Ban Ki-moon, Secretary General of the United Nations, stated in an October 15, 2007 address, "Climate change is a defining issue of our time. The science is clear. . . . We know what we have to do. We have affordable measures and technologies to do it." What we don’t have is the money – at least, we don’t have it under the current system of bank-created credit. We also don’t have time. Ban Ki-moon went on:
"Traveling in Chad recently, I saw first-hand the humanitarian toll of climate change. An estimated 20 million people depend on a lake and river system that has shrunk to a tenth of its original size over the past 30 years. In Africa right now, the worst rains in memory are washing hundreds of thousands of people from their homes. These are signs of what is to come. The problems our generation faces will be worse for our children, particularly if we do not act. . . . We must engage the private sector, stimulate economic activity, use new financing and market-based approaches, develop and transfer know-how, and create jobs."
The United Nations Development Program (UNDP) is currently seeking ideas for a debate to be held in Bali in December 2007, involving innovative ways to fund the costs of adapting to climate change in the developing world. Here is my submission:
FUNDING PUBLIC PROJECTS WITH PUBLICLY-ISSUED MONEY
Governments have the sovereign right to create and lend money. The United Nations could assume that right as well, just as the International Monetary Fund has assumed the right to issue credit in the form of "Special Drawing Rights" that are convertible into national currencies. As will be shown here, government-issued or U.N.-issued money could be used for sustainable energy projects without causing inflation, and this could be profitably done even by impoverished governments with weak legal structures and immature government accountability mechanisms.
Credit created by governments or the United Nations would have the advantage that it could be issued interest-free. Eliminating the cost of interest could cut production costs dramatically. Interest composes as much as 77% of the cost of capital-intensive goods and services such as public housing. The average is brought down by labor-intensive services such as garbage collection, for which interest makes up only about 12% of the cost; but the overall average cost of interest has been estimated at about half of everything we buy.1 If money for alternative energy projects were issued interest-free, projects that have been considered unsustainable because of the burden of interest could become not only self-sustaining but highly profitable for the funding governments.
In The Modern Universal Paradigm (2007), Rodney Shakespeare gives the example of the Humber Bridge, which was built in the UK at a cost of 98 million. Every year since the bridge opened in 1981, it has turned an operating profit; that is, its running costs (basically repair, maintenance and staff salaries) have been exceeded by the fees it receives from travelers crossing the river Humber. But by the time the bridge opened in 1981, interest charges had driven its cost up to 151 million; and by 1992, only 10 years later, the debt had shot up to a breath-taking 439 million. The UK government was forced to intervene with sizeable grants and writeoffs to save the local residents from bearing the brunt of these costs. If the bridge had been financed with interest-free, government-issued money, these costs could have been avoided and the bridge could have funded itself.2
The Inflation Objection
The argument against governments issuing and lending money for development projects is that it would be inflationary, but this need not be the case. Price inflation results when "demand" (money) increases faster than "supply" (goods and services). As economist John Maynard Keynes pointed out, when the national currency is expanded to fund productive projects, supply goes up along with demand, leaving consumer prices unaffected.3
Moreover, private banks themselves create the money they lend. Many authorities have confirmed this fact, including the Federal Reserve itself. The Chicago Federal Reserve exposed the mechanics of money creation in a publication called Modern Money Mechanics, in which it said:
"Of course, they [commercial banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts.4"
See also Money Facts, published in 1964 by Congressman Wright Patman, Chairman of the Subcommittee on Domestic Finance of the Banking and Currency Committee. Responding to the question "Do private banks issue money today?", he wrote:
"Yes. Although banks no longer have the right to issue bank notes, they can create money in the form of bank deposits when they lend money to businesses, or buy securities. . . . The important thing to remember is that when banks lend money they don’t necessarily take it from anyone else to lend. Thus they "create" it."5
During the recent bank credit crisis in August 2007, the central banks of the United States, Europe, Canada, Australia and Japan collectively extended a $315 billion credit line to commercial banks. This credit was created out of nothing (something central banks assume the right to do as "lenders of last resort"), and the sums advanced were huge.6 For comparative purposes, a mere $188 billion would have been enough to repair all of the 74,000 U.S. bridges known to be defective, preventing another disaster like that in Minnesota in July 2007. The Carbon Trust, a well-known UK company dedicated to cutting carbon emissions, is responsible for reducing emissions by nearly 2 million tons per year on a 2007 budget of only £115.9 million (about $60 million U.S.). If central banks can create hundreds of billions of dollars to save floundering private banks, governments can create comparable credits to adapt to climate change, an even more pressing problem.
The sovereign right to issue money actually belongs to governments, not to private banks; but few governments exercise that right today. The only money the U.S. government issues are coins, which compose only about one one-thousandth of the U.S. money supply (M3). All of the rest is created by private banking institutions when they make loans. This includes the privately-owned Federal Reserve, which creates Federal Reserve Notes (dollar bills) and lends them to the government and to commercial banks.7