By Colin McGrath (with comments from Brian McGrath)
Imagine the next time you buy something, pulling out a piece of plastic and purchasing your item in the exactly the same way you would now use a credit or debit card. But in this case, there is an important difference. Now you are purchasing with a transfer of shares of a broad capital index fund instead of traditional dollars. For simplicity, suppose you and the seller are using the most familiar and widely held stock market capital index fund—SPYDRS (based upon the value of the 500 largest publicly held U.S. companies). Hence, you would be trading a small piece of these companies to the seller in order to accomplish your purchase instead of using dollars. There would be a small, agreed upon transfer out of your SPYDR account into the SPYDR account of the seller for whatever good or service you bought. If this kind of transaction became widespread it would redefine what we think of as “money” and would change the nature of trading, prices, and wealth holding. It would be simple but it would be revolutionary. It would result in a privatized, non-bank transparent monetary and exchange system free of government manipulation, control and exploitation and free of the intrinsic instabilities of a currently broken fractional-reserve banking system. How could it happen?
Imagine further a forward-looking discount brokerage firm that allows you to open a SPYDR equity account with trading privileges and then gives a trading SPYDR debit card to facilitate transactions. Obviously, your purchases could not exceed the balance of your SPYDR account, unless the brokerage firm was willing to extend a short-term SPYDR loan to you. Why would a brokerage firm be willing to facilitate such purchase transactions with essentially a SPYDR debit card? Simply because it could get a small fee from every such transaction. Moreover, if the practice grows, who knows where it might end. Hopefully, SPYDRs could grow to become the effective money supply of the whole U.S. economy and why not? Instead of using fictitious value of a government fiat money, or a speculative commodity money of little actual value in production, or an artificially scarce but intrinsically worthless cyber-money such as bitcoins, we would be using the most fundamental and valuable good of a market economy—ownership of a portion of the economy’s capital stock, the means of producing all goods and services. The business opportunity for any brokerage firm accommodating changes in ownership and custody of even a small fraction of such exchanges could be staggering.
Who would win from such a trading system? Clearly buyers and sellers or users. Instead of risking the erosion of value in fiat money (inflation) they would be using, as money, an asset that currently gains in value 6 to 7 percent a year in terms of purchasing power over consumption goods. Think about it. At worst, even if you just lazily accumulated balances of such a monetary good as SPYDRs, instead of using them just for exchange, you would just be steadily growing the value of your wealth over time. That is, exactly what you would be well-advised to hold in your IRA in any case. Brokerage firms would also be winners. By facilitating such exchange and providing custody for capital “money,” they would hugely expand the demand and holding of such assets and get a fee for every transaction they facilitated. Of course, the competition would be severe and the fees for such SPYDR exchanges would be expected to be driven to a very small fraction of what trading fees currently are, in fact logically driven by competition toward zero per exchange. They might only be applied by the purchaser’s brokerage firm because the seller’s firm would simply be gathering new assets. Just for attracting the scale of new assets and trading activity, a competitive brokerage firm could easily see its way to making exchanges from such SPYDR trading accounts costless to customers as a part of its larger profit-maximizing strategy. As the volume of capital-based exchange increased and became dominant, fiat money (dollars) would be an asset few people would chose to hold or accept in trade—thus the Federal Reserve Bank and the Government that covertly finances its purchases by printing worthless currency could be a loser. However, if being a government of (and taxing) a more prosperous, larger and more stable economy is worth something, then even the government could be a long-term winner from moving to capital as money.
This last point is worth expanding on just a bit. One of the most peculiar taxes imposed upon us is the so-called “capital gains” tax. It is a tax imposed on property and assets, including capital, that gain in value measured in a fiat currency such as dollars between the time they are purchased and sold. Of all taxes it is a particularly malicious, destructive, and dishonest tax. Observers have noted that, in a society in which the government imposes a capital gains tax, all affected private property will gradually and inexorably be owned by the government, or at least given out as rewards to those who vote for it. It is an amazing scam that the government imposes this tax in a way that gets us coming and going. First the government imposes a tax based upon a supposed “gain” in value of a good or asset that we own measured in terms of a unit of fiat money and then, of course, it controls the supply of fiat currency. Thus, if it feels it is not collecting enough capital gains taxes, it can simply inflate the currency generating a huge crop of fictitious and arbitrary capital gains. Clearly it makes no logical sense to have a capital gain in money itself. Thus, if capital becomes money, the fallacy of using the value of capital to measure capital gains or losses in other goods will immediately be made to appear a fallacious a concept as it actually is.
Any broad capital index could be used as the economy’s benchmark of value and medium of exchange. Why do we suggest SPYDRs? Simply because the S&P 500, while it doesn’t include all publicly traded companies, does account for about 95% of the total value of publicly owned stocks in the U.S. That’s enough to be a pretty good representation of the broad capital market. Moreover, at a time when the general public’s direct and indirect ownership of stock is widely considered to be too narrow (in the range of about 40%) limiting the wealth-enhancing return benefits of equity ownership to too few, what better way to broaden stock ownership than using capital as money—especially in an economy in which capital is increasingly replacing labor in production of goods and services. As the ownership of capital is enlarged and broadened, aggregate investment in the U.S. economy will increase. In the process the marginal return to capital will gradually fall toward the sustained growth rate of the economy, but as it does wealth will hugely increase due to capital price appreciation. To see why, revisit Chapter Five in our book, Capital as Money.
To those who are fearful of using capital as money when the capital market is so volatile, we offer the following argument. Remember that currently the market value of capital is measured in a fictitious and volatile fiat currency (dollars) which always carries inflation risk. Beyond this, the dollar valued marginal product stream expected to be earned by capital is reduced to a present value (stock price) by using a fictitious government/Fed-determined government bond interest rate that is manipulated by central bank policy. If the resulting value of capital were not volatile under this hare-brained scheme, it would be amazing. Now imagine that instead of dollars and fed determined interest rates, the broad real marginal product of average capital itself was the fundamental or benchmark rate of return, against which all others were measured. In such a world, the value of capital would probably not be volatile at all.
In fact, the real market-determined values of capital and consumption, at the margin, would determine the level of new capital good creation (investment) and the relative value of consumption goods versus capital goods as investors rationally pursue the consumption/investment trade-off that maximizes their expected long-term consumption path. Then the benchmark basic real rate of return that markets keep their eye on would not be some fictitious so-called “risk-free” rate of return on government bonds stated in fiat currency, but rather the real rate of return to investment or capital on average which would converge to the long-term rate of growth of the economy. The continuous comparison of whether to consume or invest at the margin (or consume now versus consume later) is exactly the genius of a free market at work. In such a transparent world, the price of output used for consumption versus the price of output used for investment or new capital would logically discipline each price, driving them toward equality. Serious or sustained overvaluation of either capital or consumption goods would be unlikely. As a result, the volatility of the value of consumption or capital expressed in terms of the other would be low.
If our economy transitions to using the exchange of broad capital shares as money, then it can be imagined that at first everything will still be valued in the fiat currency—dollars. This is, of course, what traders are familiar with. Trades and values of goods and shares will doubtless be stated in dollars. However, as the economy becomes more familiar with trading units of index shares for goods and services, this intermediate, unnecessary step will tend to disappear and prices and will tend to be more economically stated directly in terms of units of capital.