Recently we had a reader ask a few questions about monetary
policy under CESJ’s proposed Capital Homesteading program. This is understandable, as the vast majority
of experts in money, credit, banking, and finance are locked into “Currency
School” assumptions, while the Just Third Way is based on “Banking School”
assumptions. Trying to understand the
Banking School from the perspective of the Currency School is virtually
impossible, as the Currency School takes some assumptions from the Banking
School, but not all.
The questions had to do with the role of insurance and where
the insurance pool would come from, and the role of the Federal Reserve.
Basically, capital credit insurance and reinsurance would replace
more traditional forms of collateral. If
we include the collateral requirement as part of the cost of borrowing,
virtually no one aside from the wealthy can borrow, because no one else by
definition has accumulated the wealth to serve as collateral. Replacing traditional forms of collateral
with insurance would both reduce the total cost of borrowing immensely by not
requiring that people accumulate savings before they can invest, and remove a
significant barrier preventing or inhibiting most people from borrowing to
finance new capital formation.
Admittedly, the initial insurance pool would have to be out
of existing savings. People with savings
would invest in the pool, and get a market-determined rate of return on their
investment. As the pool built up out of
premiums, the original investors could be liquidated . . . we mean, their investments
could be liquidated (we have to watch our language these days . . .). Risk premia
are always conservative, so there should always be a surplus in any insurance
plan that is either used to build up the pool, or paid out as dividends to
policy holders — we strongly recommend mutual insurance companies in which the
policy holders are also shareholders as long as they have policies.
Changing the financial system from its current reliance on
government and consumer debt, and to an asset-backed money and credit system
(as Henry Dunning Macleod pointed out, money and credit are simply two sides of
the same coin, so to speak) is a key feature of Capital Homesteading. The Federal Reserve, in fact, was instituted
in part to do just that — but was “hijacked” by the federal government to
finance the First World War and the New Deal.
The idea was to replace the government debt-backed National
Bank Notes of 1863-1913, the Treasury Notes of 1890, and, eventually, the
United States Notes (the “Greenbacks”) of 1861-1971 with government debt-backed
Federal Reserve Bank Notes, and then the government debt-backed Federal Reserve
Bank Notes with indistinguishable Federal Reserve Notes backed by the present
value of private sector existing and future marketable goods and services.
This was to be done by rediscounting bills of exchange from
member commercial banks, and (if that proved inadequate to provide an elastic,
asset-backed money supply) purchasing existing private sector securities
(mortgages and bills of exchange) on the open market. (Caveat: “mortgage” is not limited to home
mortgages, but is the term for any financial instrument representing the
present value of existing marketable goods and services; home mortgages, being
on consumer goods, did not originally qualify for purchase on the open market.)
Kelso’s proposal was to have the Federal Reserve stop
dealing in government-issued securities (which was only allowed originally to
be able to retire the debt-backed currencies, above), and have all new money
created in ways that created new owners and
replaced the current government debt-backed money supply with a private sector
asset-backed money supply.
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