Capital Homesteading for Every Citizen

The Capital Homestead Act is a comprehensive national economic strategy for empowering every American citizen, including the poorest of the poor, with the means to acquire, control and enjoy the fruits of productive corporate assets. Or as Louis Kelso would say; "... to create , repair and defend that which ownership provides". This long-range agenda involves major restructuring of our tax system and our Federal Reserve policies to lift unjust artificial barriers to more equitable distribution of future corporate capital and faster growth rates of private sector investment. It would shift primary national income maintenance policies from inflationary wage and unproductive income redistribution expedients to market-based ownership sharing and dividend incomes.

Economic democracy is an idea not yet tried.

The Capital Homestead Act's central focus is the democratization of capital (productive) credit. By universalizing citizen access to direct capital ownership through access to interest-free productive credit, it would close the power and opportunity gap between today's haves and have-nots, without taking away property from today's owners.

The Capital Homestead Act is designed to: 1) Generate millions of new private sector jobs by lifting ownership-concentrating Federal Reserve credit barriers in order to accelerate private sector growth linked to expanded ownership opportunities, at a zero rate of inflation. 2) Radically overhaul and simplify the Federal tax system to eliminate budget deficits and ownership-concentrating tax barriers through a single rate tax on all individual incomes from all sources above basic subsistence levels. Its tax reforms would: a) eliminate payroll taxes on working Americans and their employers; b) integrate corporate and personal income taxes; and c) exempt from taxation the basic incomes of all citizens up to a level that allows them to meet their own subsistence needs and living expenses, while providing "safety net" vouchers for the poor.

The basic interdependent components of the Capital Homestead strategy are like the legs of a three-legged stool:

1) Democratization of productive credit. Capital Homesteading would reform monetary policy to conform to the goal of sustainable, market-oriented, non-inflationary growth. The new policies would aim at an immediate reduction in prime supply-side credit charges to 3% (without subsidies) for private-sector investment, through a two-tiered credit policy. Central banks would:

• (a) Be restrained from further monetization of deficits or encouraging other forms of non-productive uses of credit (i.e., demand-side credit), which would then be forced to seek out already accumulated savings at market interest rates; and
• (b) Use the Fed discount mechanism exclusively for discounting, at low discount charges but subject to a 100% reserve requirement, "eligible" industrial, agricultural and commercial paper financed through its member commercial banks. This reform would synchronize the supply of real money with real growth of the economy. It would provide, from the bottom-up, an asset-backed currency reflected in more efficient instruments of production and keep basic economic decisions and corporate accountability in local hands. 

2) Simplification of tax systems. Capital Homesteading reforms would be centered around taxing incomes from all sources (above poverty levels) at a single rate. This would offer a universal yardstick for political hopefuls to compete against, and a direct means for:

• (a) Balancing national budgets and restraining overall spending, including social security and Medicare programs; 
• (b) Ending the use of the tax system to circumvent the appropriations process; and
• (c) Eliminating double taxation of profits in ways that maximize greater savings and investments in new plant, equipment, rentable space and infrastructure, plus removing other taxes that discourage expanded capital ownership as a basic pillar of national economic policy.

3) Linkage between all tax and monetary reforms to the goal of expanded capital ownership. This would encourage every citizen to share directly in the equity growth and profits from our ever-expanding high-technology frontier, and would insure the broadest possible base of private sector stakeholders (and thus political supporters) of reforms affecting "green growth" policies or good stewardship.

In contrast to mounting social security deficits, this strategy would create for every voter a "Capital Homestead Exemption" for accumulating over his or her working lifetime an income-producing, tax-sheltered personal estate of up to $1 million, a modern equivalent of the 160 acres of land that government made accessible to American pioneers in the orginal Homestead Act of 1862.

Citizens would accumulate their Capital Homestead shares in many ways, including such "credit democratization" vehicles as: Employee Stock Ownership Plans (ESOPs); Capital Homestead Accounts (CHAs); Consumer Stock Ownership Plans (CSOPs); and Citizens Land Cooperatives (CLCs). These high-powered financing vehicles would systematically close the wealth and income gap by linking all new monetary and tax incentives for productivity growth under the proposed Capital Homestead strategy, with an ever-expanding base of empowered citizen-shareholders.

