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.
|"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.
|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.
|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.
|"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.
|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.
|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.
|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.