Every once in a
while we get a question about money, credit, banking, and finance that allows
us to give a very brief refresher course on some basic principles that,
nevertheless, are hard to hold in your head if you aren’t using them every
day. As our correspondent queried,
Doesn’t CESJ say that
nothing needs to be done to change the law to effect instituting a bank to
finance infrastructure and similar capital projects? Some people with whom I discussed this the
other day said that while the law allows this, Congress would have to replenish
the bank or something to that effect to get money into it.
Could you clarify that for
me, please? Would anything have to be
done for the regional Federal Reserve Banks, to start making loans for
infrastructure projects now?
The quick and easy
answer is no, the Federal Reserve Act as written and as still in effect gives
every regional Federal Reserve Bank the power to (re)discount loan paper from
member banks and engage in “open market operations” to purchase securities representing
private sector hard assets. Nothing more
is needed — legally, that is.
Politically is another matter.
By the way, just
for informational and educational purposes, “open market operations” were never
intended to be a way of monetizing government deficits. Nope.
No way. The whole idea of
prohibiting the Federal Reserve from dealing in “primary” government securities
(buying securities directly from the Treasury) was to prevent that very thing
from happening.
Permission to
deal in secondary government
securities — i.e., government
securities that were already sold by the Treasury to somebody else and are thus
“on the open market” — was given in order to eliminate that part of the money
supply backed by government debt, not increase it. In order to do so, the Federal Reserve had to
be able to purchase existing government debt, and then hold it until the
government redeemed it and retired the debt.
The Federal Reserve could then replace that part of the money supply
backed with government debt with money backed by private sector assets.
Be that as it
may, the Federal Reserve Act from the beginning has enabled and empowered a
citizen-owned public utility or cooperative to obtain all the funding necessary
to upgrade and expand capacity in a sound and financially feasible manner. Money for these purposes can be created as
needed through the commercial banking system (which includes cooperative banks)
backed up by the twelve regional Federal Reserve Banks.
The method of
financing is “classic banking theory.” A
business or enterprise needing financing presents a “bill of exchange” to a
commercial bank. When the bill is
approved and accepted (“discounted”), the bank issues a promissory note which
it uses to back a new demand deposit.
The bill of exchange can then be sold (“rediscounted”) to the local regional
Federal Reserve Bank.
The business or
enterprise upgrades or expands its capacity and begins making a profit. It then repays the bank’s promissory note with pre-tax dollars,
redeeming its original bill of exchange that the bank buys back from the
Federal Reserve. The money supply
expands and contracts as needed.
In this way there
is always enough investment funds available in the economy because the money is
created as needed by the process of investment itself. Qualifications for this type of “pure credit”
financing would be:
·
An energy company is broadly or cooperatively
owned.
·
It wants to invest in proven advanced energy
technology, e.g., solar energy
production and storage systems.
·
The cost to the consumer-owners is below that of
fossil-based energy systems.
·
Sufficient profits will be generated within a
reasonable period of time to redeem the bills of exchange by means of which the
expansion or upgrade was financed.
Obviously, this
financing technique can be applied in any case where there is a reasonable
expectation that the investment will pay for itself within a reasonable period
of time. Adding to the feasibility, such
projects should be given the same favorable tax treatment as the 100% S-Corp
ESOP.
To eliminate the
need for traditional forms of collateral and reduce the costs of financing, Capital
credit insurance might be required as a charge in addition to bank
administrative fees as part of the borrowed principal.
Thus, there is no
need for Congress to issue more debt to finance rebuilding infrastructure or
anything else. It is, in fact, better if
it does not. Although today it is called
“Modern Monetary Theory,” backing money with government debt instead of
existing wealth or productive assets used to have another name: usury. And usury, while it can sometimes be
permitted, is rarely truly justified, and never optimal, even if it gets a
person, a company, or a nation out of a temporary difficulty.
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