From xxxxxx <[email protected]>
Subject Tackling the Infrastructure and Unemployment Crises: The “American System” Solution
Date December 22, 2020 1:00 AM
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[A self-funding national infrastructure bank modeled on the
“American System” of Alexander Hamilton, Abraham Lincoln, and
Franklin D. Roosevelt would help solve not one but two of the
country’s biggest problems. ] [[link removed]]

TACKLING THE INFRASTRUCTURE AND UNEMPLOYMENT CRISES: THE “AMERICAN
SYSTEM” SOLUTION  
[[link removed]]


 

Ellen Brown
December 18, 2020
Web of Debt Blog [[link removed]]

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_ A self-funding national infrastructure bank modeled on the
“American System” of Alexander Hamilton, Abraham Lincoln, and
Franklin D. Roosevelt would help solve not one but two of the
country’s biggest problems. _

, Ellen Brown

 

Millions of Americans have joined the ranks of the unemployed, and
government relief checks and savings are running out; meanwhile, the
country still needs trillions of dollars in infrastructure. Putting
the unemployed to work on those infrastructure projects seems an
obvious solution, especially given that the $600 or $700 stimulus
checks Congress is planning on issuing
[[link removed]] will
do little to address the growing crisis. Various plans for solving
the infrastructure crisis involving public-private partnerships
[[link removed]] have
been proposed, but they’ll invariably result in private investors
reaping the profits while the public bears the costs and liabilities.
We have relied for too long on private, often global, capital, while
the Chinese run circles around us building infrastructure with credit
simply created on the books of their government-owned banks.

Earlier publicly-owned U.S. national banks and U.S. Treasuries pulled
off similar feats, using what Sen. Henry Clay, U.S. statesman from
1806 to 1852, named the “American System” – funding national
production simply with “sovereign” money and credit. They
included
[[link removed]] the
First (1791-1811) and Second (1816-1836) Banks of the United States,
President Lincoln’s federal treasury and banking system, and
President Franklin Roosevelt’s Reconstruction Finance Corporation
(RFC) (1932-1957). Chester Morrill, former Secretary of the Board of
Governors of the Federal Reserve, wrote of the RFC
[[link removed]]:

[I]t became apparent almost immediately, to many Congressmen and
Senators, that here was a device which would enable them to provide
for activities that they favored for which government funds would be
required, but _without any apparent increase in appropriations_. . .
. [T]here need be no more appropriations and its activities could be
enlarged indefinitely, as they were, almost to fantastic proportions.
[emphasis added] 

Even the Federal Reserve with its “quantitative easing” cannot
fund infrastructure without driving up federal expenditures or debt,
at least without changes to the Federal Reserve Act. The Fed is not
allowed to spend money directly into the economy or to lend directly
to Congress. It must go through the private banking system
[[link removed]] and its
“primary dealers.” The Fed can create and pay only with
“reserves” credited to the reserve accounts of banks. These
reserves are a completely separate system
[[link removed]] from the
deposits circulating in the real producer/consumer economy; and those
deposits are chiefly created by banks when they make loans. (See the
Bank of England’s 2014 quarterly report here
[[link removed]].)
New liquidity gets into the real economy when banks make loans to
local businesses and individuals; and in risky environments like that
today, banks are not lending adequately
[[link removed]] even
with massive reserves on their books. 

A publicly-owned national infrastructure bank, on the other hand,
would be mandated to lend into the real economy; and if the loans were
of the “self funding” sort characterizing most infrastructure
projects (generating fees to pay off the loans), they would be repaid,
canceling out the debt by which the money was created. That is how
China built 12,000 miles of high-speed rail in a decade: credit
created on the books of government-owned banks
[[link removed]] was
advanced to pay for workers and materials, and the loans were repaid
with profits
[[link removed]] from
passenger fees. 

Unlike the QE pumped into financial markets, which creates asset
bubbles in stocks and housing, this sort of public credit mechanism is
not inflationary. Credit money advanced for productive purposes
balances the circulating money supply with new goods and services in
the real economy. Supply and demand rise together, keeping prices
stable. China increased its money supply by nearly 1800%
[[link removed]] over 24 years
(from 1996 to 2020) without driving up price inflation
[[link removed]],
by increasing GDP [[link removed]] in step
with the money supply.   

