Many people are deeply concerned, aggrieved even, by the outcomes and symptoms of our current economy - environmental catastrophes, worsening inequality, high unemployment, and so on. However when most people give a thought to how these issues might be resolved, their point of reference derive from the same capitalist framework which created the problems. This point of reference may be described as the conceptual tools that people work with; or alternatively, it could be described as the underlying paradigms. When our economy creates both the egregious outcomes and the underlying paradigms, what happens is that people try to solve the problems of capitalism using the same ideas or the same method of thinking that created the problems. The set of underlying paradigms include the assumption that it is good and healthy, or perhaps necessary, to have private banks, share owned corporations, and freehold ownership of land. On the political level, the main underlying paradigm is that representative democracy is as good as democracy will ever get. It is rarely recognised that these practices themselves are the fundamental cause of the problems that concern and aggrieve people.
This article does not examine how or why we would have a healthier economy if banks, corporations, land and natural resources were not privately owned. The argument here is why these entities and practices shouldn’t exist in the first place. The reader will probably be surprised to know that it is all contingent on a proper understanding of what money and banking is.
People rail against the activities of banks, share owned corporations, mining companies, real estate moguls, and so on. Some young people are even aggrieved with the baby boomer generation for creating the situation where property is largely unaffordable for them, precisely because the baby boomer generation got in first and bought it all up (and then use their rental income to buy even more property). The conceptual justification for the very existence of private ownership of the above-mentioned assets in the first place is in fact very weak and can be readily undercut. In practice though, railing and ranting against these institutions will not suffice. Creating a new reality that does not incorporate these notions and practices is a much healthier and more satisfying response. And in the end, it may be the only response.
In Credit Creation we explain why private banks, insofar as they practise credit creation, should not be allowed to exist. If banks actually lent out depositors’ money rather than create new money with their loans, their existence would be legitimate. Since in reality they create new money with every loan in a process called credit creation, the public/commons can rightfully claim that banking is the sole right of the commons. In principle then, private banks should not be tolerated. This is not a matter of expropriation; rather, it is a matter of not issuing a licence (for credit creation).
The argument against the existence of privately owned corporations (large ones, that is) and private freehold ownership of land follows as a consequence of the argument against privately owned banks. Let’s start with the justification for the existence of the share-owned corporation.
Let’s imagine that there is a project or series of projects that are best performed by private enterprise of some sort. The entity undertaking such an enterprise would thus be a corporation of some sort. Imagine that the capital required for such a corporation is much greater than any single person can risk. So a number of people pool their financial resources and also sell shares to finance the corporation. Each share gets a vote; labour is paid for in the form of wages; profits are divided proportional to share ownership; etcetera. This, in a nutshell, is how a share owned corporation would come into existence. It is in a sense perfectly justified and necessary if a commons bank did not exist.
Consider the moment when the need for such a corporation arises. It is recognised that a group of people with the requisite skills can carry out the project as well as maintain the structure and function of such a corporation. The financial capital required for the project is totally there in a commons bank if it exists. It holds the monopoly on credit creation and could loan as much money as is needed. The commons bank's ‘common sense’ response to this need would be: “Yes we can loan the money to start up this company. We provide the loan without requiring collateral so that no-one has leverage over the company. The loan repayment schedule will be such and such. Workers will not be on wages and profits will be divided among workers in a way that workers agree on. The company will not be owned by anyone and it cannot be sold as a whole or in parts (shares).” Because the commons bank acts on behalf of the commons, this is the only sensible response. The commons will have no desire to see people put on wages and have their labour (and therefore, themselves) treated as a commodity (cost of production); nor does it want to see the undue aggregation of power stemming from ownership of companies. The commons knows also that workers will be much more productive - and find their work more meaningful - if their remuneration is really tied with company productivity; and so on.
The commons, through its bank, replaces the original shareholders, and ensures that all the profits are divided among the workers in the company. The commons, or the commons bank, makes no profit (surplus) from the cooperative. A transaction tax covers all manner of taxes on income - for companies and individuals.
There should be nothing to prevent people trying to start up a share owned company to fulfil the same need. But they would need to use their own money. A commons bank would look at a share owned company's loan application, realise that a profit sharing cooperative would carry out the job much better - more transparently, more effectively, etcetera - and would much more readily give the loan to a profit sharing cooperative than a share owned company. Small family owned companies and similar could compete with cooperatives in say greengrocery retail, but for large scale projects, privately owned companies are unlikely to offer the same competitiveness. No large corporation can function without a line of credit.
In short, without the power of credit creation in private banks, the share owned corporation – at least the large, publicly traded ones – would not exist either.
(Quick note: whilst it would be appropriate for smaller businesses to pay for labour in wages, wage payment for labour would quickly evaporate as a practice as large privately owned companies get displaced by profit sharing cooperatives. The divide between owners/employers and wage labourers would be eliminated and the raison d'être of trade unions would be no longer.)
