some changes were introduced this recovery took almost 10 years. Today most economists believe that the adverse effects of slumps should be eased by taking suitable measures. However, the choice of which changes to introduce, for creating a beneficial effect on the national economy as a whole, is not so obvious as when in 1936 John Maynard Keynes [1] first began to prescribe them. Experience and deeper analysis of these and other proposals has found that all but two are ineffective, and one of these at best, is remedial for a limited time. The situation is more complex and a change that favours a specific part of the social structure does not necessarily improve all of it. The following analysis shows why Keynes’s proposals are mostly unsatisfactory and determines which action produces better results.

2. DESCRIPTION OF THE SLUMP AND ITS INFLUENCE

The origin of these slumps is due to speculation within the building industry and the dynamics of the supply and prices of building-land. With every other kind of traded item, the ability to use similar but different products avoids the dictatorial influence of a perfect monopoly. (This freedom is expressed in the natural self-regulation of prices, by supply always equalling demand according to Say’s Law. Neither over-production nor under-production results; competition always ensures that the goods are traded close to their optimum price.) However, as Mark Twain proclaimed “Buy land, they’re not making it anymore”, and the number of building-sites is severely limited. Consequently the land-owning cartel is absolute—there is no alternate suitable path that demand for this resource can take.

The ensuing steady rise in the prices of housing reaches a level where the landlords, banks and builders decrease in their participation and eventually stop investing or speculating in land-values. Builders no longer manage to sell their houses before they are completed and the land prices in the real-estate business cease growing sufficiently fast as to attract the speculators seeking short-term gains. Few investors or banks are now funding house-building, although it is not the cost of their construction which has dramatically changed but that of the land. At this stage in the business-cycle the system is ready to collapse and it takes only a small external shock to cause this. It inevitably comes from a different economic source, which has an independent effect on the community.

Recently and as an example, a sharp rise in oil prices causes the speculative value of out-of-town housing to fall, due to the greater cost of motoring to the more densely-populated centres of industry, commerce, learning and recreation. No longer is it desirable to reside where the more expensive travelling adds to the house-keeping bills. The reduced demand for this kind of real-estate lowers its price (and its rent), but existing mortgage payments remain unchanged and cease to be compatible. With the awareness of the speculative loss, a significant number of foreclosures follow and bank insolvencies result. As credit becomes harder to obtain, the recession of the associated economic activity spreads outside of this sector of the community, unemployment grows and many more families are unable to pay their regular fees for the rental or mortgage of their more modest homes.

The news of bank loses from the foreclosures warns the savers, with the result that many of them decide to transfer their money into non-interest paying current accounts or to withdraw it. The use of these sums by the banks is now inhibited, causing a “credit-squeeze” having high interest rates.

With less money being spent, the productive sectors of the macro-economy reduce their prices so as to encourage the purchase of more consumer goods. But this does not overcome the problems of high interest rates on loans nor return the monetary commerce to its former level. Consequently the system enters into a depressed state, with progressively lower degrees of macro-economic activity.

These experiences and the places or kinds of individuals that feel them are described below. The logical arrangement of this dissertation is complicated by the combinations of the various parties involved, together with the different ways that they are affected. The hardships caused by the slump simultaneously influence the macro-economy in four basically different ways.

2.1 Decreased Demand for Goods and Less Employment in Industry
The curtailed programme of house-building, the diminished credit and the reduced purchasing by would-be householders and other consumers, result in less economic activity and smaller demands for many kinds of goods items. The unit cost of their manufacture rises, whilst the available sums for their acquisition shrink and lower outputs are the result. After trying to stimulate the demand by reducing prices, the managers in industry and commerce are reluctant to retain labour with little or nothing to do. So they shorten the length of the working-day, temporally lay-off some of their workers and eventually have to dismiss them. Many manufacturing concerns fail to provide dividends on their shares which fall in value, whilst some companies cannot even manage to stay in business. The level of unemployment grows. Petty crime increases, due to the rising levels of poverty and boredom.

2.2 Smaller Pensions
With pension funds, the process of saving and withdrawing is a continuous one. Some of the out-flowing money comes from contributions by younger subscribers, but much of the funding is taken from the dividends on prior investments made at the stock-exchange. After these have slumped there is less money available for paying regular pensions, even though some of the losses are spread by insurance. The managers of the funds want to avoid disproportionately high withdrawals and the result is that smaller sums are paid out. Consequently the pensioners have less income to meet their needs and they buy smaller quantities of consumer goods and services.