HR 6422, THE NATIONAL INFRASTRUCTURE BANK ACT OF 2020

A promising new bill for a national infrastructure bank modeled on the
RFC and the American System, H.R. 6422
[[link removed]],
was filed by Rep. Danny Davis, D-Ill., in March. The National
Infrastructure Bank of 2020 (NIB) is projected to create $4 trillion
or more in bank credit money to rebuild the nation’s rusting
bridges, roads, and power grid; relieve traffic congestion; and
provide clean air and water, new schools and affordable housing. It
will do this while generating up to 25 million union jobs paying
union-level wages. The bill projects a net profit to the government of
$80 billion per year, which can be used to cover infrastructure needs
that are not self-funding (broken pipes, aging sewers, potholes in
roads, etc.). The bill also provides for substantial investment in
“disadvantage communities,” those defined by persistent poverty. 

The NIB is designed to be a true depository bank, giving it the perks
of those institutions for leverage and liquidity, including the
ability to borrow at the Fed’s discount window without penalty
[[link removed]] at
0.25% interest (almost interest-free). According to Alphecca Muttardy
[[link removed]], a
former macroeconomist for the International Monetary Fund and chief
economist on the 2020 NIB team, the NIB will create the $4 trillion it
lends simply as deposits on its books, as the Bank of England attests
[[link removed]] all
depository banks do. For liquidity to cover withdrawals, the NIB can
either borrow from the Fed at 0.25% or issue and sell bonds. 

Modeled on its American System predecessors, the NIB will be
capitalized with existing federal government debt. According to
the summary on the NIB Coalition website
[[link removed]]:

The NIB would be capitalized by purchasing up to $500 billion in
existing Treasury bonds held by the private sector (e.g., in pension
and other savings funds), in exchange for an equivalent in shares of
preferred [non-voting] stock in the NIB. The exchange would take place
via a sales contract with the NIB/Federal Government that guarantees a
preferred stock dividend of 2% more than private-holders currently
earn on their Treasuries. The contract would form a binding obligation
to provide the incremental 2%, or about $10 billion per year, from the
Budget. While temporarily appearing as mandatory spending under the
Budget, the $10 billion per year would ultimately be returned as a
dividend paid to government, from the NIB’s earnings stream. 

Since the federal government will be paying the interest on the bonds,
the NIB needs to come up with only the 2% dividend to entice
investors. The proposal is to make infrastructure loans at a very
modest 2%, substantially lower than the rates now available to the
state and local governments that create most of the nation’s
infrastructure. At a 10% capital requirement, the bonds can
capitalize ten times their value in loans. The return will thus be
20% on a 2% dividend outlay from the NIB, for a net return on
investment of 18% less operating costs. The U.S. Treasury will also be
asked to deposit Treasury bonds with the bank as an “on-call”
subscriber. 

THE AMERICAN SYSTEM: SOVEREIGN MONEY AND CREDIT

U.S. precedents for funding internal improvements with “sovereign
credit” – credit issued by the national government rather than
borrowed from the private banking system – go back to the American
colonists’ paper scrip
[[link removed]],
colonial Pennsylvania’s “land bank
[[link removed]]”,
and the First U.S. Bank of Alexander Hamilton, the first U.S. Treasury
Secretary. Hamilton proposed to achieve the constitutional ideal of
“promoting the general welfare” by nurturing the country’s
fledgling industries with federal subsidies for roads, canals, and
other internal improvements; protective measures such as tariffs; and
easy credit provided through a national bank. Production and the money
to finance it would all be kept “in house,” without incurring
debt to foreign financiers. The national bank would promote a single
currency, making trade easier, and would issue loans in the form of
“sovereign credit.” ’

Senator Henry Clay called this model the “American System” to
distinguish it from the “British System” that left the market to
the “invisible hand” of “free trade,” allowing big monopolies
to gobble up small entrepreneurs, and foreign bankers and
industrialists to exploit the country’s labor and materials. After
the charter for the First US Bank expired in 1811, Congress created
the Second Bank of the United States in 1816 on the American System
model
[[link removed](economic_plan)]. 

In 1836, Pres. Andrew Jackson shut down the Second U.S. Bank due to
perceived corruption, leaving the country with no national currency
and precipitating a recession. “Wildcat” banks
[[link removed].] issued
their own banknotes – promissory notes allegedly backed by gold. But
the banks often lacked the gold necessary to redeem the notes, and the
era was beset with bank runs and banking crises.

Abraham Lincoln’s economic advisor was Henry Carey
[[link removed]],
the son of Matthew Carey, a well-known printer and publisher who had
been tutored by Benjamin Franklin and had tutored Henry Clay. Henry
Carey proposed creating an independent national currency that was
non-exportable, one that would remain at home to do the country’s
own work. He advocated a currency founded on “national credit,”
something he defined as “a national system based entirely on the
credit of the government with the people, not liable to interference
from abroad.” It would simply be a paper unit of account that
tallied work performed and goods delivered. 