Effects of Capital Homesteading

Capital Homesteading will have an immediate effect on the economy. This is because the new capital goods, as Harold Moulton pointed out in The Formation of Capital, are only capital goods to the purchaser — they are consumption goods to the seller. Thus, the immediate effect on the economy in the first year of Capital Homesteading would be a per capita increase in effective demand of approximately $7,000, despite the fact that the Capital Homestead borrower will only get a few dollars, if that, at the end of the year in the first year.

If the government continues to create money backed only by future tax revenues to finance its deficits, we would expect to see moderate-to-high inflation, but the Capital Homesteading program includes cutting off the government from access to the Federal Reserve. What should happen is that the cash that companies have accumulated to finance new capital formation will be distributed as dividends, and treated as tax deductible at the corporate level.

These dividends will, in justice, be paid to the currently wealthy with their virtual monopoly on individual share ownership, and on which they will pay taxes as on regular income. If the rich spend their dividend income, this will generate the consumer demand that drives the demand for capital goods, thereby creating jobs.

If the rich do not spend their dividends, they will have to locate some investment to "park" their surplus . . . yet the capital needs of private sector companies are, presumably, being met completely by Capital Homestead financing. Dividend recipients will either have to find some speculative start-up — or a "safe" investment.

Given that the government will not be able to monetize its deficits, it will be very hungry for funds, and will very likely be the largest borrower of the initial unconsumed dividend payouts that go to the currently wealthy after being taxed as regular income. By draining this "excess effective demand" out of the economy by borrowing and taxing, the government should prevent inflation, even cause a lowering of the price level through a temporary deflation. This will benefit people on fixed incomes, as many of them have invested in government securities as the "safest" investment around. The government will not be able to set the market interest rates any more through its control of the Federal Reserve, and thus retiree income should increase at the same time that the decrease in the price level makes their money go further.

Once private sector companies can discount their paper backed by existing inventories either among themselves ("B2B") or at a commercial bank or even, through legitimate open market operations — as originally intended under the Federal Reserve Act of 1913; it wasn't for government securities — at the Federal Reserve, there will be no question of a permanent deflation, or lack of an adequate money supply. Private companies will simply take advantage of what the Federal Reserve was set up to do in the first place: monetize existing inventories of marketable goods and services through rediscounting and open market operations in privately issued paper, not government bills, thereby providing an "elastic" currency that expands and contracts with the amount of existing marketable goods and services in the economy.

Consistent with Say's Law, private companies that can produce in the near future or have on hand existing supplies of marketable goods and services will, in a sense, create their own money by drawing short-term (90-day) bills (issuing private promissory notes) and either discounting and rediscounting among themselves in high denominations (the lowest denomination of such commercial paper is typically $100,000; $1 million or more is not unusual, there is also a classification for paper denominated in billions now, or, to create money in a form that can be used in day-to-day transactions, discount the paper at a commercial bank in exchange for banknotes (rare, these days) or a demand deposit. Since this type of paper would be based on existing inventories that are already owned and not on future new capital formation that does not yet have an owner, as well as being short-term, the commercial banks should be able to rediscount the paper at the Federal Reserve without the expanded ownership requirement.

Moulton's proposal in the 1930s was not to limit central bank rediscounting and open market operations to monetizing existing inventories, but to finance future new capital formation — financed at the present value of future marketable goods and services to be produced by the new capital — the same way: by rediscounting qualified paper for capital investment for terms of up to five years, not just short-term (90-day) commercial paper backed by existing inventories or the general credit-worthiness of the issuer. Kelso and Adler improved on this by adding that the new capital financed in this way must be broadly owned by people who currently own little or nothing in the way of capital, and adjust the term of the note to make the capital purchase financially feasible.

The bottom line is that, fueled by "interest free money" that does not depend on existing accumulations of savings (past savings) financing the acquisition of capital by people who currently own nothing, the global economy could conceivably be well on its way to recovery within three months of the passage of the Capital Homestead Act, and make a full recovery within 18 months. Within three to seven years it should be possible to reach the unattainable Keynesian goal of "full employment" — not of labor alone, but of all resources and productive capacity, including labor.

by Michael D. Greaney, and CPCH

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