Last Thursday we
closed the daily posting with the eternal question, “How can we use what we
know to make every child, woman, and man into an owner of capital?” and
promised to look at it on Monday. Well,
it’s Monday, so here goes —
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| The first step . . . or the first STEPS? |
What’s the first
step in turning Just Plain Folks (JPF) into owners of productive capital?
The first thing
we learn is that it is a little misleading to say “the first step” in a program
of reform, as all of the steps should be done concurrently. We must start
somewhere, however, and monetary reform is key to the Just Third Way.
It is certainly
possible for an economy to run without “currency,” a standard way to measure
money. Ancient Egypt attained a very high degree of civilization just by having
people create money as they needed it by entering into contracts — that’s why
they needed so many scribes.
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| "Hi. I'm Henrietta, one of the earliest standards of value." |
It is much
better, however, for a government to decide on a standard unit of measure for
contracts, and for people to organize and establish institutions to deal in
contracts. The standard unit is called the unit of currency (from “current
money”), and the institution is called a “bank.”
The job of a
commercial or mercantile bank is to accept contracts offered by people who have
a capital project they want to finance. Since most people’s word or
“creditworthiness” is not generally recognized outside a small circle, and each
one differs from all the others, they are willing to pay a fee to an
institution (a bank) that has a good reputation for creditworthiness,
substituting the bank’s contract for their own.
Further, since
each bank’s creditworthiness differs from all other banks, a “bank for banks” —
a central bank — is essential to establish and maintain a uniform and stable
currency. Thus, where a single commercial or mercantile bank provides a uniform
and stable currency among all its customers, a central bank does the same thing
for all of its customers: the member banks.
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| Golden rule: the king want your gold, he get your gold. |
Note that there
is nothing in this description of central banking about financing government.
It is an accident of history that central banks got into financing government
operations and started backing their contracts (banknotes and demand deposits)
with government debt instead of private sector productive assets. The organizers
of the Bank of England, the first true central bank, had gold and silver that
King William III wanted, so he demanded that they turn it over to him as a
condition of getting a bank charter, replacing it with “government stock” that
relied on the faith and credit of the State instead of the productive capacity
of privately owned capital.
The first step in
a program of monetary reform, therefore, is to stop central bank financing of
government, and restrict all new money creation to purposes of new capital
formation.
Through Just
Third Way reforms, economic growth would be freed from the slavery of past
savings (“old money”), while creating a domestic source of new asset-backed,
interest-free (but not cost free) money and expanded bank credit to finance new
capital repayable out of future savings. To ensure that ownership of future
private sector growth and newly created wealth is universally accessible to
every citizen, such newly created money and credit would only be available
through economic democratization vehicles, administered through the competitive
member banks of a well-regulated central banking system.
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| Real golden rule: when people own capital, they have the gold and make the rules. |
The creation of
new money and credit would be non-inflationary and would simultaneously broaden
purchasing power throughout the economy. To accomplish this, a key reform is a
two-tiered interest policy by the central bank that would distinguish between
productive and non-productive uses of credit.
Under the first
tier, future increases in the money supply (“new money”) would be linked to
actual growth of the economy’s productive assets, creating new owners of new
capital through widespread access to interest-free capital credit repayable
with future profits. The central bank would create (i.e., “monetize”) interest-free credit, with lenders adding their
normal markup as service fees above the cost of money. This would establish an
unsubsidized minimal rate for financing technological growth. This would
provide the public with a currency backed by increasingly more efficient
instruments of production, real wealth-producing capital assets, rather than
unsustainable government debt.
The second tier
would allow substantially higher, market-determined interest rates for
non-productive purposes, for which “past savings” would remain available. The
central bank would be restrained from future monetization of national deficits
or encouraging other forms of non-productive uses of credit, causing upper-tier
credit to seek out already accumulated savings at market rates.
Capital
Homesteading would also provide through capital credit insurance a rational way
to deal with risk, as well as an additional check on the quality of loans being
supported by the central bank. Capital credit insurance and reinsurance
policies would offset the risk that the enterprises issuing new shares on
credit might fail to repay the loans. Such capital credit default insurance
would substitute for collateral demanded by most lenders to cover the risk of
non-payment, thus enabling the poor and others with few assets to overcome the
collateralization barrier that excludes poor people from access to productive
credit.
#30#