2.3 Bank Insolvency
The multiple-credit structure of the finance-system is now under heavy stress. With slump conditions prevailing, some of the investors and speculators are defaulting in the return of their credit, due to their inability to sell the land and buildings even for the sums at which they were purchased many years before. In parallel with this, due to the reduced level of production and wages, savings are being withdrawn at greater rates, because the reduced average rate of consumption is still more than the reduced average rate of earnings. These effects add to the credit squeeze.

The use of fixed-term savings accounts, where the money is placed in fractional-reserve bank-deposits, provides the banks with credit and it usually circulates at a good rate. Only a small proportion of the savings, from which the banks previously borrowed, are stored in their vaults. The rest is credited to the newer investors (at greater rates of interest than the savers can obtain, which normally enables the banks to become rich). But now the banks have difficulty in calling in sufficient credit for its return to the savers, some of whom have panicked and are pulling out their loans in the form of cash or placing it in current accounts having greater liquidity. These banks are forced to sell their long-term holdings at reduced prices, in order to balance their income with the greater outflow, since they have no-one else from whom to borrow. Money demand can no longer be easily met by its supply and the short-term rate of interest on credit rises. The money starvation at the banks causes some of them to declare insolvency and to become bankrupt, which results in the return of the credit being deferred, if in the closing-down process these savings have not been lost.

The irony is that later when the slump begins to ease, much of the money that is now in the hands of the nervous savers will again need to find investment opportunities and it will be returned to the banks deposit accounts. So the bank crisis is temporary and is partly due to the psychological state of these savers.

2.4 Reduced National Income
Much of the money that is collected for the public purse comes from taxation. However the slump has resulted in less macro-economic activity of the kind from which these taxes are usually raised. Consequently in matters of national finance there is also a shrinking of available funds. The Government badly needs to help itself as well as the whole social system, to escape from the effects of this national depression.

3. DISCUSSION – ATTEMPTS TO OVERCOME THESE FOUR MAJOR DIFFICULTIES

“Business cycles” of this kind are not new to our society. Various suggestions have previously been made about what a Government should do to reduce the adverse effects of slumps. The following proposals and discussions about them are presented from a holistic Finance-Ministry (or Treasury) viewpoint, where the complete system is considered taking into consideration all of the affected parts, as taught by Henry Hazlitt [2]. Various attempts to restore the macro-economy are examined below, passing from what appears to be the obvious remedy, up to some more-complicated solutions.

3.1 Call for Price Reductions and Price Controls
Usually there is a delay until the depression is recognized by the Government. The reasons for this are purely political, but as soon as it is official the first Government response is to call for a reduction in the prices of commodities. This is followed by the imposition of price controls to fix the amount charged for the more basic consumer goods, with some of them being subsidised. In fact, many of these prices have already been cut, due to the reduced demand and the need for the smaller businesses to compete and remain viable. Some of the monopolistic concerns, particularly those partly owned or controlled by the Government, need to receive formal notice before their bureaucratic systems of organization can make these changes. The effect of the lower prices is to increase the quantity of goods being consumed, which has a small positive effect on the employment figures. But for this type of commerce, the amount of money in circulation scarcely increases, so this change does not directly result in a significant improvement in the value of goods traded within the macro-economic system.

Lower prices do ease the pensioner’s problem to a degree, although nothing more is done for them and much harm may yet be caused to their savings.

3.2 Direct Attempts to Increase National Income or to Reduce the National Expenditure
The Government wants to enact new statutes to give direct benefit to the ailing parts of the system be they pensioners, industrial concerns, workers or banks. However, to achieve this aim the Government must first increase its own income (which has recently declined) and reduce its spending (which has recently increased, due to the greater numbers of unemployed workers being paid doles, or subsidies). The proposed ways for reaching this preliminary objective are to:

#1 borrow from the public and raise the National Deficit,
#2 change the amount of taxation,
#3 reduce the Governmental expenditure and
#4 deliberately inflate the currency, by printing more money.

With the exception of deliberate inflation, these changes are regarded as being temporary and their effects can be stopped or reversed after the slump has passed. These four methods of modifying the distribution of the national finances are described in more detail below.

