| In August 2007, the nation was stunned by the | | | | and construction. |
| collapse of a major Minneapolis bridge, killing nine. | | | | The argument against this creative approach is |
| The bridge had been rated structurally deficient | | | | that it would be inflationary, but would it? Inflation |
| by the U.S. government as far back as 1990, and | | | | results when "demand" (money) increases faster |
| it was only one of more than 70,000 bridges | | | | than "supply" (goods and services); and in this |
| across the country with that rating. The American | | | | case goods and services would be increasing along |
| Society of Civil Engineers estimated that it would | | | | with the money available to spend, keeping the |
| take nearly $190 billion to fix the country's failing | | | | money supply in balance and prices stable. In fact, |
| bridges over the next two decades. Minnesota | | | | it is the lending of money created out of thin air |
| and other states have the manpower and the | | | | that is inflationary, because banks create the |
| materials to rebuild. What they lack is only the | | | | principal but not the interest necessary to pay |
| money to do it. Municipal governments have to | | | | back their loans. Additional loans must therefore |
| borrow money by issuing bonds, and the interest | | | | continually be taken out just to service the |
| they must pay on these bonds is going up. | | | | "money" (or debt) that is already in the money |
| On March 13, 2008, Erik Sirri, director of the SEC's | | | | supply; and this newly-created money goes into |
| division of trading and markets, told Congress that | | | | the pockets of middlemen rather than contributing |
| the credit crisis has spread to municipal bond | | | | to the productivity of the community. "Demand" |
| auctions. "There is no question that the recent | | | | (money) thus goes up without a corresponding |
| dislocations in the municipal bond markets have | | | | increase in "supply," creating price inflation. |
| created unanticipated hardships for municipal | | | | The solution to this conundrum is to authorize |
| issuers and in some cases dramatically increased | | | | banks to monetize the production of real goods |
| their borrowing costs," Sirri said. The inability of | | | | and services, creating supply and demand at the |
| cities and states to sell municipal bonds to | | | | same time. There is substantial precedent for this |
| investors at reasonable interest rates seriously | | | | approach, stretching as far back as the early |
| threatens plans to build new roads, schools, | | | | American colonies: |
| airports and other public works projects.1 | | | | * In the early eighteenth century, the colony of |
| Although the cost of borrowing is going up for | | | | Pennsylvania issued money that was both lent and |
| municipal governments, this is not because they | | | | spent by the local government into the economy, |
| are bad credit risks. In fact, they are extremely | | | | producing an unprecedented period of prosperity. |
| good credit risks. Creditors know where to find | | | | This was done not only without producing price |
| them, and local governments have the power to | | | | inflation but without taxing the people. |
| tax to pay their bills. The problem lies with the | | | | * When Abraham Lincoln needed money to fund |
| bond insurers called "monolines," which have | | | | the American Civil War, rather than paying 25 to |
| ventured into the very risky mortgage-backed | | | | 36 percent interest charges, he avoided going into |
| securities market. This has put the insurers' | | | | debt by printing Greenback dollars that were "legal |
| triple-A ratings in jeopardy, along with the ratings | | | | tender" in themselves. Again, historians of the |
| of the municipal bonds they insure. | | | | period attest that this issue of Greenbacks was |
| While borrowing costs for municipal governments | | | | not responsible for price inflation. |
| are skyrocketing, the interest rate the Federal | | | | * A successful infrastructure program funded with |
| Reserve charges to banks has been going down, | | | | interest-free "national credit" was instituted in New |
| even though banks are proving to be much riskier | | | | Zealand after it elected its first Labor government |
| investments than local governments. The Federal | | | | in the 1930s. Credit issued by its nationalized |
| Reserve is a private banking corporation that is | | | | central bank allowed New Zealand to thrive at a |
| owned by other banks. It was established in 1913 | | | | time when the rest of the world was struggling |
