When Abraham Lincoln needed money to fund the American Civil War, rather than paying 25 to 36 percent interest charges, he avoided going into debt by printing Greenback dollars that were “legal tender” in themselves. The ploy not only allowed the North to win the Civil War but helped fund a period of unusual national expansion and development.
The island state of Guernsey, located in the Channel Islands, used government-issued money to fund roads, bridges, and other needed infrastructure throughout most of the 19th and 20th centuries, without price inflation and without incurring government debt.
The Bank of North Dakota, founded in 1919, is a wholly state-owned bank that creates credit on its books just as private banks do. This credit is used to serve local needs, and the interest on loans is returned to the government. Not coincidentally, North Dakota has a $1.2 billion budget surplus at a time when 47 of 50 states are insolvent, an impressive achievement for a state of isolated farmers battling challenging weather.
During the First World War, when private banks were demanding 6 percent interest, Australia’s publicly-owned Commonwealth Bank financed the Australian government’s war effort at an interest rate of a fraction of 1 percent, saving Australians some $12 million in bank charges. After the First World War, the bank’s governor used the bank’s credit power to relieve the depression conditions in other countries by financing production and home-building, and lending funds to local governments for the construction of roads, tramways, harbors, gasworks, and electric power plants. The bank’s profits were paid back to the national government.
A successful infrastructure program funded with interest-free “national credit” was also instituted in New Zealand after it elected its first Labor government in the 1930s. Credit issued by its nationalized central bank allowed New Zealand to thrive at a time when the rest of the world was struggling with poverty and lack of productivity. According to a book titled State Housing in New Zealand, published by the Ministry of Works in 1949:
“To finance its comprehensive proposals, the Government adopted the somewhat unusual course of using Reserve Bank credit, thus recognizing that the most important factor in housing costs is the price of money—interest is the heaviest portion in the composition of rent. … This action showed … it was possible for the State to use the country’s credit in creating new assets for the country.”
The objection invariably raised to proposals for government self-funding is that the result would be dangerously inflationary. Addressing that issue in the Winter 2004 edition of the New Zealand Guardian Political Review, Stan Fitchett explored whether the New Zealand government’s 1930s approach would create price inflation today. He confirmed with bank officials that 97 percent of the New Zealand money supply is now created by commercial banks when they make loans. The year he was writing, the money supply increased by 18,527 million New Zealand dollars, or 16.8 percent; and 97 percent of this increase came from commercial bank lending. Fitchett confirmed with banking experts that if the Reserve Bank had created 100 million New Zealand dollars to build new houses in New Zealand, the sum would have had no noticeable impact on inflation, since it was only one-half of one percent of what was already being added to the money supply annually by private commercial banks. Similar ratios apply in the United States and other countries.
If it is dangerously inflationary for public banks to create money, then it is dangerously inflationary for private banks to do it; but we don’t hear economists and politicians clamoring for the private credit machine to be shut down. To the contrary, a flood of money is being poured into that choking and sputtering machine in a desperate attempt to get its pistons firing again. A more efficient solution to the credit crunch would be for the government to abandon its old Tin Lizzie-model credit machine and create a shiny new public Firebird model; and the first thing the new credit engine might be tested on are green energy projects of the sort proposed by Mr. Moore. Out of the ashes of a failed GM could arise not only a new, clean way of traveling but a new way of funding government and the services we expect from it.