3.2.1 To Borrow from the Public and Raise the National Deficit
The National Bank with the cooperation of the Treasury offer for sale some new national bonds, as well as the continuing re-issue of recently redeemed ones. These bonds, which are guaranteed Governmental loans, can be purchased like the preference shares of a new public company and they are traded similarly, until their duration has been reached and their face-value is redeemed. The new low-interest paying bonds are presently regarded as being safer than other kinds of share-investment and they attract clients who otherwise prefer to hold their savings in current “mattress” accounts. The psychological pressure from this offer assures and encourages these nervous savers to re-invest. The interest on this loan is borne by the Government and tax-payers.

The expanded National Deficit enables the Government to pay for the execution of additional public works, thereby providing the employment which the building trade can no longer sustain. This also has a significant indirect effect, to be described in a later part of this work.

Alternatively the Government can use these sums to relieve the banks from their risk of bankruptcy. It returns to them some liquidity and allows them to weather the storm of heavy cash withdrawal. The recipient banks pay a normal or sometimes a high rate of interest for this special loan, so the Government and tax-payers are not penalized by the interest on the credit from issuing the bonds, whilst the favoured banks are obliged to service their loans. This action avoids the personal losses suffered by its remaining clients, after the faltering bank otherwise would have to declare bankruptcy.

Providing that these loans are obtained neither by greater taxation nor by inflation, they do not seriously damage the macro-economy, although it does slow down until the debts are cleared. It allows the banks to get past the difficult period, but if they default on their interest or fail to return their loans as arranged, then the public purse is raided once again. When the slump is past its worst point, confidence returns and the savers re-invest in shares. Then the greater flow of money through the banks allows them to return what they borrowed from the Government, which subsequently reduces the magnitude of the National Debt.

In the situation where big industrial concerns receive similar help from the Government, these companies may be aiming only to continue their operations–to employ large numbers, whilst still remaining inefficient and ineffective in their production. This is unacceptable and before this bale-out is executed the industry must show that it is not taking the credit merely to postpone its financial failure. Also it must present realistic plans about how it aims to become a stable and viable concern. This loan delays the alternate beneficial effects that would occur elsewhere in the system, although the situation may not be so critical there as within the specific industry that is being helped. Consequently this action and its overall result is worthwhile to a limited degree.

These solutions ease the effects of the slump only amongst certain industrialist’s, worker’s, and banker’s critical states. The Government should balance the distribution of these relieving effects throughout all of the system, other parts of which also badly need its support.

3.2.2 To Change the Amount of Taxation
Often it is thought that a reduction in the amount of taxation on earnings and purchases can stimulate the demand for produce and its consumption, thereby encouraging more employment. However this view is only part of the whole picture, because it simultaneously reduces the Government income and decreases the public expenditure elsewhere. In a reciprocal manner, the effect of greater taxation on personal income and consumption is that the demand for these goods is reduced. But instead of the sales income mostly going to the production sector, more of it would pass through the Government to its various ministries and newly installed employment sources. Thus for either kind of change, the distribution of the work output is modified but the total sum used for payment of its wages has not. Comparing both of these opposing policies, the altered demand for goods must be balanced against the modified supply of social services and public utilities. Hence, neither policy can stimulate (nor retard) the current overall rate of macro-economic activity; all that it achieves is a re-distribution of what each participant does.

3.2.3 To Reduce the Governmental Expenditure
The outlay of public money to the Government ministries is not a waste. Apart from tax-collection, these departments and offices provide a variety of necessary services, such as those for education, public health and various emergencies, without which the average citizen would not manage properly. He/she would need to pay more for the service than what the national (social) insurance covers. As implied by the above description, a new frugal approach on the part of Government does not change the total amount of money flowing around the system. It has about the same overall effect as that obtained when reducing the taxes and the progress of the national economy as a whole is no different. It is only the distribution of activity within certain of its sectors, which is affected.

