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Chapter 18

THE SOURCES OF FUNDING FOR THE SYSTEM OF

DISTRIBUTION

One of the major questions remaining is where the money will come from for theindependent agencys purchase of the index mutual fund shares. It has been best to leavethis question until after our discussion of free market ideology.

New-money creation:New money is created more or less constantly by the central bank as it expands

the money supply to match a growing economy. (Often, it expands the supply more thanthat, creating a bubble.) During Alan Greenspans tenure as chairman of the FederalReserve in the United States, he once told how at its February meeting, the FederalOpen Market Committee reaffirmed the provisional ranges set last July for money and

debt growth this year: 1 to 5 percent for M2, 2 to 6 percent for M3, and 3 to 7 percent forthe debt of domestic nonfinancial sectors.1 (The references to M2 and M3 are todifferent types of money as defined by monetary economists.)

Economist William R. Allen explains that most money is created by banklending commercial banks create the deposits they lend. Banks are required to holdreserves equal to a minimum fraction of their deposit liabilities An increase in reservescan come from bank borrowing from the Fed The dominating thing is open marketoperations. The Fed often enters the government securities market. If the Fed buyssecurities from bond dealers, it thereby directly creates money dollar-for-dollar equal tothe value of the purchase There will be additional reserves, on the basis of which bankscan create a multiple of new checking deposits. There has long been an extremely large

correlation between Fed purchases and sales of government securities, on the one hand,and the money supply, on the other.2

For a shared market economy, we should consider an alternative to such FOMCpurchases of government securities from bond dealers. This would involve abandoningthe FOMC open market operations money-creation and instead having the independentagency buy the index mutual fund shares it needs by using similarly-created money. Theagency itself, the FOMC, or the national Treasury could be given the legal power tocreate money and, instead of buying government securities with it, to buy the fund shares.This could put the same amount of new money into the business system as before,providing capital to business in general and having the same effect on the price level.The money would simply enter the system at a different place. The result would be that

the enterprises forming the economy would receive their billions of extra dollars, while atthe same time the independent agency would come into ownership of billions of dollars ayear worth of index mutual fund shares all without a penny being taken from anyonethrough taxation or otherwise. It simply adapts a mechanism that is already in use andtaken for granted as part of the normal operation of the market economy. Purchases inthe amounts mentioned by Greenspan would come to billions of dollars per year. Theeffect would be cumulative, with the shares purchased one year being added to thosepurchased previously.


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Much of the expansion of the money supply from open market operations comesnot from the initial purchase of government securities, but from the multiplier effectwithin the banking system as new accounts are created. This means that the agencypurchase of fund shares (if the same amount is used for their purchase as the FOMCwould have used for its government bond purchases) will be in a dollar amount that is

smaller than the total increase in the money supply would have been. If it were thoughtdesirable to have the entire increase in the money supply result in purchases for thedistribution-fund, the amount of newly-created money could be increased to what thetotal expansion would have been under the present system of infusing the money intobanks. In such case, it would be worth considering going to 100%-reserve banking,taking the banks entirely out of the business of creating new money themselves throughthe present practices multiplier effect. The entire increase in the money supply wouldcome from fund purchases by the independent agency. This may have considerableadvantage in addressing the problem of the business cycle, which is a separate issue thanwe have been discussing, but nevertheless a very important one. The economist IrvingFisher advocated 100%-reserve banking for that purpose.

I have recently become aware that the idea of shifting the direction of newlycreated money was advanced in the 1920s. An article by Stephen M. Goodson in 2009says that one of the 20th centurys foremost monetary reformers, Major Clifford HughDouglas advocated the transfer of the money creation process from private banks which create money out of nothing as an interest-bearing debt to the state. Thisgovernment-created money he termed Social Credit. He favored the payment of a basicincome or national dividend to each citizen.3 This is similar to our thinking here,although without the shared market economy feature.

Taxation:It is worth noting that Douglas went further along the lines favored here,

accepting and expanding upon Henry Georges point (which we have discussed invarious connections) about how the unearned increment in an economy should be usedfor the common benefit. He spoke of the unearned increment of association comingfrom the cultural inheritance passed down through successive generations. Theownership of these intangible factors vests in the members of the living communityEthically, because it is an inheritance from the labours of past generations of scientists,organisers, and administrators, and pragmatically because the denial of its communalcharacter sets in motion disruptive forces.4 This unearned increment can provide avast source for taxation without violating the classical liberal principle that someoneshould be entitled to keep what he has earned (subject only to ordinary taxation).

We recall that Henry George spoke primarily of the unearned increment onrising land and mineral values, and said it could be fully taxed and used for public needs(such as, in a shared market economy, for fund purchases).

There is, however, a necessary qualification. This relates to how the

"unearned value" of something like land or minerals can be taxed away in today's societywithout in effect expropriating the present owners. Those owners have paid for the propertywhen they have acquired it, so the unearned value has gone to the sellers (and actually totheir predecessors in a long chain of title). In dealing with the current owner, there is nojustification for taking the portion of the value of the land represented by the purchase price.


