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 additional 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; activities 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 decreases 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.
Briefly:Land Value Taxation (LVT) lowers production costs, raises demand and employment. Stops land speculation and associated corruption. Eliminates the need to keep land development plans secret. Only disadvantage is to the land owners, who don't use their land.