| to prevent bank runs and otherwise keep the | | | | with poverty and lack of productivity. |
| banks from getting into trouble for | | | | * The island state of Guernsey, located in the |
| over-leveraging (lending out many times their | | | | British Channel Islands, has been funding |
| assets), and that remains its principal function | | | | infrastructure with government-issued money for |
| today. The Federal Reserve recently extended | | | | over 200 years, without creating price inflation |
| $200 billion in financing to 20 top investment | | | | and without government debt.5 But Is It |
| banks at wholesale rates, but these low rates are | | | | Constitutional? |
| not being passed on to municipal governments or | | | | These governments could create the money they |
| home buyers. The Federal Reserve is evidently | | | | needed because they were sovereign entities, but |
| working for the banks more than for taxpayers | | | | what about individual States governed by a |
| or local governments.Thinking Outside the Box: | | | | federal Constitution? In the United States, the U.S. |
| The Minnesota Transportation Act | | | | Constitution controls. But that august document |
| Many people are getting tired of waiting for the | | | | says very little about the creation of money - so |
| Federal Reserve and the federal government to | | | | little that banks have stepped in and taken over |
| act, and one of them is a Minnesota resident | | | | the business by default. Here are the sole |
| named Byron Dale. Dale has drafted a bill called | | | | Constitutional provisions directly addressing the |
| "the Minnesota Transportation Act" (MTA), which | | | | creation of money: |
| is scheduled for hearing before the Minnesota | | | | |
| Senate Transportation Committee on March 25, | | | | Article I, Section 8, Clause 5 |
| 2008. If adopted, the bill could represent a major | | | | : The Congress shall have Power...To coin Money, |
| innovation in the way state and local projects are | | | | regulate the Value thereof, and of foreign Coin, |
| funded. It would mandate Minnesota's | | | | and fix the Standard of Weights and Measures. |
| Transportation Department and State-chartered | | | | Article I, Section 10, Clause 1: No State shall...coin |
| banks to enter into an agreement providing that | | | | Money; emit Bills of Credit; make any Thing but |
| the banks would advance funds for | | | | gold and silver Coin a Tender in Payment of Debt. |
| legislatively-approved transportation projects in | | | | Congress has been given the power to coin |
| the same way that banks make commercial loans | | | | money, but minting coins is not the same thing as |
| - simply by "monetizing" the projects themselves. | | | | issuing paper money, checkbook money, |
| Banks routinely monetize the promissory notes of | | | | accounting-entry money, or electronic money - |
| borrowers just by making book entries to a | | | | the forms of money used most often today. |
| checking account and saying "you have a new | | | | Arguably, "to coin" money was an archaic way of |
| deposit with us." (More on this below.) | | | | saying "to create" money, but then what is to be |
| Under the MTA, the state-chartered banks would | | | | made of the clause stating, "No state shall . . . |
| create a pass-through account titled an Asset | | | | make any Thing but gold and silver Coin a Tender |
| Monetization Account (AMA), monetizing the bid | | | | in Payment of Debt"? "Coin" here clearly means |
| value of projects. This would be done in the same | | | | precious metal coins, period. |
| way that banks monetize collateral, except that | | | | That clause is interesting for another reason: |
| the deposit would go on the bank's books as an | | | | when was the last time you heard of a State |
| asset rather than a liability, turning the bid value of | | | | paying its debts in gold or silver coin? States |
| the project into "money" without debt. This | | | | routinely pay their debts with the bank-created |
| money would be debited electronically out of the | | | | accounting-entry money that now composes |
| AMA and credited to the State's Transportation | | | | over 97 percent of the U.S. money supply (M3), |
| Account (STA), from which it would then be | | | | and that form of money is omitted from the |
| debited out and credited in to the contractor's | | | | Constitution altogether. The States therefore |
| bank account in a state bank, according to the | | | | violate the Constitution every day, something |
