First Steps for Introducing Monetary Reforms

Yesterday we looked at the legal technicalities involving using the Federal Reserve as the source of financing for a program of expanded capital ownership.  We discovered that even today, when the central bank of the United States has been used primarily for something it was never intended or designed for, it still has the capacity to do what needs to be done.  It’s all right there in § 13(2) of the Federal Reserve Act.

Now we need to look at the specific steps for implementing Capital Homesteading monetary reforms to accelerate private sector growth linked to expanded capital ownership.  These would be as follows:

No more of this stuff (bills of credit).

1. Declare a moratorium on any future purchases by the Open Market Committee of the Federal Reserve System of U.S. Treasury bills and other public debt paper, including foreign currencies, thus forcing the U.S. Treasury to sell directly its paper on the open market to be purchased with existing savings, and putting an end to further monetization of government deficits.

More of this stuff (bills of exchange).

2. Simultaneously, the Federal Reserve should announce a two-tiered credit policy under which Federal Reserve-monetized credit for Capital Homesteading (broadly owned private sector growth) would be set at a service fee of an estimated 0.5% or less. The Federal Reserve’s discount window would be exclusively available to member banks and members of the Farm Credit system for rediscounting “eligible” paper for feasible industrial, commercial, and agricultural projects.

More than land can be homesteaded.

3. Legislators would then structure citizen accessibility to the lower-cost, Federal Reserve -monetized capital credit, ideally from the bottom up. For example, like the one-time $10,000 home loans to World War II veterans, allotments to obtain Capital Homestead credit (e.g., $7,000 per capita annually) could be extended directly to eligible individuals through individual Capital Homestead Accounts (CHAs) to be used to obtain credit to purchase investments of their choice, as long as local banks (subject to federal feasibility criteria) determine the venture to be feasible and the loan repayable with future pre-tax earnings. (It is important to note that the proposal is not to create money and then find suitable capital investments. That would be inflationary. Rather, the proposal is first to find suitable investments and then create money backed by the present value of the investment itself to finance formation of the capital.)

Commerce and industry can also be homesteaded.

With the “bottom-up” approach to Capital Homesteading, loans from local banks to IRS-approved, tax-exempt Capital Homestead Accounts (CHAs), would provide every citizen and all members of his family access to capital credit to invest in full dividend payout, voting shares of new and expanding enterprises or SEC-approved private offerings of existing shares. Pre-tax profits would secure and repay the loans, which ideally would be insured by private sector capital credit insurance and re-insurance.

Citizens through CHAs would have the choice of investing that credit in companies in which the individual or his family has a stakeholder interest, such as (1) a company for which a member of the family works, (2) a citizens land bank that aggregates local land for large-scale development, (3) a utility or other natural monopoly servicing his community, (4) a company in which he is a regular customer or supplier, or (5) a diversified portfolio of SEC-approved mature companies with a solid track record of profitability.

Power to the people through property.

This option would place enormous economic power (the power over money and capital credit) in the hands of the American people, where it belongs. Local banks and financial institutions would still guide the process, backed up by capital credit insurers and ultimately by federal and state banking and tax authorities. To discourage bad investments, high-risk ventures would be automatically subject to high premium rates for capital credit insurance, thereby creating a protective shield against the use of bank credit for blatantly non-feasible projects.

An alternative, more top-down, management-controlled approach to credit diffusion would be to channel capital credit through existing or new enterprises that adopt ownership-expanding legal entities like ESOPs, Citizens Land Banks, and Consumer Stock Ownership Plans. In this way, entrepreneurs, farmers, professionals — those who conceive and launch enterprises — could start their own new ventures. Corporations and farms needing expansion capital would then have new lower-cost sources for meeting their funding requirements.

All lower-tier credit, except for credit to purchase one’s primary residence, would have to be supported by a bank-approved business feasibility study reflecting the self-liquidating nature of the transaction. In the case of the top-down approach, the loan paper would also be:

(a) guaranteed and secured by the general creditworthiness of the enterprise as a going concern;

(b) collateralized by equity instruments, accounts receivable, land and other hard assets involved in the transaction, plus the shares of stock acquired with the loan;

(c) insured to cover the risk of default by commercially available credit insurance, through premiums paid by borrowers or lending banks;

A return to prosperity.

(d) designed to be repayable principally from the future pre-tax earnings of the enterprise guaranteeing the loan’s repayment;

(e) indorsed (the correct spelling for financial instruments) for negotiability by the commercial banks making the loans; and

(f) indorsed and guaranteed by every collective bargaining unit or voluntary association representing workers of the enterprise, adding further security to the loans to its members.

4. Banks negotiating loan paper that is eligible for rediscount with the Federal Reserve would be free to allow market forces to determine the bank’s mark-up for money, above the Federal Reserve’s 0.5% Capital Homesteading service fee. Thus, commercial bank lenders could cover their normal administrative costs and profits, plus a premium to cover the anticipated risk of default on the specific investment being financed. Lending rates for prime customers should drop to an estimated 3% or less under the two-tiered credit system, without any taxpayer subsidies.

By the way, many of the postings in this series are from the draft of the revised edition of Capital Homesteading for Every Citizen we've been working on, so if you see something really unusual or confusing, you might want to let us know.

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