This past Monday
we addressed the problem of the “Automatic Gainsayer” who keeps insisting that
(in our example) Country Y is so corrupt that we could never institute Just
Third Way reforms, especially of the financial and tax systems. For the sake of the argument, we demonstrated
that even if the reforms turned out to be impossible from the top down — which, with the right
leader, is a non-issue — it would still be possible to institute reforms from the bottom up.
Today we will
conclude our little dissertation on why a properly run central bank is
essential in an economy that wants to engage in sustainable growth and
development by giving a few specifics on what a properly run central bank
should be doing. Since this is the Just
Third Way blog, we’ll do this within the framework of the Four Pillars of an
Economically Just Society,
·
A Limited Economic Role for the State,
·
Free and Open Markets,
·
Restoration of the Rights of Private Property,
and
·
Expanded Capital Ownership.
A Limited Economic Role for the State,
Most people (and
all politicians . . . by which we don’t necessarily imply that politicians
aren’t people) think that central banks were invented to finance
government. No, that was just an
accident of history. Central banks were
invented to ensure that commercial (mercantile) banks always had
“accommodation,” that is, sufficient credit and reserves to engage in commerce.
 |
| Legal Counterfeiter for the Government |
When the
“Merchant Adventurers” formed the Bank of England, they pooled £1.2 million in
gold and silver to serve as reserves to meet demand for conversion of note
issues and redeem obligations for which there were no offsetting balances. William III, short of cash, demanded a “loan”
of the gold and silver as a condition of granting a charter, replacing the
specie with “government stock” (i.e.,
unbacked bills of credit) that were — by government fiat — “good as gold”
(which begs the question that if government debt was “good as gold,” why did
the government need the Bank’s gold?).
Thus, by the stroke of a pen, the Bank of England was transformed from a
private sector venture into a de facto government agency.
The first central
banking reform, then, is to forbid further monetization of government
debt, a form of "legal counterfeiting," an oxymoron like the "living constitution" that killed the U.S. Constitution, or "government intelligence" (no comment). If the government wishes to
borrow, it must go to existing pools of savings, not create obligations backed
by its own obligations — i.e.,
promises to pay backed by promises to pay.
Being unable to operate except by raising money through taxation or
borrowing existing funds necessarily restricts the economic role of the State
by making it dependent on the people, rather than the other way around.
Free and Open Markets
Free and open
markets are the best means yet found for determining just wages, just prices,
and just profits. The problem is that few
people these days have the means to participate in the market, free or unfree.
 |
| A free market is one to which everyone has means of access. |
By “free market,”
of course, we do not mean a market in which “anything goes” (laissez faire), but one in which everyone is
free to participate, that runs by fair and just rules that everyone can
understand, and that apply to all.
One definition of
money being “the medium of exchange,” it necessarily follows that participation
in a free market includes access to money and credit — the media of exchange. (According to Henry Dunning Macleod, money
and credit are simply two different aspects of the same thing.)
By prohibiting
further monetization of government debt, the central bank can return to its
original function: providing liquidity for private sector development. By allowing anyone with a qualified project
access to a commercial bank, and all commercial banks access to the central
bank, there could always be enough media of exchange to carry out all
transactions. This would provide the
means for every citizen to participate freely in the market.
Restoration of the Rights of Private Property
When a government
monetizes its own debt, it inflates the currency by creating more claims on
existing wealth, but without owning the wealth on which it is creating
claims. It is, essentially, making
promises for other people to keep — again, a form of "legal counterfeiting."
 |
| Inflation steals value |
That is, when a
government monetizes its own debt, it is violating the property rights of its
citizens by decreasing the value of privately held financial assets denominated
in the national currency, and transferring the value to its own coffers. By not allowing governments to monetize their
own debt, private property is restored to that degree.
Of course, the
primary object of this “pillar” is to secure to corporate shareholders a
meaningful vote and the income attributable to their pro rata share of
ownership. That does not, however,
preclude restoring other rights of private property by reforming the central
bank.
Expanded Capital Ownership
A reform of the
central bank is essential to any program of expanded capital ownership. It answers the question, Where is the money
to come from?
The key to
Capital Homesteading is to realize that capital is “inherently
financeable.” That means not that you
pay for capital, bur that the capital pays for itself. That being the case, if a proposed capital
project is reasonably expected to pay for itself out of its own profits in the
future, why should you pay for it out of what you have withheld from
consumption in the past?
Just as existing
unconsumed production from the past can be conveyed by a contract called a
mortgage, future uncreated production can be conveyed by a contract called a
bill of exchange. The requirement, after
all, is the same in both cases: the contract must be redeemed on the specified
date; you don’t have to have the production on hand when you enter into the
contract. You only have to be able to
deliver the production when you fulfill the contract.
Thus, anybody
with a financially feasible capital project can take a contract for the
purchase of the capital to a commercial bank, and the bank will examine
it. If the bank agrees that the project
will pay off as expected, it will accept the contract and issue a promissory
note. This promissory note will back a
new demand deposit, which the borrower will draw on to finance the new capital.
Once the capital
becomes profitable, the borrower will pay off the promissory note, redeeming
the contract, and enjoy the rest of the income him- or herself, having become a
capital owner.
The central bank’s
role in this is to accept the contract from the commercial bank, issuing its
own promissory note to back a demand deposit in the name of the bank, which
provides 100% reserves to cover the bank’s loan to the original borrower. This ensures a uniform and stable, elastic,
and asset-backed currency for the region served by the central bank.
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