Back in 1912
people were demanding reform of the financial system as a result of the Panics
of 1893 and 1907. The problem was that
few people demanding reform had a good grasp of what money actually is. Having looked into why we think Modern
Monetary Theory (MMT) does not give a good — or even coherent — definition of
money, today we will look at a Just Third Way understanding of money.
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| "As I always say, '$100.00 saved, is $100.00 earned'!" |
First, money and credit, and where they come from, are not as mysterious
as most people think. To understand how money
is created, however, we first have to ask, “What is money?”
Most simply put, money is anything that can be accepted to satisfy a
debt. In this way, “money” and “credit”
are simply two sides of the same thing—a system of making promises and keeping those
promises. As Black’s Law Dictionary states, money is “all things transferred in
commerce.” All money is therefore a
contract, and, in a sense, all contracts are money. Money can take many forms of how people
exchange things they own. Money is based
on, and derived from, the concept of private property(the right to the fruits of
and control over what a person owns.)
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| Currency and money are not exactly the same thing. |
Money is therefore a “social good, ” an artifact of civilization invented
to facilitate economic transactions. Like
any social good, money can be used justly or unjustly. It can be used by those who control it to
suppress the independence and human potential of the many, or to achieve
economic liberation and universal prosperity by financing capital ownership for
every citizen.
Most economists will explain that
money is: (1) the medium of exchange, (2) a store of value, (3) a standard of
value, and (4) a common measure of value.
Only the first two of these, however, apply to all money. The other two describe currency, “current
money, ” and really say the same thing: “a commonly recognized determination of
value, often regulated, but need not be created, by government.”
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| Louis O. Kelso |
Making things a little clearer, lawyer-economist Louis Kelso delved
further into the nature of money. His
concern was the impact of contracts and property on the economic system—which
is reasonable, as money is, ultimately, a system of contracts for the exchange
of property rights:
Money is not a part of the visible sector of the economy;
people do not consume money. Money is
not a physical factor of production, but rather a yardstick for measuring
economic input, economic outtake and the relative values of the real goods and
services of the economic world. Money
provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals
can accumulate claims against others, or against the economy as a whole, or
against many economies. It is a system
of symbols that many economists substitute for the visible sector and its
productive enterprises, goods and services, thereby losing sight of the fact
that a monetary system is a part only of the invisible sector of the economy, and
that its adequacy can only be measured by its effect upon the visible sector. (Louis O. Kelso and Patricia Hetter, Two-Factor
Theory: The Economics of Reality. New
York: Random House, 1967, 54.)
Creating money using a commercial and central banking system (such as the
U.S. Federal Reserve System) is not supposed to be a secret guarded by high
priests. The system was designed to allow
money to be created or cancelled as needed by the economy. That way there would never be too little money
(resulting in deflation) or too much (causing inflation).
The House Banking and Currency Committee, in its widely circulated
publication, A Primer on Money (August
5, 1964), noted:
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| Not exactly what we had in mind. . . . |
When the Federal Reserve Act was passed, Congress intended
[the purchase of “eligible paper” by issuing promissory notes] to be the main
way that the Federal Reserve System would create bank reserves . . . When this
practice was followed, the banks in a particular area could obtain loanable
funds in direct proportion to the community’s needs for money. But in recent years [i.e., from 1933
to 1964], the Federal Reserve has purchased almost no eligible paper (p. 42).
When the Federal Reserve System was set up in 1914 the money
supply was expected to grow with the needs of the economy . . . It was hoped
that by monetizing “eligible” short-term commercial paper, by providing
liquidity to sound banks in periods of stress, and by restraining excessive
credit expansion, the banking system could be guided automatically toward the
provision of an adequate and stable money supply to meet the needs of industry
and commerce . . . To safeguard their liquidity and provide a base for
expansion, the member banks could obtain credit from the nearest Federal
Reserve bank, usually by rediscounting their “eligible paper” at the bank — i.e.,
selling to the Reserve Bank certain loan paper representing loans which the member
bank had made to its own customers (the requirements for eligibility being
defined by law). If necessary, the
member banks might also obtain reserves by getting “advances” from the Federal
Reserve bank (p. 69).
In other words, under a central banking system as originally designed, businesses
or other productive enterprises would obtain loans at their local commercial
bank, a process called “discounting.” The
commercial bank, in a process known as “rediscounting, ”would then sell the
qualified loan paper of the business enterprises to the central bank. This would create an “elastic, ” asset-backed
reserve currency to stabilize the economy.
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| There is a better way. . . . |
As a social tool, however, the money creation powers of the central bank
are like the vote. They can be used to
keep an élite in power, or they can
spread power around by financing capital formation and acquisition by every person
by creating money to purchase assets that pay for themselves out of their own
future profits. Once the assets are paid
for, the stream of profits provides the owners an ongoing source of income to help
meet consumption needs such as food, clothing, shelter, healthcare, and
education.
The Center for Economic and Social Justice (CESJ) has proposed “Capital Homesteading,
” an application of principles CESJ calls “the Just Third Way, ” to reform the
financial system so that it works to the advantage of everyone, not just a few. The world, as R. Buckminster Fuller suggested,
can work for “100% of humanity.”
Under this program every child, woman and man (“capital homesteaders”)would
have an equal right to purchase on credit newly issued equity shares that give the
vote and receive all profits earned on the shares.
This amount would be the same for everyone, rich or poor. It is important to note, however, that no new
money would be created until the shares a Homesteader wants to buy have been
approved by the lender and deemed a good risk by a capital credit insurer.
A commercial bank would accept a contract for a loan — “paper” — from a Homesteader,
“buying” it by issuing a promissory note.
The bank would then immediately sell its paper to one of the twelve
regional Federal Reserve banks. The Federal
Reserve would issue its own promissory notes to back newly printed currency or new
demand deposits that would be handed over to the Homesteader to purchase the shares
he or she wants to buy.
When the shares pay dividends, the Homesteader would use the dividends
first to repay the loan used to acquire the shares. The Federal Reserve would cancel the money, thereby
avoiding inflation. The Homesteader
would then have dividend income to use for consumption needs. (More about this can be found on the CESJ
website, www.cesj.org, under the heading “Capital Homesteading.”)
In this way the Federal Reserve System would create an asset-backed
currency that increased or decreased as the need for money increased or
decreased, avoiding deflation or inflation.
At the same time, it would rapidly increase the number of capital owners
in the country, while decreasing the wealth and income gap.
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| Not quite what we had in mind. . . . |
It would also decrease the role of the State in taking care of people as
they are able to take care of themselves.
As the loans were repaid, the currency would be taken out of circulation,
or the demand deposits “erased” from the books.
This would remove money from the economy that was not linked directly to
hard assets.
Although no actual teller’s window exists where commercial banks stand
in line to sell loan paper to the Federal Reserve, the transaction is described
as taking place at “the discount window”(the process is actually rediscounting,
but it’s called the discount window). When
the “discount window” is “open, ”commercial banks can sell their “qualified industrial,
commercial and agricultural paper” to the central bank. When the “discount window” is “closed, ”commercial
banks must go elsewhere to obtain excess reserves to lend, or cease making
loans.
Thus, the establishment of the Federal Reserve really did have the
potential to become an “Economic Fourth of July” . . . assuming the economy
grows faster in ways that every citizen can earn more wages and profits to
purchase what the economy can produce. Without
that, the social good of money and credit will keep being used to make the rich
richer and keep the non-rich property-less and powerless.
#30#
