We were going to
call this “Capital Formation for Dummies,” but we don’t want to risk a lawsuit
from one of our favorite — and most useful — publishers. All we want to do is outline how, under
Capital Homesteading, any child, woman, and man can become an owner of
productive capital without selling his or her soul, or taking stuff that
doesn’t belong to him or her.
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| "Capitalist pig? Socialist swine? I answer to both. Call me." |
So, we’ve
established that the fundamental economic principle of socialism is the same as
the fundamental economic principle of capitalism. We’ve also learned that the only real
difference between capitalism and socialism is one of degree, not of kind.
Yes, in theory socialism and capitalism are
180 degrees from one another — in theory.
Socialism posits that all rights originate in the collective, which is
impossible, so that no one has any rights except for those that the power élite
of the State (however you construe it) consider allowable. Capitalism accepts that rights originate in
the individual . . . but is indifferent to the fact that as the social order is
currently structured the vast majority of people cannot exercise their rights
in any meaningful fashion.
To all intents
and purposes, then, there is no effective difference between socialism and capitalism
as far as the ordinary person is concerned.
Sure, capitalism recognizes that inalienable rights exist . . . but so
what? Without the means to exercise
those rights, you might as well not have them.
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| Certain rights are universal and absolute. |
That’s what
Capital Homesteading is designed to counter.
Through acts of social justice, barriers that inhibit or prevent people
from exercising their natural rights are removed, and the means to make those
rights effective are made democratically available to all qualified persons.
And, yes, you do
have to qualify to exercise any
right, especially a natural right. For
example, to exercise the rights of life, you have to be alive. To exercise the rights of liberty, you have
to be free. To exercise the rights of
private property, you have to have access to the means of becoming an owner and be able to control what you own
within reasonable limits.
That is why
murder and theft are prohibited by every law code ever devised, and slavery
isn’t such a good thing, either. It’s
also why creating barriers that prevent the exercise of rights — including
access to the means of exercising rights — violates both individual and social
justice.
Capital
Homesteading’s focus, therefore, is on democratizing access to the means of
acquiring and possessing productive capital.
And that means access to money and credit.
After all that
buildup, how Capital Homesteading would work for the ordinary person might be a
bit of a letdown. It’s just too simple —
especially compared with the Keynesian gymnastics that currently have the
global economy in thrall.
Now, keep in mind
that we’re not talking here about how to get a Capital Homestead Act enacted
into law anywhere. We’re talking about
how the system would work in general terms once it’s up and running.
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| What are the annual or periodic capital needs of the economy? |
Every year or
period (ideally, this would be done four times a year to coincide with seasonal
fluctuations in the market), whatever government bureau or agency that has been
charged with oversight of the system estimates the total capital needs for the
next period. This is divided by the
total population — everyone who is a
citizen will automatically be eligible — giving the estimated amount each
citizen can borrow to purchase qualified, newly issued shares in blue chip
companies.
It is important
to note that money is not created and handed out. At this point, there is no new money in the
system. Instead, each citizen is given a
voucher entitling him or her to borrow money that will only be created after it has been verified that a
proposed investment is sound, and that can only
be used to finance that proposed investment.
This way, the amount of new money in the system is tied directly through
private property to the present value of future marketable goods and services
in the economy.
Locating
financially feasible projects before creating any money prevents both
artificial (“demand pull”) inflation and deflation. It cannot, of course, prevent “natural”
demand pull inflation or “cost push” inflation.
These result from changing consumer wants and needs, and increases in
production costs, respectively.
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| "Demand-Pull" inflation at its worst. |
It also doesn’t
prevent currency appreciation, which is different from deflation. In currency appreciation your money is worth
more because it will buy more, usually because of increases in productivity or
cost efficiencies that lower prices. In
deflation, your money is worth more because there’s less of it, so the value
goes up because the system doesn’t allow for expansion of the money supply as
production increases, or because some politician thought it was a good idea to
deflate the currency.
Having received
your voucher (you just turned into the example), you go down to your friendly
local bank and ask your Capital Homesteading consultant what’s available for
investment. She looks over the options
and your wants and needs, and suggests 1,000 shares of Coozbane Corporation, a
company with a proven track record and with an award winning system of Justice-Based
Leadership, Governance, and Management, at $9.80 per share.
You say, “That
looks good. Let’s run it past Our
Capital Credit Insurance Guy.” The OCCIG
gives his approval, and your friendly local bank issues a promissory note for
$10,000, worth $9,800 at a 2% discount for risk and time value of money, and
creates a new demand deposit in your name after you sign the promissory note
and hand over the contract requiring you to use your $9,800 to purchase 1,000
shares of Coozbane Corporation along with a lien on the shares.
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| Jean-Baptiste Say: "Production equals income." |
You immediately
purchase the 1,000 shares of Coozbane Corporation for $9,800 and put them into
the escrow account inside your Capital Homestead Account. When the Coozbane Corporation pays dividends,
you make ten equal payments of $1,000 each over time. This releases the shares from escrow, repays
the promissory note, and redeems the contract for the purchase of shares. It also cancels the $9,800 the bank created
for you to purchase the shares, and gives the bank $200 in revenue.