3.2.4 To Deliberately Inflate the Currency
The national economy may be regulated in more than one way by this action. During normal times when only small changes to the rate of progress of the system are required, they are obtained by adjusting the National Deficit. Then some money either is withdrawn or is made available, the choice normally following the degree to which the national budget has been met. In years of prosperity, larger amounts of taxes are collected and there is a budget-surplus. Then this extra money can be withdrawn from circulation, with the cooperation of the National Bank who store (or destroy) the bank-notes, having reduced the National Deficit by selling back to the Government some bonds or Treasury Bills. However when there is reduced economic activity and the lower amount of tax collected results in a failure to meet the budget, the deficit is made up by the issue of new bonds or Treasury Bills in exchange for the stored money (or by printing new bank-notes). Here its influence enables the banks to increase their amount of credit for investment, thereby encouraging industry to be more productive. Normally these budget surpluses and deficits are a relatively small proportion of the gross domestic product (under 5% of the total) and when taken over many years, the average of the various resulting inflating and deflating effects is small.

However, when a slump prevails, the printing and distribution of larger amounts of new money also can be used for the courser regulation of the macro-economy. Then the Government directly spends this money to stimulate the level of macro-economic activity, without intending to introduce any later deflation to counter the effects. (Even after conditions improve, this opposing action would be likely to cause another slump.) There is reluctance to use this kind of monetary instrument, due to the scale of the correction being much greater than when adjustments to the budget are being made, as described above. The effect of the inflation on the system no longer remains small and it is a dishonest way for the Government to temporally obtain greater spending-power and lower debt.

Inflation effectively taxes savers by reducing their long-term purchasing-power and spoils the amount of real interest that fixed-rate savings yield. It also cheapens money that is already owed, so the Government, mortgagees and other creditors benefit after the inflation has caused the prices and wages to rise. (This applies to most forms of credit, unless the loan was linked to the cost of living or to a more stable currency.) The inflated prices also reduce trade with foreign countries making it harder to sell goods abroad, whilst the cheaper local money makes it easier to import them. This effect on international trade worsens the production situation at home, until the exchange rate of the local currency is eventually devalued and the amount of trading returns to its previous level.

The Government can use this income in the four direct ways for relieving the effects of the slump. These are for subsidizing pensions and/or production and keeping low the price of certain basic goods, for national projects by hiring building-constructional and other unemployed workers (their incomes minus taxes to exceed their previous doles), for keeping its ministries at full strength or for lending to the banks. The new money is injected at a steady rate and on a scale where it regularly covers the losses from some or all of the hardships listed above. Unless the effects of all four of the problems are restored in a uniform manner to their former conditions, the slump will not be fully relieved. Even so, the adverse and unstable effects of the inflation itself remain to be tackled. After the inflation has ceased, the additional money in circulation eventually causes the prices and wages to catch up. Consequently, this form of slump relief will not endure without it creating further distress.

3.2.5 Comments and Summary of the Direct Methods
By using of any of these four straight-forward techniques, the Keynesian School of economics claims that the resulting initial increase in demand causes more macro-economic activity to follow. There is supposed to be a multiplier-effect on growth, so that in the case of reduced taxation and greater personal income, it is thought that the consumers have more money to spend or invest and that consequently the total demand grows. These claims do not consider the need to take money from one part of the system in order to supply it to another. The newly increased demand and its opportunities are balanced by the smaller number of jobs that the Government now continues to maintain. Reduced taxation of the productive process cannot affect the total numbers employed.

The producer/worker/consumer/saver model on which Keynesian Theory is based is over-simplified and limited in its scope. It fails to properly represent the whole social system and also (incidentally) the implied time interval of this model is uncertain. With the inclusion of the negative multiplier-effect of the lost Government jobs, the overall benefit is zero. The writer (and others) has built a more comprehensive simulation-model of the system, where the overall multiplier is a few percent per annum and not the few hundred that was originally reckoned. Thus the Keynesian Theory does not work in practice.

The same situation arises when the Government borrows money from the public. Some of the money that the investors lend would otherwise be available for use in industry. With the new bonds issue, the industrialists do not obtain the same encouragement for their activity as when the investor’s choice was limited to the stock-market. The Government investment results in more employment there, but this advantage is in one place only and there is an equivalent reduction of investment and employment in the rest of industry.

Credit having been obtained by a bonds issue, the Government necessarily returns the interest to the investors on an annual basis, until the bonds are redeemed. Although the prime-rate of this interest is now reduced (see below), the coverage of this deficit raises the tax burden unless the money is loaned to the banks with the return of interest. The national budget must be balanced and the Treasury should explain where and how its new income is being spent. Money that is used for providing the new jobs cannot also be taken for servicing the loan.

