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.
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| "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.)
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| "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.
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| "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.
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