Chapter 18





One of the major questions remaining is where the money will come from for the independent agency’s purchase of the index mutual fund shares.  It has been best to leave this 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 than that, creating a “bubble.”)  During Alan Greenspan’s tenure as chairman of the Federal Reserve in the United States, he once told how “at its February meeting, the Federal Open 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 for the debt of domestic nonfinancial sectors.”[1]  (The references to M2 and M3 are to different types of money as defined by monetary economists.)

          Economist William R. Allen explains that “most money is created by bank lending – commercial banks create the deposits they lend.  Banks are required to hold reserves equal to a minimum fraction of their deposit liabilities… An increase in reserves can come from bank borrowing from the Fed… The dominating thing is ‘open market operations.’… The Fed often enters the government securities market.  If the Fed buys securities from bond dealers, it thereby directly creates money dollar-for-dollar equal to the value of the purchase… There will be additional reserves, on the basis of which banks can 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 FOMC purchases of government securities from bond dealers.  This would involve abandoning the FOMC “open market operations” money-creation and instead having the independent agency buy the index mutual fund shares it needs by using similarly-created money.  The agency itself, the FOMC, or the national Treasury could be given the legal power to create 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 at the same time the independent agency would come into ownership of billions of dollars a year worth of index mutual fund shares – all without a penny being taken from anyone through taxation or otherwise.  It simply adapts a mechanism that is already in use and taken for granted as part of the normal operation of the market economy.  Purchases in the amounts mentioned by Greenspan would come to billions of dollars per year.  The effect would be cumulative, with the shares purchased one year being added to those purchased previously. 

          Much of the expansion of the money supply from open market operations comes not from the initial purchase of government securities, but from the multiplier effect within the banking system as new accounts are created.  This means that the agency purchase of fund shares (if the same amount is used for their purchase as the FOMC would 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 thought desirable to have the entire increase in the money supply result in purchases for the distribution-fund, the amount of newly-created money could be increased to what the total expansion would have been under the present system of infusing the money into banks. 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 through the present practice’s multiplier effect.  The entire increase in the money supply would come from fund purchases by the independent agency.  This may have considerable advantage in addressing the problem of the business cycle, which is a separate issue than we have been discussing, but nevertheless a very important one.  The economist Irving Fisher advocated 100%-reserve banking for that purpose. 

          I have recently become aware that the idea of shifting the direction of newly created money was advanced in the 1920s.  An article by Stephen M. Goodson in 2009 says that “one of the 20th century’s foremost monetary reformers, Major Clifford Hugh Douglas… 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.  This government-created money he termed Social Credit.  He favored the payment of a basic income or national dividend to each citizen.”[3] This is similar to our thinking here, although without the “shared market economy” feature. 



          It is worth noting that Douglas went further along the lines favored here, accepting and expanding upon Henry George’s point (which we have discussed in various connections) about how the “unearned increment” in an economy should be used for the common benefit.  He spoke of “the unearned increment of association” coming from “the cultural inheritance” passed down through successive generations.  “The ownership of these intangible factors vests in the members of the living community… Ethically, because it is an inheritance from the labours of past generations of scientists, organisers, and administrators, and pragmatically because the denial of its communal character sets in motion disruptive forces….”[4]  This unearned increment can provide a vast source for taxation without violating the classical liberal principle that someone should be entitled to keep what he has earned (subject only to ordinary taxation). 

          We recall that Henry George spoke primarily of the “unearned increment” on rising 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 society without in effect expropriating the present owners.  Those owners have paid for the property when they have acquired it, so the unearned value has gone to the sellers (and actually to their predecessors in a long chain of title). In dealing with the current owner, there is no justification for taking the portion of the value of the land represented by the purchase price.  It will only be just to the present owners to tax the unearned increment occurring after the shared market economy is introduced. 

          It is enough just to tax the unearned increment that arises in the future.  Assume, for example, that someone buys land for $100,000 and it increases in value to $200,000 as the city 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 period the increase in value has occurred, could (and should) be considered as accruing to the community as a whole. 

          As Henry George argued, the rise in values attributable to increasing population (or to changing technological demand or other factors that aren’t related to the owner’s efforts) are rightly an asset of the general community.  George envisioned this as a huge source of public funds.  Whatever it is judiciously concluded to amount to, it can be used for fund purchases or other public uses.

          Looking to the future, there will be vast unearned increment going to any person who earns income in the future economy.  As we noted in Chapter 14’s conceptual critique, 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 scientific knowledge from the past (as well as to the entire infrastructure of civilization that creates the 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 the other, 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 the community against the need to provide the participants in the market economy a fully ample incentive in light of their risk and contribution.  Whatever part is taken for the community can, if that is the choice, be put into fund purchases. 

          Contrary to the strongly held conviction of free market conservatives and libertarians 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 to prevent the rise of a hereditary caste can also go into fund purchases. An important concern will be about a possible flight of people and capital from a given country to avoid its taxation, however rightful that taxation may be.  National laws and international compacts 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 through the agency would provide people with income for all periods of their lives.  There would be no need for both systems. 

          The same would apply to the money now spent for welfare and the many forms of assistance to the poor.  A news report in 1997 said that “this year, welfare spending will hit $412 billion, or 5 percent of the total U.S. economy… In the next decade, the United States will spend $5 trillion on welfare, or roughly $50,000 for each taxpaying household.”[5] 

          People of differing viewpoints vary as to how much a general system of income support will reduce crime, if at all.  To the extent it does, the billions of dollars spent on the 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, supplemental retirement annuities, and IRAs (“individual retirement accounts”) for retirement can go into the fund purchases or into extra forms of savings to supplement the general distribution.  The same can be said for what people spend on life insurance to protect spouses and children from destitution.  Nor will people need to purchase insurance policies for nursing home and home health care in their old age, although they may find desirable supplemental savings or insurance for needs of that sort that may well cost more than they can afford from their receipt of the common distribution.  Much that is now spent by charities for those in need will no longer be necessary, and the many programs for the hungry and the homeless can eventually be disbanded.        

          With these many sources at hand, there will be little problem finding the means to create 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 in today’s political dynamic.  The political system is only in the slightest degree responsive to public opinion.  President Eisenhower spoke of the power of “the military-industrial complex,” and that became a rallying-cry of the New Left in the late 1960s.  The hold that an elite has on American public life at this time is, however, considerably broader than that.  People rotate from positions in the Congress and executive branch to lobbying, and then back again.  International corporations, big money, ethnic power groups, the media, academia, the legal profession all combine to impress a common ideology (spoken of as “political correctness”) that establishes policy.  On foreign policy issues, what top scholars have come to call “the Israel lobby” has been a dominant force that few dare contradict.

          Any challenge to this stranglehold is derided as “populist.”  For a purported “democracy,” such an epithet is fatuous.  The ideal, voiced by Lincoln, has long been “a government 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 likely continue.  With them, who is to say what is possible?





[1] .  Testimony of Alan Greenspan, Monetary Policy Objectives, Federal Reserve Board Summary Report, February 26, 1997, p. 10.

[2] . William R. Allen, The Midnight Economist, 3rd Edition (Sun Lakes, AZ: Thomas Horton and Daughters, 1997), p. 247.

[3] . Stephen M. Goodson, Impact, April/May 2009.

[4] . Excepts from Douglas’ book Social Credit (first edition in 1924, with a revised edition in 1933), available on the Internet at

[5] . Wichita Eagle, August 16, 1997, report by Robert Rector of Knight-Ridder/Tribune.