Governmental short-sighted policies of creating new jobs do not consider the corresponding loss of work places elsewhere. Once Governments cease taking this myopic attitude, they will find that the overall effect is no different than without this policy being applied. The only way that jobs can really be created is by making available greater opportunities to produce and to earn (see below).

Even with the deliberate introduction of inflation and Governmental spending, the overall result is similar. In a remedial manner inflation weakens the monetary strength of certain parts of the system in order to strengthen others. After summing the total influence on both credits and savings, the true effect can be seen, although it now includes some time-dependency. The early effective gains by the creditors equal the later losses by the savers. Thus inflation does not help the whole system to regain strength over the long-term, although it defers some of the adverse effects of the slump to a time when recovery has hopefully begun. And it achieves this by a socially unjust redistribution of the purchasing-power.

A more-remote observer of the macro-economy at large would find that it has a natural means of autonomous control, where the real factor of influence in its operation is the value of goods being produced and traded and not the face-value of the money itself. Money is a medium of exchange that represents value, whilst intrinsically having none. After credit is given, it must subsequently be returned. With deliberate inflation, the purchasing-power of the cheapening money being circulated first rises and then falls back, whilst the overall rate of progress of the whole macro-economy is better maintained with a smaller short-term fluctuation resulting from the first shock of the collapse.

Consequently, after giving due consideration to a comprehensive model of the whole system, the direct methods are found to be incapable of overcoming the problems caused by the slump. This is with the exception of inflation, which is temporally effective, but it results in an unethical means of delaying some of the adverse consequences.

3.4 Indirect Ways of Helping the Macro-Economy
To have some lasting effect here a more profound Governmental policy is needed, of which the following are possible methods (with the comments being included here):

#1 to control the reserve-ratio of cash deposits held in banks,
#2 to reduce the prime rate of interest and
#3 to stimulate production by the proper use of the land.

3.4.1 The Control of the Reserve-Ratio of Cash Deposits Held in Banks
It is easy to blame the banks for allowing their reserves to become so low and (as collaborators with the land-owning investors and speculators) for being unable to determine when the land-value bubble is about to burst. Had the analysis been done properly and the degree of lending curtailed in enough time, the damage due to bank insolvency would not have occurred and the recession not progressed far beyond the real-estate business. But banks are too close to the action to be able to see the full picture. Their chief business-aim is to provide the investors with as much credit as possible without raising their reserves very far above the minimum, so it is difficult for them to decide how much money to store at any particular time. Some banks even find ways to disregard the minimum sum that they should be storing in their vaults and they are in big trouble at slump time. But even when the banks conform to this proportion, a “run on the bank” can still cause them financial embarrassment.

The National Bank has the power to supply credit to the banks at the “window of last resort”, when their individual reserves are running low. This facility is provided because the banks are obliged to return money to the savers at the end of its duration, without it necessarily being re-invested. But, there is a limit to how much of this kind of credit can be provided. The effect of the slump can easily cause this greater degree of reserve to be exceeded and the window closes.

The reserve-ratio on deposit accounts is normally set by the Finance Ministry (Treasury), who should be able to anticipate when the stock-market is close to a sudden large drop in value. Unfortunately, the simulation methods for macro-economic forecasting have not achieved much success in showing when the land-market price-failure is about to occur (and as described above, its cause being due to a small random shock after a steady rise). The only method of slump anticipation which seems to work is to base them on an 18 year cycle, as claimed by the Georgist organizations, who understand better about how land-values vary [3]. However, neither the banks nor the Government are convinced of this and in common with other forecasters they cannot yet determine how big the effect of a particular slump will be.

The Treasury could instruct the banks on the necessary adjustments to be made to the reserve-ratio, but this is difficult to administer due to the technical problem of not knowing exactly the amount being held in the money reserves and the various sums and durations of the very short-term credits that the bank often use. Also, due to other smaller macro-economic regressions, it is hard to anticipate and identify which one is likely to be significant and how to frame the necessary legalisation.

3.4.2 The Reduction of the Prime-Rate of Interest
The theory behind this applies to the current group of national bond-holders (and indirectly to other savers too). After their effective interest rates have been cut, it becomes less worth-while for this group to invest in the Government bonds and they will be more inclined either to put the money into durable capital goods through the stock-market or to spend more on consumption, which are helpful in strengthening the demand and raising the amount of economic activity. Since the bonds for the National Debt are continuously being returned and re-issued, the effect of making a reduction in the rate of interest is likely to felt quite fast. The other group of investors, previously described as nervous, is encouraged to withdraw their liquid assets (see above) due to the greater security offered by the low-interest bonds. However, three aspects in adopting this policy are of significance.

