Commenter Steven Shaw asks:
With a jubilee, are all debts forgiven, no matter how large they are? What is to stop folks from borrowing big just before JB-day? Who do you suspect is hurt by a jubilee? the prudent? How would private and local exceptions work and what would they look like?
Taking the questions in order:
1) All debts would be forgiven under what I have proposed, except for a) the currency – which in the US is in the form of Federal Reserve Notes, and being “notes”, are debt – and b) demand deposits, which are debts owed by banks to their depositors. Any other debts, no matter how large, would be forgiven and canceled as a matter of law, although of course anyone who wanted to pay a debt anyway could do so even if it was not enforceable.
2) The question is not whether people could be stopped from “borrowing big just before JB day”, because there would have to be a lender for that, and it’s hard to imagine there would be any. This particular problem would be more or less automatically precluded. What would be something of a problem is that there would be plenty of notice that the jubilee was going to happen and people would justifiably move into the forms of wealth that were not going to be canceled, such as currency and demand deposits. It’s important to note that although this may affect individuals for good or ill while they try to position themselves for the post-jubilee economy, system wide it will make no difference: the formula will remain the same. If there are more demand deposits this will simply result in a higher dollar-gold ratio. If there is more gold, the reverse.
In addition, bonds would be on the chopping block, but stocks wouldn’t, at least not common stocks, because they are not debt. So one might imagine a rush into cash and deposits and a significant appreciation in equities, although the latter is less certain: with liquidity so drastically reduced, what would anyone actually pay for a share of stock? This would be such a big question that I doubt any real movement into equities would take place.
3) The biggest problem with a jubilee is that certain prudent people would probably be financially hurt, although I would argue that they’d probably be hurt more, but in a different way, if we didn’t have a jubilee (with widespread civil unrest, for example, everyone suffers). Someone who owns no hard assets and has little cash or savings in demand deposit accounts would be nearly impoverished, even if they had – and I think this would be a typical example – a pension of some kind. The pension would be a debt of the pension fund to the pensioner, and would be canceled. People who invested primarily in bonds or any other form of debt would be hurt.
The most prudent people of all, of course, would be those who have invested in gold, and they would most likely do quite well, although that is by no means a lock. It would depend on how they held their gold, and what the purchasing power of the revalued gold would actually translate into. It is quite possible that at first, there would be little to purchase no matter how many dollars anyone had. This would be a huge readjustment for everyone. It is reasonable to expect that production would temporarily take a big nose-dive, because no one would have the foggiest idea what price their products would actually bring. In addition, it is also reasonable to expect that the supply of gold would rapidly increase due to its much higher valuation in dollar terms. That would essentially dilute the purchasing power of gold very quickly as well. Since there is bound to be a sort of monetary chaos at first, it would probably be best to accumulate hard assets: homes, cars, washing machines. Marijuana.
Just kidding about the marijuana.
4) As to private and local exceptions, this is a very good question, too. I’m assuming there will be relatively few people in the position of having no hard assets to fall back on, and little in the way of savings and currency. Think of an elderly pensioner who rents his flat, lives on his pension income and doesn’t really own anything. His income – the only thing he really has – would be wiped out.
Though few in number this is a terrible problem and an unjust result for such people.
Nevertheless, the governments, both federal and state, will have a sizable reserve with which to work: between them they will possess 20% of the nation’s monetary wealth, which ain’t nothing. Addressing these situations, which again would probably be very few in number relatively speaking, would be high on the priority list of things for the government to do. And this is perfectly proper: the governments and their officials are among the most culpable people now living in fostering this whole mess, which in turn requires this massive readjustment.
For any others who might unfairly fall through the cracks, I’m going to rely on people’s basic decency. Many people will have what amounts to a windfall when their debts are forgiven them. Anyone who has experienced a windfall like that – or at least someone, or some of them – would be obligated, in my opinion – perhaps not legally or by force but at least morally – to ensure that some other poor soul in their community who for whatever reason experienced the reverse, became impoverished in the course of the monetary readjustment, and didn’t fit into or qualify for whatever legislative remedy the government came up with, did not experience a catastrophe and had at least a place to live, food and clothing. This would not be so much charity as gratitude on the part of the giver(s). The entire world, in real terms if not monetary ones, will be so much better off – except for the banksters and the government employees, many of whom will have to take pay cuts and/or find another line of work.
I want to thank Mr. Shaw for these important and thoughtful questions.
Lawyers on Strike 
This does mean that the whole idea is politically difficult. It’s great for the goldbugs. It’s also great for the land speculator who has borrowed to buy many rental properties — debts are cancelled but rental contracts are not. Bloody fantastic!
The jubilee can be gamed by any who can find a lender (a bank) to lend them as much as possible. Banks don’t lend their own money so they are ok. Imagine a couple who have almost payed off their on home worth say $800k. They drawn down $600k via a line of credit a day or two before the debt-jubilee. Post jubilee, they own their “$800k” house _and _ the $600k in their bank.
Just wanted to point out that your pensioner is now destitute but still owes, say, $300/week to his lessor. The lessor in at the meanwhile now no longer owes anything on the pensioner’s flat. I guess the pensioner moves out at this point and starts the first riot ;).
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I fixed your errors and deleted the other post. Amazing what you can do as a moderator, eh?
Yes it’s politically difficult. I don’t see it happening. At some point people take to the streets, as they are doing in the middle east, and then everything else gets lost in the noise.
