Yesterday we looked at what appears to be the single biggest problem when trying to resolve the current economic crisis in Ireland on a permanent basis — or anywhere else, for that matter. That is, the understanding of money and credit, and thus private property and even what it means for somebody or something to be a "person." Money is a contract, nothing more. The right of free association dictates that, as long as the matter of the contract is otherwise lawful and the parties to the transaction are competent, there is no reason why anyone anywhere should not be able to participate in the financing and thus ownership of new capital.
The Restructuring of the Social Order
Now, whether the social order — the aggregation of institutions that constitute our ever-changing milieux or "medium of life," as Father Ferree called it (Introduction to Social Justice, 1948) — is structured in such a way as to eliminate barriers to the fullest possible exercise of our natural rights to life, liberty, property, and the pursuit of happiness is another matter. When the institutions of society are such that they inhibit or prevent the legitimate and effective exercise of any of our natural rights, the proper response is to organize with others and carry out "acts of social justice" to bring our institutions into closer conformity with the precepts of the natural moral law and the demands of the common good.
To say it again, the way in which the social order today is most seriously flawed is in our money and credit systems — money and credit, as the lawyer-economist Henry Dunning Macleod explained, being simply two different aspects of the same thing. ("Money and Credit are essentially of the same nature; Money being only the highest and most general form of Credit." (Henry Dunning Macleod, The Theory of Credit. Longmans, Green and Co., 1894, 82.)) Under the iron dictates of the Currency School, however, all three mainstream schools of economics and most of the others assume as a given that money consists exclusively of coin, currency and (although some disagree) demand deposits and some time deposits. Omitted from this understanding is the vast amount of money issued by private individuals and companies in the form of various types of bills of exchange and promissory notes.
Further, under the Currency School, the coin, currency, and demand deposits must be gold or silver, backed by gold or silver, or government debt. The essential between private property and money is either ignored or removed, and "money" is limited to claims on the present value of existing wealth issued by the State or a State-substitute. (The Austrian School of economics maintains the link between private property and money, but does not extend the concept to present value of future marketable goods and services.) Construing money as representing the present value only of existing inventories of marketable goods and services limits the "supply of loanable funds" to whatever is withheld from consumption; the supply of money and credit, a right of private property and free association, becomes itself construed as a commodity.
Viewing money and credit — the means by which we exercise the "economic franchise" — as a commodity under the control of the State is analogous to the situation in a country in which the governors have decided that there are only 100,000 votes to be divided among 250,000 otherwise qualified adults. These votes will necessarily to be allocated among those individuals or groups that will use the votes to keep the current governors in power most efficiently. Assuming elections are held, votes will be allocated only to those who already have power, with the bulk of the votes going to those with the most power; the "one person/one vote" concept is meaningless when there is only one vote for every 2-1/2 qualified adults. This is analogous to capitalism. If the governors decide simply to keep themselves in power, they will allocate all votes to the existing government. This is analogous to socialism.
This distorted understanding of money and credit thus limits the ability to finance new capital formation to those who already own capital and can therefore either afford to cut consumption, or whose capital is so productive that they cannot possibly consume all of their income and necessarily reinvest the excess in more capital. Absent a redefinition of private property or a coercive redistribution of existing wealth, there is no way for those who currently lack ownership of capital to acquire ownership of capital, save by the exercise of super-heroic effort or by chance.
A "New" Money and Credit System
The answer to the question as to how people without ownership of capital can acquire ownership without changing definitions of money, credit, private property, freedom of association, or anything else, and without redistribution either directly through the tax system or indirectly through inflation, is to open up democratic access to the means of acquiring and possessing private property in capital. This is done by allowing people who have located a financially feasible investment (that is, capital that is expected to generate sufficient income to repay its own cost of acquisition within a reasonable period of time and thereafter provide an income sufficient to meet common domestic needs adequately), to create money backed by their private property stake in the present value of the investment. In other words, democratic access to money and credit is achieved by eliminating barriers that prevent or inhibit people's ability to enter into contracts involving the acquisition of capital. This is the basic principle behind the Employee Stock Ownership Plan, or "ESOP."
If others in the community accept the owner's "paper," that is, privately issued bills of exchange representing the present value of the existing or future marketable goods and services that constitute the matter of the contract, then the owner uses the bills of exchange directly as "money." ("And Scrooge's name was good upon 'Change, for anything he chose to put his hand to" — Charles Dickens, A Christmas Carol, "Stave I.") These are called "merchants' acceptances."
If others in the community do not accept the owner's paper, he or she takes it to a commercial or mercantile bank (a "bank of issue" or "bank of circulation"), "discounts" the bill at the bank, and receives in exchange promissory notes issued by the bank, for which service the bank takes a fee — the discount. This makes the bill a "bankers' acceptance." If there is a central bank, the commercial bank can rediscount the paper at the central bank, thereby ensuring a uniform and stable currency in the entire region served by the central bank. To satisfy the demand for collateral, the "borrower" (the drawer of the original bill of exchange) may use the "risk premium" typically charged on all loans to purchase a capital credit insurance policy to pay off in the event of default.
In this way, those who currently lack ownership of capital can acquire ownership of capital, financed by the future earnings (future savings) generated by the capital itself. This process is described in much more detail in Dr. Harold Moulton's book, The Formation of Capital (1935) as well as Kelso and Adler's The New Capitalists (1961). In this context, the subtitle of the latter is particularly significant: "A Proposal to Free Economic Growth from the Slavery of [Past] Savings." The actual steps are outlined in "An Illustrated Guide for Statesmen," that can be implemented anywhere in the world, but probably with greater ease in Ireland than in many other places.