Monday, October 6, 2014

Some Thoughts on Money and Credit


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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