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by simple tests.

Today, however, gold and silver no longer circulate as currency. Therefore, trust in the issuer of a paper or base metal token currency is of primary importance. It becomes easy to create money without backing it with any kind of assets. When that happens, the issuer is making a promise on which he or she cannot deliver.

That is why linking money creation to the creation of wealth-producing assets is so important. It ensures that money will not be created unless there is some means to make good on the money's promise to deliver wealth.

Why link money creation specifically to productive assets? Aren't gold and silver good enough? No. Since precious metals used as currency are not consumed, a change in the amount of the currency relative to the amount of goods and services produced in the economy - even if the currency is gold or silver - results in inflation or deflation. Thus, linking money creation to the actual creation of productive assets ensures a stable price level and a sound money supply.

How can that be done? Conceptually it is very easy. Extending "pure credit" (i.e., new credit not tied to past accumulations of wealth) to someone who has a feasible productive project results in the creation of money backed by the present value of the goods and services to be produced. Since the productive project is feasible (as determined by the commercial bank that makes the loan), there is a very good chance the loan will be repaid. As the loan is repaid out of profits, the money is destroyed. Thus, you have a money supply that expands and contracts with the expansion and contraction of wealth in the economy.

Since the growth or shrinkage of the money supply matches the growth or shrinkage of production, you would not have either inflation or deflation. Adding in expanded ownership of the productive projects financed this way means that widespread effective demand is increased (because people will be gaining ownership incomes) and the projects have even a greater chance of being successful (because people can use their ownership incomes to purchase the goods and services produced).

One such method of providing a society with an adequate and stable money supply is called "capital homesteading for every citizen." Capital homesteading describes among its provisions a set of central bank reforms that would result in an asset-backed currency sufficient to finance the formation of capital in a way that everyone could become an owner of productive assets.

Learn more about this author, Michael Greaney.
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