The Capital Commons
Robert C. Hockett - Cornell Law School
-- All societies must address at least two questions where the organization of productive activity is concerned. The first is whether production will be mainly publicly managed, privately managed, or ‘mixed.’ The second is whether the financing of production will be mainly publicly managed, privately managed, or mixed.. In the American commercial republic, we seem to have answered the ‘who handles production’ question more or less to our own satisfaction long ago. From the founding era to the present, we have elected to leave production primarily, though not of course solely, ‘in private hands.’ We have never relied heavily upon state-owned enterprises in production as China once did, nor have we ever had much in the way of nationalized industry in the way post-war Britain once did, though we do have some ‘government-sponsored enterprises’ (GSEs).
Where the financing of production is concerned, on the other hand, we in the US have been decidedly more ambivalent.
For the past 160 years, our financial system has operated essentially as a public-private franchise arrangement. At the core of our franchise lie (a) the sovereign public (the ‘public’ of our ‘republic’), along with its money-modulator – the issuer and manager of its monetized full faith and credit, its ‘money’ – on the one hand; and (b) the private sector financial institutions and markets we publicly license to allocate most of the resultant Wicksellian ‘bank money’ or ‘credit-money’ – public money’s fiduciary equivalent – on the other hand. In recent years, developments in several distinct ‘spaces’ have prompted what amounts to a broad reassessment of the US’s hybrid financial arrangements. One such development is weariness with our system’s penchant for over-generating the public credit that fuels bubbles and busts rather than production, a consequence of leaving our public capital – by far the greater part of investment capital – to private management. This is what I have long called poor credit modulation.
Another ground of critique is our hybrid system’s poor record on what I have long called credit allocation, from which modulation turns out to be inseparable. Our morbid fear of explicitly, rather than implicitly, ‘picking winners and losers’ is the culprit here. Finally, another impetus to reform is the scandal of commercial and financial exclusion that our system permits, while still another is the promise offered by new financial technologies where ending both that and leaky monetary policy are concerned. In a recent article, “The Capital Commons: Digital Money and Citizens' Finance in a Productive Commercial Republic,” I (a) accept these criticisms, which I myself have leveled continuously over the past fifteen years, (b) argue that privately ordered production requires publicly ordered finance, and (c) show how to structure finance publicly on a Fed balance sheet forthrightly recognized as a Citizens’ Ledger.
The core problem with present circumstances, I argue, is that under free commercial arrangements like ours the public character of most investment capital is simply not compatible with private capital management. Pervasive recursive collective action predicaments endemic to all exchange economies, combined with the decoupling of profits from production made possible by stratified capital ‘markets’ in such economies, render the combination inherently volatile and hence unsustainable.
The only way to get public capital allocation right, and thus to get credit modulation and long-term productive investment right, is to manage public capital publicly and private capital privately. My article accordingly shows how to do this in detail, as noted above, through the simple organizing framework of a public balance sheet conceived as a central bank balance sheet.
On the asset side of this balance sheet, two measures that I propose in the article will redirect public capital toward the public portfolio rather than private portfolios. First, the Treasury’s Federal Financing Bank will invest continually in ongoing infrastructural renewal, developing a public asset portfolio no more and no less variegated than the nation’s infrastructure itself – and one in which the Fed itself can invest.
Second, restoring the US’s regional Federal Reserve District Banks to their original status as a network of regional development banks – what I call ‘Spreading the Fed’ – will ensure that all private sector development financed with public capital yields productive, not merely profitable, assets. This it will do both by discounting production-associated business paper, as in its distant past, and by strictly conditioning Fed lending to private sector banks upon promised local and regional development.
The liability side counterpart to this asset side supplementation of the Fed balance sheet will be the provision to all citizens, businesses, and legal residents of digital P2P ‘FedWallets’ through which an upgraded ‘People’s Fed’ issues ‘Democratic Digital Dollars.’ This will end commercial and financial exclusion, leaky monetary policy, and consumer financial data ‘harvesting,’ while enabling the equitable sharing of public wealth growth through ‘Commonwealth Growth Dividends.’
A macroprudential Price Stabilization Fund – or ‘People’s Portfolio’ – and an FSOC-inspired National Reconstruction & Development Council, comprising the heads of all cabinet-level executive agencies with jurisdiction over infrastructure and industry, completes the picture. It will enable perpetual democratic determination of what nationally ‘counts’ as ‘development’ and, therefore, ‘productive.’
In the course of my arguments and proposals, I trace all salient consequences that flow from the resultant overhaul of our system of financing production, from banking through ‘shadow banking’ to the capital markets. I also make some surprising discoveries along the way.
Among these is that full separation of Fed and Treasury, monetary and fiscal policy, itself an artifact of franchise finance and hence the false hope of separating credit modulation from credit allocation, is no longer tenable. Another is that global central bank digital currency (CBDC) development is now corroborating much of what the article argues.