A ‘story’ to explain why exchanging land for money is ridiculous.
We are so habituated to the idea that land is a purchasable commodity that almost no-one considers that the exchange of money for freehold ownership of land is a ridiculous practice. In this article we will demonstrate using a hypothetical situation why it is a ridiculous practice.
There is a joke that goes something like this:
A man walks through land owned by a rich man born into one of the old aristocratic families. The owner accosts the trespasser and says “Hey, you’re trespassing on my land. Will you kindly get out?”
The trespasser says “How is it your land?”
“Because my father passed it to me.”
“And how did your father get it?”
“His father passed it to him.”
This process repeats itself a few times until the trespasser says “Okay, I get it: father passes it to son over the generations. But how did your original forebear acquire it?” The aristocrat says “He fought for it”.
“Well…” says the trespasser, “I’ll fight you for it.”
If we imagine that the idea that fighting to settle ownership of land is ridiculous in a modern society, then exchanging money for land is only slightly less ridiculous. To help you to understand why, some simple facts about money need to be pointed out.
- Money today is fiat money which means that governments create it out of nothing except by legalising it into existence. This act of legalisation of a currency into existence is in principle an act done on behalf of the commons. There is no promise to exchange it for a precious metal.
- When money is loaned today, we utilise a process called credit creation in which new money is created with every loan. Loans do not use the money of depositors. The original creation of money (printing of notes and coins) is vested to a communal entity (government or central bank) which acts on the community behalf. In capitalist practices, private banks have wrangled the right to credit creation from the community.
- Finally, the supply of money is in principle infinitely expandable.
Now imagine the following hypothetical situation:
A large ship with many passengers is shipwrecked on a large inhabitable island, without having been able to alert the world to its predicament. The passengers realise that they might not be found for a very long time, so they decide that they had better form a social structure which included an economy with its own money.
Fortunately, there is a crate of playing cards that has been washed ashore with the boat and someone has the idea to turn some of these cards into a local currency. The rest of the cards are marked and stored under communal guard as a form of future money supply. (Playing cards have been used as currency in Australia’s early colonial history.) Someone also has the bright idea of setting up a community bank and drawing up accounts which can handle deposits of money, and using cheques as a means of transferring money between accounts. The bank can also make credit creation loans. In short we have the essence of a modern money and banking system on our island.
Simultaneously, our forward thinking settlers on the island have allocated parcels of land to everyone (reserving a lot for communal use) but it quickly becomes obvious that hardly any two parcels of land have the same value, varying according to location, fertility, access to various things and so on. So the community draws up a schedule in which land rent is charged, and people can bid various amounts for different parcels of land.
After a period, a person who has amassed quite a lot of money thinks: ‘Wouldn’t it be lovely if I could own this land permanently?’ He makes an offer to the community. He says that he will trade so many units of the currency for freehold and permanent ownership of the land. The community laughs at his proposal.
Why is his proposal laughable? Because the community has the capacity to create as much money as it wanted to. There is no shortage of money on the community’s side. Even if all the playing cards were retired from wear and tear, the community still has money in its accounts. It makes new money at will and also makes new money as credit creation with every loan.
The only thing that is apocryphal about the above story is the possibility of a boat being shipwrecked without alerting the world; and also the existence of such an unknown and uninhabited island. Everything else is theoretically possible. The story allows us to re-imagine and re-create a money and banking system – and how it would relate to land ownership – if we were to start a monetary and banking system from scratch. It also enables us to imagine what the future could be if we were to transform our current system.
If we rescind the power of private entities to make new money with every loan, and realise the power that the community has in money creation, then we would also realise that exchanging land (a communal asset) for this artificial entity called money is a crazy notion.
Given however that we have to start from a position in which a lot of land is currently privately owned, a commons bank with a monopoly to credit creation could nonetheless easily step in, replacing the loans that private banks currently have outstanding as the latter get paid and retired (i.e. not increasing the total money supply); and very quickly buy up any land that is put on the market. Land then becomes commons owned in perpetuity.
In the Fractal Economy Cooperative, we intend to make the impossible possible. We do not have a monopoly on credit creation. We do not even have a licence for credit creation at the moment. In fact we have no money worth talking about to begin with (startup capital of a four figure sum). We have the ‘absurd’ notion that we can nonetheless take on the capitalist banking system, play the game within their rules, and still beat them. If you like an impossible challenge, think about this: We begin only with ideas and no financial power; we then build up credibility (‘credit’) within the community, and with it communal funds; we gain a banking licence at some stage and carry out banking as a commons bank; we create profit sharing cooperatives to compete with the large privately owned companies and show how much better work can be; we loan out money (at zero interest) to a commons land trust and thereby show how land use can be easily affordable for all and not a source of inequity; eventually we can extinguish the capitalist economy and replace it with a healthy one because we actually produce things (as opposed to unearned income) and because we command the loyalty of people.