Monday, October 05, 2009

The Minnesota dollar 

Can a bank create money to fund public works?

Leslie Davis, a candidate for governor (who received 1% of the votes of delegates in a straw poll last weekend at the state GOP convention) proposes that we
...pass a law requiring Minnesota state--chartered-banks to create debt-free checkbook-money and use it to build a state-of-the-art transportation system of roads, rails, bridges and ports. And maintain them. This will create thousands of jobs, begin paying the debt out of the system, This is not a loan, it is simply a new legally required service of state-chartered banks.
But this made no sense to me, because for the bank to create money it must create a liability on its balance sheet. What is the offsetting asset you put on the books to keep your balance sheet in balance, or what do you reduce in your liabilities or net worth?

So I had to rummage around a bit but apparently this idea was in a bill last year proposed by a bipartisan set of sponsors (including local GOP representative Dan Severson.) SF 705 proposes just what Mr. Davis wants. In relevant part,
Subd. 3. Origination and movement of project money. (a) The commissioner of management and budget shall notify all state-chartered banks of the project number and its total bid value. The bid value must be divided among all state-chartered banks in proportion to their capital and surplus as of the due date of their financial reports submitted to the commissioner of commerce under section 48.48, for the most recent reporting period that ended at least 90 days before the date of notification to the state-chartered banks regarding that project. Using the accepted ability of banks to create money, each state-chartered bank shall create money equal to its share of the bid value of each project.
(b) Each state-chartered bank shall then electronically transfer this money to the commissioner of management and budget.
(c) The commissioner of management and budget shall then electronically transfer this money as payment under the terms of the project contract into a checking account maintained by the contractor in a state-chartered bank. The commissioner shall make the payments only at the direction of the governmental agency for which the project is performed.

Subd. 4. Direction to bank examiners. The state-chartered banks are free of any
reserve requirements affected by the creation of money required under this section; this money is deemed to be an asset to the state-chartered bank, to the state, and to the people of this state, and not as a liability to anyone.
So this means that the amount of reserves a bank holds to keep your deposits safe would be drawn down by the state.

Ellen Hodgson Brown wrote about SF705 last year, but it argues that the deposits must go on the books as an asset. This is wrong, however. A bank cannot create an asset without creating a liability -- balance sheets must balance. A comparable scheme was invented in Guernsey in the 19th Century, but the bank received a note from the state to hold as the asset. Perhaps this is meant by the bill when the Commissioner of Management and Budget divides up the bid values of projects. But that would be an unsecured debt; how would FDIC treat this?

Guernsey is a well-known haven for offshore banking, and site of some of the Icelandic banking crisis' collateral damage. And we should note that Guernsey uses its own currency. I am unclear how this is to work if the banks of Minnesota are still to use a unified U.S. dollar. Brown suggests that this act may be unconstitutional. There was private money between the end of the Second Bank of the United States in 1836 and the National Bank Act of 1863. (I own several examples of that private money.) But short of creating a Minnesota dollar, I do not see how this could work other than placing on the asset side of state-run bank a non-interest-bearing promissory note from the state government. To me that looks like a tax on bank earnings, and would quickly encourage most state-chartered banks to seek a national charter.

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