On Usury and Other Dishonest Profit, Part XXXIII

Obviously, simply saying that something must be done about the economy doesn't do anything. The world is filled with people who are busy instructing everyone else what they should be doing — usually what the others would prefer to be doing, if only they could, and if they had some specific blueprint to follow. One possible blueprint is the Capital Homesteading proposal of the Center for Economic and Social Justice. This posting is adapted from "The Case for a Capital Homestead Act for America" on the CESJ website.

In the US economy, productive capital grows annually in both the public and private sectors at a rate exceeding $7,000 for every man, woman and child. As that capital is currently financed using traditional methods, few, if any, new owners will be created. Over the years this has led to an enormous and growing wealth gap, illustrated by the fact that the two wealthiest Americans had greater accumulations than half the American people combined, while the top 10% own 90% of all directly-held corporate stock. Most citizens have not accumulated enough assets to meet their household needs for more than a month or so. They are wholly dependent on jobs, welfare, and charity to meet their needs. The non-rich have no independent source of an adequate and secure income.

CESJ's Capital Homesteading proposal is designed to close this growing wealth gap. It has the potential to do this in a manner consistent with free enterprise values of private property, free market competition and minimal government intervention with voluntary choices among producers and consumers. In other words, Capital Homesteading aims to lower barriers to full participation in the economic common good so that the poor and non-rich people can lift themselves up into capital ownership.

Unlike other proposals to make the distribution of wealth throughout the economy more equitable, Capital Homesteading would have the power to vest non-owners with property in the means of production without taking anything away from the rich except their unjust monopoly over ownership of as-yet uncreated capital. Like the homesteading of land under Lincoln's Homestead Act of 1862, the "Capital Homestead Act" is oriented to an open frontier — the technology frontier — that can and should be made equally accessible to everyone (but especially those who currently have no significant ownership of the means of production) as a fundamental right of citizenship.

The Capital Homestead Act is a proposal to provide a package of integrated income, gift, retirement and inheritance tax reforms, combined with monetary policy changes and other structural improvements to national economic policy. These are designed to provide every citizen an equal opportunity to own, control and share profits from productive capital.

The political rationale behind the Capital Homestead Act is that there is no reason that those who already have capital (and collateral to qualify for capital loans) should have a monopoly or be the exclusive beneficiaries of the government's control over "social goods" like money and credit that largely determine who will own future capital. A political democracy cannot rest comfortably and sustain itself on a foundation of government-supported economic plutocracy. Decentralized wealth would counter the corrupting influences of concentrated wealth in campaign financing.

An essential premise of Capital Homesteading is that those who have no capital should have equal access to credit to acquire capital, and that that credit should be made available by the government's central bank and allocated through local lenders for financing the capital needs of the productive economy. To address the growing wealth gap in market economies, Capital Homesteading would end the monopoly those who already have capital (and thus collateral to qualify for capital loans) gain when the government fosters the creation of more wealth through extension of capital credit and tax incentives for investment.

Facilitated by the monetization of capital credit under Federal Reserve policy and reinforced by capital credit insurance as a substitute for traditional collateral as described in the previous posting, Capital Homesteading reforms would enable every citizen to establish a tax-sheltered Capital Homestead Account (CHA) at a qualified local lending institution. This would allow every citizen to purchase and accumulate dividend-yielding, full-voting shares to supplement retirement income, relieving the burden on Social Security as the aged population expands. As with most ESOPs and in contrast to IRAs, the citizen would put up none of his or her own money. Through the CHA, he would gain access to self-liquidating capital loans at low service charges to buy equity shares. These shares would be expected to recover their purchase price out of future pretax dividends. The loan insurance, with premiums paid out of dividends, would cover the risk that the loan failed to be self-liquidating.

It is important to realize that, in accordance with sound money, credit, and banking theory, no money would be created and no credit actually extended through loans of this type until and unless the Capital Homesteader — the prospective borrower — located a sound and financially feasible investment and had the proposed investment properly vetted by the loan officer of a commercial bank, backed up by a second examination by the company that would insure the loan. If a proposed investment did not pass both reviews, no loan would be made, and no money created; all new money creation would be directly linked to the present value of a sound and financially feasible investment. Consistent with the "Real Bills" doctrine, this would avoid the twin evils of inflation (too much money chasing too few goods and services) and deflation (an insufficient supply of money to purchase available goods and services).

CHA loans could be invested in shares of: 1) the company where the citizen or a family member works, directly or through an Employee Stock Ownership Plan ("ESOP"), 2) companies in which the citizen is a regular customer or supplier, directly or through a vehicle that operates in accordance with the same principles that guide the ESOP, 3) a Community Investment Corporation (CIC) to link the citizen-owner to profits from and control over local land planning and development, and 4) a variety of blue-chip growth companies with a track record of profits once capital self-sufficiency has been reached and diversification of the ownership portfolio can be justified under the "poor man's prudent man rule," attributed variously to Andrew Carnegie and Mark Twain: "Put all your eggs in one basket — and watch that basket very carefully."

To encourage the issuance of new shares for meeting the financing needs of an enterprise, the double tax on corporate profits would be eliminated for companies that sell full dividend payout, voting shares to CHAs by making dividends tax deductible at the corporate level, although fully taxable as regular income to the recipient, unless used to make debt service payments on his or her accumulation in his or her CHA. To secure economic independence, each citizen would be able to defer taxes on his or her CHA accumulations below $1,000,000 until the assets were taken out or distributed to heirs, and to deduct as legitimate investment expenses the service fees and risk premiums, as well as the administrative cost of the CHA, if it were not self-directed.

To further promote CHAs, a "National Capital Credit Association" (NCCA) would be set up, to do what Fannie Mae and Freddie Mac do in facilitating and securitizing home mortgages. The NCCA, which could be owned and controlled by CHA lenders and citizens, would package insured CHA loans, create software for helping lenders to scrutinize the feasibility of CHA loans, and set uniform standards for CHA insurers, reinsurers, and lenders.

The NCCA and competitors qualified by the Federal Reserve would then bundle and take these securitized CHA loans to the Discount Window of the regional Federal Reserve Bank. The Federal Reserve would treat these insured dividend-backed securities (DBSs) as it currently treats government debt paper, using them as substitute backing for the currency. Then, as the Federal Government pays down the national debt, the productive assets of the economy — the real economy — would stand behind the nation's currency.

Currency linked to productive capital owned and controlled broadly among the people would replace vague government promises as a measure of value and as a safeguard against inflation and irresponsible or non-democratic policies by the nation's central bankers. Under Capital Homesteading, money would again be a servant of people, not their master, and would become an instrument to promote humanity's creative potential and quest for a just market economy.

Naturally, a program such as Capital Homesteading will have no effect at all if it cannot be implemented. Possible ways to achieve implementation will be the subject of the next posting in this series.