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It will only be just to the present owners to tax the unearned increment occurring aftertheshared market economy is introduced.

It is enough just to tax the unearned increment that arises in the future. Assume, forexample, that someone buys land for $100,000 and it increases in value to $200,000 as thecity grows up around it, and that none of that increase is due to improvements made on the

land. This increase, as adjusted for the inflation that may have occurred during the periodthe increase in value has occurred, could (and should) be considered as accruing to thecommunity as a whole.

As Henry George argued, the rise in values attributable to increasing population(or to changing technological demand or other factors that arent related to the ownersefforts) are rightly an asset of the general community. George envisioned this as a hugesource of public funds. Whatever it is judiciously concluded to amount to, it can be usedfor fund purchases or other public uses.

Looking to the future, there will be vast unearned increment going to any personwho earns income in the future economy. As we noted in Chapter 14s conceptualcritique, that income will be partly due to the value added by the individual or the firm,

but will also be significantly due to the enormous accretion of technology and scientificknowledge from the past (as well as to the entire infrastructure of civilization that createsthe context for the earnings). The latter is rightly the asset of the entire community.

How much of a given sum of earnings is due to the one, and how much to theother, has no conceptual answer, and will have to be determined by the society on an on-going basis. The division should be one that balances the rightful claims of thecommunity against the need to provide the participants in the market economy a fullyample incentive in light of their risk and contribution. Whatever part is taken for thecommunity can, if that is the choice, be put into fund purchases.

Contrary to the strongly held conviction of free market conservatives andlibertarians up to now, there will be a valid rationale, consistent with a classical liberal point of view, for progressive taxation. The inheritance taxes that are necessary toprevent the rise of a hereditary caste can also go into fund purchases. An importantconcern will be about a possible flight of people and capital from a given country toavoid its taxation, however rightful that taxation may be. National laws and internationalcompacts may be necessary to prevent that from happening.

The many present-today expenditures that will be made unnecessary:Subject to complex details of transition, all money going to Social Security for its

various purposes that include old age and disability assistance, now and in the future,could go instead to index mutual fund purchases by the agency. The distribution throughthe agency would provide people with income for all periods of their lives. There wouldbe no need for both systems.

The same would apply to the money now spent for welfare and the many forms ofassistance to the poor. A news report in 1997 said that this year, welfare spending willhit $412 billion, or 5 percent of the total U.S. economy In the next decade, the UnitedStates will spend $5 trillion on welfare, or roughly $50,000 for each taxpayinghousehold.5


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People of differing viewpoints vary as to how much a general system of incomesupport will reduce crime, if at all. To the extent it does, the billions of dollars spent onthe many parts of the justice system can be shifted to pay for fund purchases.

The money that firms and employees now put into pension savings, supplementalretirement annuities, and IRAs (individual retirement accounts) for retirement can go

into the fund purchases or into extra forms of savings to supplement the generaldistribution. The same can be said for what people spend on life insurance to protectspouses and children from destitution. Nor will people need to purchase insurancepolicies for nursing home and home health care in their old age, although they may finddesirable supplemental savings or insurance for needs of that sort that may well cost morethan they can afford from their receipt of the common distribution. Much that is nowspent by charities for those in need will no longer be necessary, and the many programsfor the hungry and the homeless can eventually be disbanded.

With these many sources at hand, there will be little problem finding the means tocreate the fund for distribution, except problems of transition.

For all of this to happen in the United States, there will need to be a seismic change intodays political dynamic. The political system is only in the slightest degree responsiveto public opinion. President Eisenhower spoke of the power of the military-industrialcomplex, and that became a rallying-cry of the New Left in the late 1960s. The holdthat an elite has on American public life at this time is, however, considerably broaderthan that. People rotate from positions in the Congress and executive branch to lobbying,and then back again. International corporations, big money, ethnic power groups, themedia, academia, the legal profession all combine to impress a common ideology (spokenof as political correctness) that establishes policy. On foreign policy issues, what topscholars have come to call the Israel lobby has been a dominant force that few darecontradict.

Any challenge to this stranglehold is derided as populist. For a purporteddemocracy, such an epithet is fatuous. The ideal, voiced by Lincoln, has long been agovernment of the people, by the people, and for the people.

The hurricane-force winds of change that have raised the issues addressed in this book will create enormous tensions. In their absence, the stranglehold would likelycontinue. With them, who is to say what is possible?

ENDNOTES


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1 . Testimony of Alan Greenspan, Monetary Policy Objectives, Federal Reserve Board SummaryReport, February 26, 1997, p. 10.2 . William R. Allen, The Midnight Economist, 3rd Edition (Sun Lakes, AZ: Thomas Horton andDaughters, 1997), p. 247.3 . Stephen M. Goodson,Impact, April/May 2009.4 . Excepts from Douglas bookSocial Credit (first edition in 1924, with a revised edition in 1933),

available on the Internet at www.mondopolitico.com5 . Wichita Eagle, August 16, 1997, report by Robert Rector of Knight-Ridder/Tribune.
http://www.mondopolitico.com/http://www.mondopolitico.com/

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