| terms of the contract. The contractor would | | | | they must do if they are to pay their debts at all, |
| spend this money to complete the project. The | | | | since gold and silver coins are no longer in general |
| money would flow into Minnesota's economy, | | | | circulation. The Constitution obviously needs to be |
| where it would provide for better, safer, more | | | | amended to suit the times. Meanwhile, the Tenth |
| durable roads and bridges. It would be used to | | | | Amendment to the Constitution (part of the Bill of |
| purchase goods and services, benefiting business. | | | | Rights) provides: |
| It would go to pay taxes, helping the State | | | | |
| balance its budget. And it would flow back into the | | | | X - Rights of the States under Constitution |
| state-chartered banks as interest on outstanding | | | | : The powers not delegated to the United States |
| loans, reducing the number of loan defaults and | | | | by the Constitution, nor prohibited by it to the |
| improving the profits of the state-chartered | | | | States, are reserved to the States respectively, |
| banks. In this way, says Dale, the MTA would | | | | or to the people. |
| benefit every segment of society.Too Radical? | | | | Creating checkbook money is not specifically |
| Maybe Not . . . | | | | delegated to the United States, so it must be |
| Dale says he has been proposing this sort of | | | | delegated to the States, unless it is specifically |
| state funding alternative for years; but only now, | | | | prohibited to them. What about the provision that |
| with the looming liquidity crisis, have legislators | | | | "No State shall . . . emit Bills of Credit"? According |
| begun to take him seriously. His plan may not be | | | | to "the 'Lectric Law Library," "bills of credit are |
| such a radical departure from existing practice as | | | | declared to mean promissory notes . . . . Bills of |
| it sounds. Commercial banks are already in the | | | | credit may be defined to be paper issued and |
| business of creating money. Except for coins, our | | | | intended to circulate through the community for |
| entire money supply is now created by banks in | | | | its ordinary purposes as money redeemable at a |
| the form of loans.2 Indeed, banks create all the | | | | future day." Bills of credit are promises to pay |
| money they lend. This was confirmed by the | | | | later rather than what is being discussed here: |
| Chicago Federal Reserve in a booklet called | | | | checkbook money issued as "legal tender" - the |
| "Modern Money Mechanics," which states: | | | | sort of dollars banks issue every day when they |
| "Of course, [banks] do not really pay out loans | | | | make commercial loans. The Constitution does not |
| from the money they receive as deposits. If they | | | | say who is authorized to issue this sort of money |
| did this, no additional money would be created. | | | | - whether in paper, electronic or accounting-entry |
| What they do when they make loans is to accept | | | | form - so under the Tenth Amendment, this right |
| promissory notes in exchange for credits to the | | | | is reserved to the States and to the People. |
| borrowers' transaction accounts. Loans (assets) | | | | As the credit crisis deepens and exposes the |
| and deposits (liabilities) both rise [by the same | | | | inability of the existing banking structure to meet |
| amount]."3 | | | | the public's needs, creative funding plans similar to |
| Many other authorities have confirmed this | | | | the proposed MTA could be popping up in |
| money-creating mechanism of commercial banks.4 | | | | communities around the country. If the U.S. |
| State-chartered banks get their authority to | | | | Congress and the privately-owned Federal |
| create money from the State, and the State has | | | | Reserve will not issue the funds necessary for |
| the authority to determine the purpose for which | | | | bridge and road repair and other urgent public |
| banks create money. State banks are now | | | | projects, we can encourage our State legislators |
| permitted to create money to monetize a | | | | to fill the breach; and if they won't do it, we the |
| mortgage or other promise to repay. They could | | | | people can get together, apply for a bank charter, |
| as easily be authorized to "monetize" the promise | | | | and create the funding ourselves. (See E. Brown, |
| of contractors to deliver labor and materials to | | | | "How to Start Your Own Bank," |
| the State in the form of road and bridge repair | | | | webofdebt.wordpress.com, February 23, 2008. |