Firstly, it relieves some of the Government’s (and tax-payer’s) burden in servicing the national debt, thereby helping to balance the loss of national income due to the lower production activity. The Treasury wants to have as low a prime-rate of interest as possible, in order to reduce the interest leaking from its income. It can exploit the advantage of the greater security that the bonds offer compared to the average rate of yield obtainable by alternative investment. In times of slump the level of confidence of the investor in the stock-market is low, as well as the average obtainable yield. Consequently, even without the above considerations the prime-rate can be cut back. With investor nervousness being felt, this rate can be reduced to even smaller levels.

(In times of prosperity the opposite applies and the prime-rate is raised to be as high as the stock-market average yield or even better, in order to successfully compete with it. Due to the need to maintain the National Debt, most governments favour a slow rate of inflation, to reduce its effective magnitude whilst avoiding the alternative of regular deficit budgeting.)

Secondly, it indirectly influences and reduces the amount of interest being paid on new mortgages and on other loans, thereby easing the borrower’s difficulties, helping to avoid the risk of defaulting and encouraging the entrepreneur’s efforts. It reduces the degree of his/her competition with the banks for savings and investment money. The low interest may cause the banks to reduce the rate they take on steady mortgages and what they offer on new ones too, after they realise what the greater interest rates do to the general investment situation and to their own struggling mortgagees.

However and thirdly, there are limits between which this policy may be applied. For very small reductions in the prime-rate the effect on the tax-payer is of little significance, but if the reduction is too great or if it is introduced in large announced steps, it will drive the investors into taking their money aboard, where the interest rates may not (yet) have diminished to such a large extent.

3.4.3 To Stimulate Production by the Proper Use of the Land
Since the macro-economy eventually will recover from the effects of the slump, it is instructive to ask how this comes about and to take steps to speed up the process. This enquiry also brings us back to questioning the initial cause of the slump. As described above, the slump originates from speculation in land-values, where the inflated prices inhibit its sale and proper use. After the slump develops, the smaller sums of money still available for investment are attracted by the reduced land prices, which are all that the landlords (and banks) can now obtain. The indirect effect of the Keynesian initiative for new public-works is to make the land more productive and valuable, thereby encouraging land-speculation once again. As the prospects slowly improve, these two effects enable the building trade to gradually recover. The depleted prices of the land begin to grow during the new business-cycle, although in practice this process is protracted.

To better stimulate the recovery, the Government should progressively introduce a tax based on the value of the land. This tax drives out any speculation in the land and steadily lowers its price. The taxed sum grows more slowly as this value falls. No longer does it become worthwhile for a land-owner to continue to hold onto unused land for speculation in its value. Either he/she brings it into proper use or rents or sells it to somebody else who can. This easily defined tax disregards whether the land is built-on or undeveloped, nor does it depend on the use that the site in question is currently providing. Then the land-value ceases to be speculative and it self-adjusts downwards until the competitive costs for its ownership and use are stable. Thus land-value tax is an incentive which gives the entrepreneurs opportunities for producing goods at reduced costs. The numbers of unemployed workers reduces as the land monopolies are steadily eliminated.

Simultaneously, the national income rises due to this tax. After the financial conditions improve sufficiently and the Government income is partly restored, it is possible for it to reduce all the other kinds of production-based taxes on earnings, consumption and capital gains. These beneficial changes greatly stimulate the demand for goods and investment within the macro-economy, enabling it to overcome the adverse effects of the slump far more quickly than if it was left to recover by itself.
Whilst some of the other proposals to overcome the slump will have beneficial effects, they are of a secondary magnitude compared to this proposal, which is unique because it rapidly removes the effect of the slump and also attacks the cause of it, inhibiting the possibility of its recurrence.

[1] “General Theory of Employment, Interest and Money” by John Maynard Keynes,
Palgrave Macmillan, 1936.

[2] “Economics in One Lesson” by Henry Hazlitt, Harper and Brothers,1946.

[3] “The Power in the Land” by Fred Harrison, Shepheard Walwyn (Publishers) Ltd., 1983.

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