Still, maybe there’s something to having this out there as an option. Maybe people will see the wisdom and practicality of it in the middle of the chaos. All anyone can do is try. I’ve been given a legal education and this is another effort to put it to good use. Like many of my efforts it meets with little or no approval, which is puzzling in some ways, and in some ways not. People are complicated. They are suspicious of lawyers and any solutions the law may offer, in part because the law and lawyers have become so degraded by their own hand. I can’t do anything about those things, but I’ll do what I can do. I suppose this isn’t much. But it’s something.
I doubt you’d see much last minute lending and borrowing, because from the lender’s point of view that makes no sense. The pensioner who owns nothing and rents would not “owe” his lessor anything, but this situation would still be a problem. I hope a rare one. And in those rare instances, I would also hope that those who had benefited so much by having the debt monkey lifted off their backs would find a solution. If the guy were my neighbor, I know I would be able to find one.
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Thanks for fixing up the typos. Also neglected to thank you for writing such a detailed response to my questions.
I think you are glossing over the problems of the pensioner who was renting his flat prior to the JB. How is it that he does owe anything now? He still has a tenancy agreement stating that he owes $300/week to his (now debt free) landlord.
You could count “last minute lending” as fraud but its difficult to police. Why would banks be reticent to offer lines of credit right up to JB day. Certainly anyone with a large existing line of credit would do well to draw on it to increase their demand deposits prior to the JB.
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Just as the landlord is debt free, so would his tenant be, including from any debt to the landlord arising out of any contract or lease. That’s not the problem.
The problem is how living arrangements are allocated. The free market probably does the best job at that, but there hasn’t been a free market in dwellings for a very long time. The distortions that have occurred will not be solved by the jubilee amendment alone. It’s how people conduct themselves afterward that will determine that. The free market will have been restored, but whether people will abuse it, or even keep it from there going forward, is an open question.
There is a limit to what the law can do. I’m simply recognizing that. That’s not the same thing as glossing over the problem. The law can reset everything to zero, sort of. It cannot make everything wonderful. People themselves will have to do that. They are capable of it. They are also capable of the opposite.
Maybe I wasn’t clear about this, but I can’t see last minute debt loading as a big problem, because the lenders will know the jubilee is coming, too, and will cut off any credit. It would be completely irrational to do otherwise. I can’t rule out irrational behavior, of course, but generally lenders will not lend if they know they’ll never get the money back, or at least won’t have the legal right to get it back.
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Are all contracts (and leases) cancelled then by your amendment? If not, then there remains a problem.
I do hope too that given some windfall, that folks would be generous, forgiving and accommodating. You have perhaps too much faith in human nature though.
If a JB was coming, I certainly wouldn’t lend you $100k as you wouldn’t have time to pay it back. However, a bank is a different story. Do they really care about getting the money back once the debt is cancelled by the JB? What I’m pointing out is the potential to game the system. If I owned a credit card, for instance, I would cash-advance up to my limit prior to the JB (given the rules you lay out).
It’s not clear to me what a JB would do to banks. I am not certain they would survive.
It’s difficult to imagine a fair jubilee without it having been a standard part of law. For instance, the ancient Levitical Jubilee was every 50 years. Everyone knew it was coming – creditors and debtors alike. I’m not sure that the Levitical Jubilee could be characterised as a debt jubilee i.e. debt cancellation. It seems that land was only really ever leased from the original owners, as when the JB comes, the land returns to the original owners. People sold into bondage would also be released in the Jubilee year. I’m not sure how the Levitical Jubilee could be used today but it’s cycle of release every 50 years seems like a very good idea.
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In drafting any law, particularly a constitutional amendment, you have to resist the temptation to address every problem with verbiage. The law has to be understood, and the longer it is the less likely there won’t be some problem even understanding it in the first place.
The problem of gaming the system, I just don’t see it. Once a debt cancellation is in the offing, there won’t be any lenders. Just as you would be crazy to keep lending, so would any bank. That particular problem just takes care of itself.
You do raise an interesting question about what would happen to banks afterward, though. Since another jubilee would be a near impossibility in the short term, I suppose they could just resume lending right away without fear of a new debt cancellation; however, what would they lend? The proposed amendment zeroes the banks out: they would have gold to cover their deposits and that’s it. But they would owe every penny of their deposits to their depositors. Unless they lent those deposits at interest, or their depositors converted them into time deposits so as to make them available for lending, banks would have no way to make money, other than by charging customers for maintaining their demand deposit accounts. This was historically done, by the way – banks would charge customers for keeping demand deposits. But it’s been so long it would take a lot of getting used to.
The gold standard, which would be instituted at the same time, would be a sizable disincentive to further indiscriminate lending and borrowing. Lending demand deposits would probably be criminal as being a fraud, but remember it would be inappropriate to specify that in a constitutional amendment, and maybe in a federal law of any kind.
A bank could make funds available for lending by restricting the depositor’s right to withdraw funds for a specified time – making accounts, in other words, that were not “demand” deposits. They would pay interest on these accounts, whereas they would charge fees for keeping demand deposits. A very different world. And the way it was, not that long ago. Banking would become quite unexciting, and not very profitable. As it should be.
Maybe it’s just me, but I see all of these developments as being very positive. Not to mention that on the other side of the equation, borrowing would be difficult, expensive, very frowned upon and burdensome. People would therefore earn money in preference to borrowing it, a far more natural social condition than we have currently. This is almost the whole point of doing this jubilee/gold standard thing. The availability of cheap borrowed funds has brought the terrible distortions our economy is experiencing now: the waste, the disparity of wealth, the increasing transfer of wealth from the productive sector to the government and financial sectors. The gradual impoverishment, the cause of which seems quite mysterious until with a lot of study and thought, you realize that it’s a problem with the law, and our understanding of it and adherence to it.
Always nice to hear from you, Steven. How are things down under?
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