As Moulton proved, despite the assertions of the Keynesians, Monetarists, and Austrian School — and almost every minor economic school, including all forms of socialism — money can be created through the banking system without the necessity of existing accumulations of savings, and without taking anything away from current holders of wealth . . . including holders of government bonds. The quantity of money does not determine the level of trade. Rather, consistent with Say's Law of Markets, the level of trade determines the quantity of money.
As readers of this blog should be aware, this is possible through something called the real bills doctrine. The real bills doctrine is that money can be created as needed without inflation or deflation if (and only if) the new money is based on the present value of existing or future marketable goods and services. The only legitimate use of existing accumulations under the operation of the real bills doctrine is to provide an insurance pool — collateral — if the new money turns out to have been created to finance a capital project that does not generate its own repayment.
Theoretically, under Capital Homesteading, it would be possible to continue to finance government deficits by creating money through the Federal Reserve, just as now. From the standpoint of Irving Fisher, the inflation (he called it "reflation") this would cause would actually help maintain a stable price level, offsetting the fall in prices anticipated as people's income became worth more in response to the increasing productiveness of capital. "Reflation" would, of course, cheat people by forcing them to pay higher prices than necessary, but it would finance government deficits and prevent the fall in prices that, in a Keynesian/Monetarist/Austrian framework based on existing accumulations of savings, is a disaster.
The problems with allowing the government to monetize deficits under Capital Homesteading render such a step social, political and economic suicide, however. The two most critical problems are:
1. It is never a good idea to allow government to finance operations without recourse to the tax system. As Henry C. Adams pointed out in 1898 in his book, Public Debt: An Essay in the Science of Finance, allowing government to circumvent the tax system is the surest way to destroy liberty and individual autonomy, to say nothing of allowing stronger states to take over weaker ones.Obviously, these problems are rooted in re-defining the concept of "money" from "anything that can be used in settlement of a debt," to "a purchase order issued by an all-powerful State or economic elite." Our questioner, however, wanted to know what would happen under Capital Homesteading to holders of government securities. We'll look at that issue in the next and, hopefully, final posting in this series.
2. Fisher and others mistake currency appreciation (good) for deflation (bad). Currency appreciation means that it costs you as much or less in terms of your labor or capital as it did before to obtain your money, but the money buys more than it did before. Deflation means that there isn't enough money in the economy to provide for the needs of trade, and the value of the money is bid up as the interest rate falls. In both cases the money is "worth more," but the former is a great benefit (as Moulton pointed out in Income and Economic Progress, 1935), while the latter is very bad for everybody except holders of financial assets.