Capital Homesteading for every Citizen

Until the 16th century and the reinvention of commercial or mercantile banking, the way to invest was to withhold some of your income from consumption, accumulate enough savings in the form of cash, then invest in some capital, usually land.  The problem for most people was whether they made enough cash income to be able to set some aside and eventually accumulate enough in savings to purchase capital that would generate enough income to justify having deprived yourself of past consumption.

The picture changed when commercial and mercantile banks reappeared on the scene.  It was now possible, by drawing bills of exchange, to finance new capital by turning increases in future production into money, rather than accumulate the savings achieved by cutting consumption.  The results were immediate: the rate of economic development went from a curve that was almost completely flat, to one that was almost straight up.

Most new capital (“investment”) has, since the 16th century, been financed by turning “future savings” (increases in production), rather than “past savings” (decreases in consumption) into money, and using it to finance new capital.  That is, that is the way that the rich finance new capital.  They do not use their own money, of course.  Nor do they use other people’s money.  Instead, they create new money, backed by the present value of the marketable goods and services they expect their investment to produce in the future.  They use their current wealth as collateral to demonstrate their “general creditworthiness” that makes it reasonably certain that they will make good on their promises to redeem the money they created to finance their new capital.

As for the rest of us, we do not have the wealth to use as collateral to back up any promises we might make by creating money for investment.  We are stuck using the pre-16th century form of investing: cutting consumption and saving.  With modern consumer credit, the decision becomes more difficult (and, in some respects, more dangerous).  That is, do we go into debt to finance consumption?  If so, and if we get an inflow of income sufficient to repay the debt, do we repay the consumer debt, or do we purchase capital (invest) in something that will repay our consumer debt, and then continue to generate a stream of income to increase our consumption power or future investments?

Obviously, if we could use the finance methods used by the rich and simply create our own money for investment, the question would be moot.  You would create money for investment, redeem the money out of future profits from capital, after that use the capital income to retire consumer debt, and thereafter avoid going into consumer debt by having increased your income.

We do not, however, have the same power as the rich to create money for investment.  The logical thing to do in that case is to compare the interest you’re paying on consumer debt with the expected return from a particular investment.  If the return from the investment is greater than the interest on the consumer debt, make the investment.  Even if the consumer debt falls due and you must liquidate the investment, you will still be ahead by whatever the investment earned in the interim.  If, however, the projected return from the investment is less than the interest rate on the consumer debt (and don’t forget to add in ALL costs of making the investment, including transaction fees and all other expenses), the logical decision is to reduce the consumer debt.

Of course, the real solution to this problem is for every to have the ability to finance investment the same way the rich do (create money in a way that the investment pays for itself), and use consumption income for consumption.  One possibility for this is called “Capital Homesteading,” which could be adapted for any economy in the world.  Through a program of Capital Homesteading, every child, woman and man in the world could have enough income to meet reasonable consumption needs, and accumulate investments without having to cut consumption.