"Show Me the Money," Part II

Reading through Dr. Kurland's response yesterday covering the effects that the implementation and maintenance of a Capital Homesteading program would have on the economy, we come to the realization that the subject is much greater than the time and space Dr. Kurland was able to devote to it. Consequently, he used a lot of "shorthand" that made some implicit assumptions. Because we believe our job is to teach, I felt that expanding a little on what Dr. Kurland said might be appropriate. Using his e-mail as the starting point, then, I came up with the following additional response . . . which I'll cut into two parts both to make it more manageable to read and to save me the trouble of coming up with postings for the rest of the week.

Dear Dr. Kurland:

I think the questioner is expressing something that we're going to start hearing more about: where is the money to come from for Capital Homesteading? This highlights the importance of the work of Dr. Harold G. Moulton, especially as summarized in his 1935 monograph, The Formation of Capital.

To try and state the case of contemporary economics and finance as briefly as possible, the set of assumptions and reasoning underlying the comments seems to go something like this:

1. Existing accumulations of savings are the sole source of financing for anything, whether capital formation, government spending, or stimulating consumer demand.

2. These accumulations can be redistributed through the hidden tax of inflation, but only within certain tolerable limits imposed by the Keynesian tradeoff between unemployment and inflation.

3. This tradeoff limits the amount of money available for anything, that is, the amount of money available determines the level of transactions.

4. If government uses up all the available money, whether directly through taxation or indirectly through inflation, capital formation will be spurred by the increase in effective consumer demand, limited by the amount of savings existing in the system and taxed away or redistributed through inflation.

5. If the money currently being used by government is, instead, diverted to Capital Homestead Accounts, business will be starved for financing, the State will be unable to fund its programs, and, since Capital Homesteaders will use their capital incomes first to repay the credit and then spend for consumption, there will be insufficient savings in the system to start the cycle over again at #1; economic growth will grind to a halt, and there will be an economic meltdown.

The fallacy in this argument, the source of the other fallacious assumptions and conclusions, is the dogmatic belief that existing accumulations of savings are the sole source of financing for anything. Under this assumption, small ownership for Capital Homesteading cannot be financed unless we strip government, consumers, and big business of financing. The quantity of money, presumably limited to what already exists, is an iron constraint that holds economic growth and development in a condition of utter dependency on it — what Kelso and Adler called, "The Slavery of Savings." Virtually all current schools of economics insist that the quantity of money in the system determines the level of trade. Period.

The story does not, however, end with that period, whatever mainstream economists want to believe. Something else is possible, and that "something else" will be the subject of the third and final posting in this series.

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