On that model, in 1862 Abraham Lincoln issued U.S. Notes or Greenbacks
directly from the U.S. Treasury, allowing Lincoln’s government not
only to avoid an exorbitant debt to British bankers and win the Civil
War, but to fund major economic development, including tying the
country together with the transcontinental railroad – an investment
that actually turned a profit
[[link removed]] for
the government.

After Lincoln was assassinated in 1865, the Greenback program was
discontinued; but Lincoln’s government also passed the National Bank
Act of 1863, supplemented by the National Bank Act of 1864. Originally
known as the National Currency Act
[[link removed]],
its stated purpose was to stabilize the banking system by eradicating
the problem of notes issued by multiple banks circulating at the same
time. A single banker-issued national currency was created through
chartered national banks, which could issue notes backed by the U.S.
Treasury in a quantity proportional to the bank’s level of capital
(cash and federal bonds) deposited with the Comptroller of the
Currency.

FROM ROOSEVELT’S RECONSTRUCTION FINANCE CORPORATION (1932-57) TO HR
6422

The American president dealing with an economic situation most closely
resembling that today, however, was Franklin D. Roosevelt. America’s
32nd president resolved massive unemployment and infrastructure
problems by greatly expanding the Reconstruction Finance Corporation
(RFC) set up by his predecessor Herbert Hoover. The RFC was a
remarkable publicly-owned credit machine that allowed the government
to finance the New Deal and World War II without turning to Congress
or the taxpayers for appropriations. The RFC was not called an
infrastructure bank and was not even a bank, but it served the same
basic functions. It was continually enlarged and modified by Pres.
Roosevelt to meet the crisis of the times until it became America’s
largest corporation and the world’s largest financial organization.
Its semi-independent status let it work quickly, allowing New Deal
agencies to be financed as the need arose. According to
Encyclopedia.com
[[link removed]]:

[T]he RFC—by far the most influential of New Deal agencies—was an
institution designed to save capitalism from the ravages of the Great
Depression
[[link removed]].
Through the RFC, Roosevelt and the New Deal handed over $10 billion to
tens of thousands of private businesses, keeping them afloat when they
would otherwise have gone under …. 

A similar arrangement could save local economies from the ravages of
the global shutdowns today.

The Banking Acts of 1932
[[link removed]] provided
the RFC with capital stock of $500 million and the authority to extend
credit up to $1.5 billion (subsequently increased several times). The
initial capital came from a stock sale to the U.S. Treasury. With
those modest resources, from 1932 to 1957 the RFC loaned or
invested _more than $40 billion_. A small part of this came from its
initial capitalization. The rest was financed with bonds sold to the
Treasury, some of which were then sold to the public. The RFC ended up
borrowing a total of $51.3 billion from the Treasury and $3.1 billion
from the public.

Thus the Treasury was the lender, not the borrower, in this
arrangement. As the self-funding loans were repaid, so were the bonds
that were sold to the Treasury, leaving the RFC with a net profit. The
RFC was the lender for thousands of infrastructure and small business
projects that revitalized the economy, and these loans produced
a total net income
[[link removed]] of over
$690 million on the RFC’s “normal” lending functions (omitting
such things as extraordinary grants for wartime). The RFC financed
roads, bridges, dams, post offices, universities, electrical power,
mortgages, farms, and much more–all while generating income for the
government.

HR 6422 proposes to mimic this feat. The National Infrastructure Bank
of 2020 can rebuild crumbling infrastructure across America, pushing
up long-term growth, not only without driving up taxes or the federal
debt, but without hyperinflating the money supply or generating
financial asset bubbles. The NIB has growing support
[[link removed]] across the country from
labor leaders, elected officials, and grassroots organizations. It can
generate real wealth in the form of upgraded infrastructure and
increased employment as well as federal and local taxes and GDP,
paying for itself several times over without additional outlays from
the federal government. With official unemployment at nearly double
[[link removed]] what
it was a year ago and an economic crisis unlike the U.S. has seen in
nearly a century, the NIB can trigger the sort of “economic
miracle” the country desperately needs.  

____________________________

_This article was first posted on ScheerPost
[[link removed]].
Ellen Brown is an attorney, chair of the Public Banking Institute
[[link removed]], and author of thirteen books
including Web of Debt
[[link removed]], The
Public Bank Solution
[[link removed]],
and Banking on the People: Democratizing Money in the Digital Age
[[link removed]].  She also co-hosts a
radio program on PRN.FM [[link removed]] called “It’s Our Money
[[link removed]].” Her 300+ blog articles are
posted at EllenBrown.com [[link removed]]. _

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