Roosevelt's New Deal was largely funded through the Reconstruction Finance Corporation (RFC), a public financial institution set up earlier by President Hoover. Its funding source was the sale of bonds, but proceeds from the loans repaid the bonds, leaving the RFC with a net profit. The RFC financed roads, bridges, dams, post offices, universities, electrical power, mortgages, farms and much more; and it funded all this while generating income for the government.
A System of Public Banks and "Green QE"
The U.S. Green New Deal envisions funding with "a combination of the Federal Reserve [and] a new public bank or system of regional and specialized public banks," which could include banks owned locally by cities and states. As Sylvia Chi, chair of the legislative committee of the California Public Banking Alliance, explains:
"The Green New Deal relies on a network of public banks -- like a decentralized version of the RFC -- as part of the plan to help finance the contemplated public investments. This approach has worked in Germany, where public banks have been integral in financing renewable energy installations and energy efficiency retrofits."
Local or regional public banks, Chi says, could help pay for the Green New Deal by making "low-interest loans for building and upgrading infrastructure, deploying clean energy resources, transforming our food and transportation systems to be more sustainable and accessible, and other projects. The federal government can help by, for example, capitalizing public banks, setting environmental or social responsibility standards for loan programs, or tying tax incentives to participating in public bank loans."
U.K. professor Richard Murphy adds another role for the central bankas the issuer of new money in the form of "Green Infrastructure Quantitative Easing." Murphy, who was a member of the original 2008 U.K. Green New Deal Group, explains:
"All QE works by the [central bank] buying debt issued by the government or other bodies using money that it, quite literally, creates out of thin air. ... [T]his money creation process is ... what happens every time a bank makes a loan. All that is unusual is that we are suggesting that the funds created by the [central bank] using this process be used to buy back debt that is due by the government in one of its many forms, meaning that it is effectively canceled."
The invariable objection to that solution is that it would act as an inflationary force driving up prices, but as argued in an earlier article of mine, this need not be the case. There is a chronic gap between debt and the money available to repay it that needs to be filled with new money every year to avoid a "balance sheet recession." As U.K. professor Mary Mellor formulates the problem in her book "Debt or Democracy" (2016):
"A major contradiction of tying money supply to debt is that the creators of the money always want more money back than they have issued. Debt-based money must be continually repaid with interest. As money is continually being repaid, new debt must be being generated if the money supply is to be maintained. ... This builds a growth dynamic into the money supply that would frustrate the aims of those who seek to achieve a more socially and ecologically sustainable economy."
In addition to interest, says Mellor, there is the problem that bankers and other rich people generally do not return their profits to local economies. Unlike public banks, which must use their profits for local needs, the wealthy mostly hoard their money, invest it in the speculative markets, hide it in offshore tax havens or send it abroad.
To avoid the cyclical booms and busts that have routinely devastated the U.S. economy, this missing money needs to be replaced; and if the new money is used to pay down debt, it will be extinguished along with the debt, leaving the overall money supply and the inflation rate unchanged. If too much money is added to the economy, it can always be taxed back; but as MMTers note, we are a long way from the full productive capacity that would "overheat" the economy today.
Murphy writes of his Green QE proposal:
"The QE program that was put in place between 2009 and 2012 had just one central purpose, which was to refinance the City of London and its banks. ... What we are suggesting is a smaller programme ... to kickstart the UK economy by investing in all those things that we would wish our children to inherit whilst creating the opportunities for everyone in every city, town, village and hamlet in the UK to undertake meaningful and appropriately paid work."
A network of public banks, including a central bank operated as a public utility, could similarly fund a U.S. Green New Deal -- without raising taxes, driving up the federal debt or inflating prices.
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