We can therefore dismiss the two main systems that rely on the wage system, capitalism and socialism. The only real difference between the two is the identity of the small elite that owns or controls ownership of the means of production, anyway. What we propose, then, is something analogous to Chesterton and Belloc's "distributism," or an economic arrangement of society characterized by widespread direct ownership of the means of production.
Classic distributism adds that there is a preference (not a mandate) for small, family-owned farms and artisan shops. Further, Chesterton and Belloc assumed as a given that existing accumulations of savings are necessary to finance capital formation. The goal, however, is more important than the specific means used to achieve the goal — particularly if the means are contrary to sound principles of economics and finance, or somehow violate fundamental principles of the natural moral law.
As we saw in the previous posting in this series, Capital Homesteading gets away from the presumed reliance on existing accumulations of savings to finance capital formation by going back to sound banking principles. A commercial bank that has the power to act as a "bank of issue" (that is, can issue banknotes or create demand deposits — checking accounts), can take a real bill — a lien on something of value — as security from a borrower. This is backed up with a capital credit insurance policy for additional security, or "collateral." The bank can then print banknotes or create a demand deposit in the amount loaned on the bill, and hand the banknotes or checkbook over to the borrower.
The borrower takes the "money" and invests it in a project that is reasonably expected to generate enough profit to repay the loan, buy back the real bill, and provide sufficient income for the borrower on which to live. When the loan is repaid, the bank cancels the banknotes or the demand deposit, and returns the bill to the borrower, who in turn cancels the bill.
Because the money is created in the same or lesser amount of the present value of the investment, there can be no inflation unless the investment fails. In that case, of course, the money supply is reduced by the amount of the capital credit insurance proceeds paid to the lender. The capital credit insurance company pays off on the policy, and the bank takes the money and cancels the money, the same way the bank would have had the loan been repaid by the borrower in the usual way. This offsets the inflationary impact of the prior money creation for the failed investment.
Thus, by getting the right to go to a commercial bank and borrow up to, say, $7,000, and participate with the bank in creating money in this fashion, a "Capital Homesteader" could, with the guidance of a competent financial advisor, purchase part ownership in: 1) companies for which a member of the family works; 2) a company where the Homesteader has a monthly billing account; or 3) "qualified" companies that are well-managed and highly profitable. Companies could also establish Employee Stock Ownership Plans (ESOPs) for their workers, and Consumer Stock Ownership Plans (CSOPs) for their regular customers to borrow funds repayable with future pre-tax profits, for the issuance of new shares, or for the purchase of existing shares.
Communities that adopt for-profit Citizens Land Cooperatives (CLCs) could attract interest-free credit to buy land for development or build new infrastructure. This would enable every citizen to participate as a shareholder in community land planning and governance decisions. Moreover, each citizen would share in the profits from rents and fees for the use of land and infrastructure. Through a Capital Homestead Act, access to capital credit — which today helps make the rich richer — would be enshrined in law as a fundamental right of citizenship, like the right to vote.
Using its powers under § 13 of the Federal Reserve Act of 1913, the Federal Reserve System would supply local commercial banks with the money needed by businesses to grow. The central bank would discount the real bills presented to commercial banks, instead of allowing banks to create money on their own. This would stabilize the currency and provide immediate 100% "hard asset" reserves for all the money in the commercial banking system.
An important feature of Capital Homesteading is that the new money and credit for private sector growth would flow through Capital Homestead Accounts and other credit democratization vehicles. This would ensure that as many people as possible had the means to acquire and possess private property in the means of production. Capital Homesteading would thereby enable a country to comply with the recommendation expressed by Pope Leo XIII in what is generally considered the first "social encyclical," Rerum Novarum (1891),
We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners. (§ 46)Through a well-regulated central banking system and other safeguards (including capital credit insurance to cover the risk of bad loans), all citizens could purchase with interest-free capital credit, newly issued shares representing newly added machines and structures. These purchases would be paid off with dividends that the paying companies could deduct from their taxable income. Nothing would come out of anyone's existing accumulations of savings or reduce the income anyone uses for consumption purposes.
Once the acquisition loan was fully repaid, the Capital Homesteader would be the full, legal owner of the shares. Thereafter, the Homesteader would receive an adequate and regular income sufficient to meet common domestic needs from the earnings of the capital he or she accumulated over the years, and be able to pass it on to any children.
That is how Capital Homesteading is designed to work — although we have only hinted at the technical details of the proposal. It only remains to organize in solidarity with like-minded others, and get to work. The first step would be to visit the CESJ website and find out more about Capital Homesteading.
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