One of the important things not being discussed about the financial crisis is that the money that is gone was not real in the first place, something we have mentioned from time to time. . .
Sam Smith's Great American Political Repair Manual, 1994 - The total federal state, local and private debt in this country in 1996 was around $14 trillion. The actual money supply was just under $6 trillion. So what happened to the rest of the money? Most of it doesn't exist and never did. We call this imaginary money debt. This debt is money that we (as individuals, companies and government) have borrowed, primarily from private sources. As Bob Blain, a professor at Southern Illinois University, put it:
"Most debt is not the result of people borrowing money; it is the result of people not being able to repay what they owed [to banks or individuals] at some earlier time. Instead of declaring them bankrupt, creditors just add more to their debt."
This new debt is called interest. Many people think the idea of the government printing money is shameful, yet our laws permit private financial institutions to create money all the time. Every time you fail to pay off your credit card, you're letting a banker print some more money.
You're not the first, of course. For example, when the Congress met in February 1790 to figure out how to pay off the Revolutionary War debt of $75 million, Alexander Hamilton strongly advocated issuing debt certificates and using them as money. Congressman James Jackson of Georgia warned that this would "settle upon our posterity a burden which [citizens] can neither bear nor relieve themselves from. . . Though our present debt be but a few millions, in the course of a single century it may be multiplied to an extent we dare not think of."
An alternative to Congress borrowing money to pay off its debt would have been to have created the $75 million, using Congress's constitutional power to "coin money and regulate the value thereof." Instead Congress began a long tradition of borrowing the money that -- five trillion dollars of debt later -- many believe we can neither bear nor relieve ourselves from.
In the early 19th century, the little British Channel island of Guernsey faced a smaller but similar problem. Its sea walls were crumbling. its roads were too narrow, and it was already heavily in debt. There was little employment and people were leaving for elsewhere.
Instead of going still further into debt, the island government simply issued 4,000 pounds in state notes to start repairs on the sea walls as well as for other needed public works. More issues followed and twenty years later the island had, in effect, printed nearly 50,000 pounds. Guernsey had more than doubled its money supply without inflation.
A report of the island's States Office in June 1946 notes that island leaders frequently commented that these public works could not have been carried out without the issues, that they had been accomplished without interest costs, and that as a result "the influx of visitors was increased, commerce was stimulated, and the prosperity of the Island vastly improved." By 1943, nearly a half million pounds worth of notes belonged to the public and was so valued that much of it was being hoarded in people's homes, awaiting the island's liberation from the Germans.
About the same time that Guernsey started to fix its sea walls, the town of Glasgow, Scotland, borrowed 60,000 pounds to build a fruit market. The Guernsey sea walls were repaid in ten years, the fruit market loan took 139. In the first part of the 20th century, Glasgow paid over a quarter million pounds in interest alone on this ancient project.
How did Guernsey avoid the fiscal disaster that conventional economics prescribed for it? First and foremost by understanding that when you build roads or sea walls or colleges or houses, you are not reducing your society's wealth. In fact, if you do it right, you are creating something that will add to its wealth. The money that was created was simply backed by public works rather than gold or "full faith and credit." It was, in fact, based on something more solid than the dollar bills in our wallets today. In contrast, tacking on an interest charge to public works -- as we do in the US -- creates no new wealth, but merely transfers claims on existing wealth from debtors to creditors.
The privilege of creating and issuing money is not only the supreme prerogative of government, but is the government's greatest creative opportunity. By the adoption of these principles, the taxpayers will be saved immense sums of interest. -- Abraham Lincoln