In this way you
can become an owner of income generating productive capital, but without
reducing current consumption income, and spending your life scrimping and
saving out of an already inadequate wage.
Of course, for more than these bare bones, it might be good to take a
look at the “Capital
Homesteading” pages on the CESJ website. . . .
All that is from
your point of view. What about from the
bank’s perspective? Where does it get
the money it’s lending you to purchase the shares?
The bank creates
the money out of the present value of the new capital in which you’re
investing. To people who don’t really
know how the different types of banks work, this can look like magic, or waving
a wand to make something out of thin air — but it’s not. If that were the case, then the banks really
would be the “banksters” that people who don’t know what they’re talking about
talk about.
So what, exactly,
does a bank do? How does it create
money?
To understand
what a bank does, we have to understand that all money is simply a
promise. If the promise is good, it has
a “present value” . . . meaning that the promise is worth something right now,
in the present time.
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| A banknote only for banks: the $100,000 bill. |
Obviously, the
longer you have to wait for a promise to be fulfilled, the less it’s going to
be worth right now because of risk and the time value of money. The promise is going to be “discounted.”
Thus, people who
understand risk and that “stuff happens” might calculate that a promise made to
deliver $10,000 in ten years is only worth $5,000 today because there
is a fifty/fifty chance that something is going to happen to prevent that
promise from being kept.
Of course, the
closer you get to the time the promise is to be kept, the more certain it is
that it will be kept. That’s why finance
textbooks almost always use 90-day commercial paper at a 2% discount to
illustrate the concept of “discounting” and “rediscounting” (the first time a
promise of this kind is traded, it’s called discounting,
while every subsequent transaction is rediscounting).
Thus, a bank
creates $98,000.00 by issuing a promissory note for which it receives
$100,000.00 in ninety days, making a $2,000.00 profit. A bank can only do this, however, if someone
brings it a promise worth $98,000.00 that it can turn into money. The bank cannot just create money out of
nothing, even though many people seem to think that’s what a bank does.
So what does a
central bank like the Federal Reserve do?
Well . . . right now, not what it’s supposed to. What is a central bank supposed to do?
In the Greater
Scheme of Things, a central bank is a bank for banks. In the days before central banking was
invented, every bank’s promissory notes had a different value, especially if
there were no reserve requirements or there was no standard reserve currency
into which all forms of money could be converted. This could get annoying, because you would
have to stop in the middle of a deal and figure out how many of Bank A’s notes
worth 38¢ on the dollar should be used to pay for something priced at 100¢ on
the dollar, when the merchant had Bank B’s notes worth $1.29 to make change
with.
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| Cpt. Marryat, hero, novelist, confused buyer. |
Couldn’t
happen? Sorry — that was what was going
on in the 1830s and 1840s after President Andrew Jackson got rid of the U.S.
central bank. The novelist Captain
Frederick Marryat visited the U.S. from England at that time, and almost gave
up trying to pay for anything. During
the Civil War, the official paper money, the gold and silver coins, and the
private token money in paper and copper all had different dollar values. People went nuts.
A single bank’s
promissory notes, however, all had the same value. What central banks were invented to do was to
tie all banks together so that all banknotes had the same value, no matter
which bank issued them, and to ensure that there was always enough reserve
currency available.
That way, it
didn’t matter how many productive investments people came up with. There would always be enough money to finance them because the commercial banks
and the central bank between them would simply turn the present value of any
project into money that could be used to finance the project.
So, what happens from
the bank’s perspective is that a commercial bank “accepts” a promise (a
contract) from a borrower, and issues a promissory note to the borrower to back
a new demand deposit (bank-ese for putting money in your checking account instead
of printing banknotes). This is the
first discounting of the loan, and the one that creates the money to buy the
new capital.
The commercial
bank then turns around and sells (rediscounts) the loan to the central
bank. The central bank issues its own
promissory note, this one to the commercial bank, and uses the promissory note
to back a new demand deposit in the commercial bank’s name, or print new
banknotes — usually the demand deposit.
This instantly creates new reserve currency (a Federal Reserve Note and
a check drawn on the Federal Reserve both count as “reserve currency”) that is
backed by the central bank’s promissory note, which is in turn backed by the
original loan to the borrower, which is backed by the new capital the borrower
finances with the new money, which is backed by the borrower’s demand deposit
at the commercial bank, which is backed by the commercial bank’s promissory
note.
As the borrower
repays the loan, the commercial bank cancels the promissory note of the
borrower, then takes a small cut and passes the payment on to the central
bank. The central bank cancels the promissory
note of the commercial bank, and gives the borrower’s loan paper back to the
commercial bank. The commercial bank
then gives the borrower back the loan paper, and the debt is settled.
