My favorite course ever had the same structure. It was an elective, with only about 15 3d and 4th year students. Those not up for the reading dropped out. We covered about 20 high quality economic papers in 6 months, quite impressive for a teacher to accomplish that with students. I can pretty much still remember the contents of the course.

There was homework due before class from the material!

> Before class, we were assigned to read a chapter from the textbook, understand the material, and complete two or three homework problems from the material we had just self-learned. [Emphasis mine.]

Grade the students on this?

I had classes with the same structure. The homework was one of those online setups, and our professor had a policy that we should be ready with questions. If the questions stopped during class, the homework grade would be replaced by the grade on a quiz. The quizzes were fair game every day,were limited in scope,and only happened if the professor decided there was too little engagement.