Anything that has a present value can be put into a contract as “consideration” — the inducement to enter into a contract. Past savings obviously have a present value, for the marketable goods exist, and claims on them can be drawn or issued and used as “money.” Money, of course, is anything that can be accepted in settlement of a debt, or “everything that can be transferred in commerce.” All money is thus a contract, just as in a sense all contracts are money.
Not only do existing goods have a present value, future goods, goods that don’t even yet exist, also have a present value. This present value can be put into a contract called a “bill of exchange” and either used directly as money, or taken to a commercial or mercantile bank and exchanged for the bank’s promissory note.
The borrower’s bill of exchange backs the bank’s promissory note, and the bank’s promissory note backs a new demand deposit. The borrower uses the demand deposit to finance economic growth, and when his or her project generates profits, uses a portion of the profits to buy back his or her bill of exchange from the bank, thereby cancelling the new money that was created.
To make this process more secure and to spread the risk of default, there can be a “bank for banks” called a central bank. The commercial bank can take the bill of exchange that it accepted from the borrower, and sell it to the central bank in exchange for the central bank’s promissory note that backs either new currency or a commercial bank demand deposit at the central bank.
When this is done, the original bill of exchange backs the central bank’s promissory note, the central bank’s promissory note backs the commercial bank’s demand deposit at the central bank, the commercial bank’s demand deposit at the central bank backs the commercial bank’s promissory note, the commercial bank’s promissory note backs the borrower’s demand deposit at the commercial bank, and the borrower’s “creditworthiness” (ability to repay the commercial bank’s promissory note) backs the original bill of exchange. In this way it is possible to finance economic growth by increasing production in the future, rather than by cutting consumption in the past.
There is, however, another use for past savings: collateral. Banks will not purchase a bill of exchange unless the issuer (the borrower) is deemed “creditworthy.” This includes possession of something of value that can be seized if the borrower fails to redeem his or her bill. This, too, restricts ownership of new capital to those who are already rich, or who have the political power to change the definition of ownership and redistribute what belongs to others.
Kelso and Adler, however, recommended replacing traditional collateral in the form of existing wealth with capital credit insurance. The “risk premium” already charged on all loans (except for some government bonds that are, somewhat dubiously, deemed “risk free”) can be changed into an actual premium on an insurance policy that pays off in the event a borrower defaults.
It is thus unnecessary to insist on capitalism in order to preserve property, or socialism to ensure that everyone can benefit from economic growth. Simply by shifting from past savings to future savings it becomes possible to “free economic growth from the slavery of [past] savings,” as Kelso and Adler put it.
Kelso’s invention of the Employee Stock Ownership Plan (ESOP) is an application (in part) of these principles. Through an intensive program of expanded capital ownership such as “Capital Homesteading,” the benefits of capital ownership financed with future savings could be extended to the entire economy.