Every so often we get a question from one of our readers that we can answer and get a new blog posting at the same time. This one comes in response to someone in another country who wanted to know the basic principles of the new monetary system we propose under Capital Homesteading and other Just Third Way reforms.
Specifically, we were asked if we could say something about the new monetary system that could be established by any country that has or would establish a central bank.
|"Don't like that title? You should have seen the old one!"|
First, what we’re talking about is not, strictly speaking, anything new at all. It’s actually a return to the original idea of money, something along the lines of what Louis O. Kelso described in his third book, Two-Factor Theory (1967):
Money is not a part of the visible sector of the economy; people do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector. (Louis O. Kelso and Patricia Hetter, Two-Factor Theory: The Economics of Reality. New York: Random House, 1967, 54.)
|"Currency Principle? Feh. Banking Principle!"|
To give a short and snappy answer, all monetary systems in the world today operate on the basis of the Currency Principle. Stated most simply, the Currency Principle is that the level of economic development or activity depends on the quantity of money in the economy. This necessarily implies that all financing must come out of past savings — and that means either the rich (who control past savings) or the State (that can manipulate the currency) end up owning pretty much everything.
Under the new system that we propose that all capital formation would be financed with future savings and include universal access to capital ownership by every person. As specified under § 17 of the UN Universal Declaration of Human Rights, every person has the right to own property individually or in free association with others.
This is called the Banking Principle, or "the 'real bills' doctrine." Again stated most simply, the Banking Principle is that the level of economic development or activity determines the quantity of money, not the other way around as in the Currency Principle. This implies that new capital formation can be financed either with existing (past) savings or future savings, which means that anyone with a financially feasible capital project — i.e., one that pays for itself out of the future earnings of the capital itself (“future savings”) — can become an owner of capital. Capital ownership does not have to be restricted to a private sector élite as in capitalism, or the State as in socialism.
|"I give Economic Personalism my imprimatur!"|
All types of money, whatever form they take, are either past savings or future savings. In general terms, past savings financial instruments (money) are called mortgages, while future savings instruments are called bills of exchange.
The total money supply consists of currency (coin and banknotes) which is backed by either past or future savings, and checking accounts that are also backed by either past or future savings, savings accounts (past savings), commercial paper (future savings in large denominations issued by businesses for a short term), and other securities in the private sector backed by existing inventories or future production.
For financing future growth at non-inflationary (or deflationary) rates, the emphasis of economic personalism is on bills of exchange (future savings), which allow new capital to be financed without the necessity of past savings.
That’s the basic outline of the monetary reforms we propose under the Just Third Way of economic personalism. We’ll look at some more questions when we return to this subject.