Ellen Brown Rebuilding America’S Infrastructure

POLICY BRIEF

ELLEN BROWN REBUILDING AMERICA’S INFRASTRUCTURE

How to Save $1 Trillion Without Increasing the Deficit, Causing Inflation, or Raising Taxes

March 2017

The $1 trillion public-private infrastructure plan proposed by the Trump Administration would cost an additional $1 trillion- plus in financing and user fees over a ten-year period. The total cost could be cut literally in half by funding the plan through the government’s own depository bank. Better yet, the project could be free, funded with an issue of sovereign currency from the Federal Reserve or the U.S. Treasury. This policy brief lays out a variety of funding options that would not increase taxes or the federal debt, would not trigger hyperinflation, would not result in massive privatization of public assets, and would be feasible legislatively. There is a powerful historical precedent for such an approach: in constructing the transcontinental railroad, Abraham Lincoln doubled the money supply, lent the money for infrastructure, and made a 60 percent return. That is how a sovereign nation rebuilds its infrastructure! THE NEXT SYSTEM PROJECT: POLICY BRIEF

Our infrastructure is crumbling, and has public of financing $1 trillion in infrastruc- been for years. In their latest quadrennial ture projects at around $1.18 trillion— report card on the state of America’s more than doubling the cost. As a 2008 airports, bridges, tunnels, roads, and oth- Government Accountability Office (GAO) er infrastructure, the American Society report warned, “there is no ‘free’ money of Civil Engineers (ASCE) awarded the in public-private partnerships…”5 United States a disappointing D+.1 It is es- timated that the nation needs more than But there is actually “free”—or at least $3 trillion in infrastructure over the next cheap—money to be had elsewhere. decade.2 President Trump has promised Among other alternatives, infrastructure a massive program of rebuilding, some- could be funded by the Federal Reserve thing both Democrats and Republicans through a program of “qualitative eas- agree should be done. The roadblock lies ing,” a variant of the now well-estab- in finding the money. A $1 trillion plan lished monetary measure of “quantitative unveiled by a group of Senate Democrats easing” (QE) by which central bank-gen- in January 2017 would rely on direct erated money would circulate in the real federal spending, paid for by closing economy. This might be implemented tax loopholes.3 But in earlier attempts, through a network of state-level public- this type of funding option has failed ly-owned banks funded with low-interest to secure support from Republicans in Federal Reserve loans to build infrastruc- Congress. The $1 trillion Trump infrastructure in their states. To those concerned ture plan, by contrast, is claimed to be that such an approach would represent “revenue neutral,” increasing neither debt an infringement upon the much-vaunted nor taxes. However, the plan as revealed “independence” of the Federal Reserve, by Trump’s economic advisers appears it’s worth pointing out that this bridge was to do this either through public-private already crossed when Congress passed partnerships or by outright privatization, the Fixing America’s Surface Transporta- imposing high user fees on the citizenry tion (FAST) Act in 2015. FAST required the for assets that should be public utilities. Federal Reserve to transfer to the Treasury Department everything in excess of $10 Private equity investment now generates billion from its capital surplus. In Decem- an average return of about 11.8 percent ber 2015, the Federal Reserve complied annually on a ten-year basis.4 Even at with the law by transferring an additional simple interest, that puts the cost to the $19.3 billion to the Treasury.6

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Another option would be to set up a fed- funding through the government’s own eral infrastructure bank as a depository credit-generating bank.9 That can also bank, on the model of the state-owned be done with even cheaper sources of Bank of North Dakota (BND). The con- funding. How will be discussed below, servative state of North Dakota is now following a closer look into the public-pri- funding infrastructure through the BND vate options currently on the table. at a mere 2 percent annually. In 2015, the North Dakota legislature established a the trillion dollar BND Infrastructure Loan Fund program private equity plan that made $150 million in funds available While the precise details of President to local communities at a 2 percent fixed Trump’s plan are not yet known, they are interest rate and a term of up to 30 likely to be similar to those put forth in a years.7 The proceeds can be used for the report released by his economic advisers construction of new water and treatment Wilbur Ross and Peter Navarro in Octo- plants, sewer and water lines, transporta- ber 2016.10 The report called for $1 trillion tion infrastructure, and other infrastruc- in infrastructure-related spending over ture needs to support new growth in ten years, funded largely from private local communities. sources. The federal government would provide around $167 billion in tax cred- If President Trump’s $1 trillion infrastruc- its to private investors, who would then ture plan were funded at 2 percent over make an equity investment in an infra- 10 years, the interest tab would come structure project and borrow the remain- to only $200 billion—nearly $1 trillion der on private bond markets. The plan is less than the $1.18 trillion that would supposed to be revenue neutral from the be expected in profit by private equity standpoint of the federal government, investors. Not only could residents save due to tax credits recouped in the form $1 trillion on tolls and fees, but they of increased tax revenue from wages and could also save on other taxes, since the contractor profits. But the private sector 2 percent interest would return to the financiers would then pay off their debts government, which would own the bank. (including interest) and turn a profit on Interest and other costs of financing, on the back of user fees (e.g. tolls), higher average, compose around 50 percent of rates (e.g. water bills), and payments the cost of infrastructure.8 That means from state governments (e.g. revenue the cost can be cut nearly in half by guarantees).

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Such public-private partnerships (PPPs) the rest of the world, these risks are rarely in infrastructure have a checkered history, taken by private investors,” writes Randy at best. A 2011 report by the Brookings Salzman, associate editor of Thinking Institution found that “in practice [PPPs] Highways North America. “Because Uncle have been dogged by contract design Sam guarantees the bonds, taxpayers problems, waste, and unrealistic expecta- end up paying off the notes years after tions.”11 One example is the Dulles Green- construction is complete… [and] the shell way, a toll road outside Washington, D.C., company’s bankruptcy again ensures the nicknamed the “Champagne Highway” private partner will not pay back Uncle due to its extraordinarily high rates and Sam’s already interest-free loan on the severe underutilization in a region crip- project, nor the depreciation it took when pled by chronic traffic problems.12 Local it ‘struggled’ to be viable before ‘suc- (mostly Republican) officials have tried in cumbing’ to bankruptcy.”15 vain for years to either force the private owners to lower the toll rates or have the From the continuing outcry over the state take the road into public owner- disastrous 75-year deal the city of Chica- ship.13 In 2014, the private operators of the go made with private investors regarding Indiana Toll Road, one of the best-known the operation of its parking meters to the PPPs, filed for bankruptcy after demand reversal or prevention of water privatiza- dropped, due at least in part to rising toll tions in the face of public opposition in rates. Other high-profile PPP bankruptcies multiple jurisdictions, private investment have occurred in San Diego, CA; Rich- in infrastructure remains highly contro- mond, VA; and Texas.14 To mitigate the risk versial—and often extremely unpopular for private investors, some PPP agree- with local constituents. In the wake of the ments require a “minimum revenue guar- Indiana Toll Road Concession Company antee” (MRG) and/or a “non-compete” bankruptcy, transportation policy spe- clause from the local government. This cialist William J. Mallett stated that it was absurdly limits the public sector’s ability “just the latest in a series of events that is to build new roads or improve existing leading Congress to reassess the role of roads, if that needed work would de- private investment in transportation infra- crease revenues for the private operator. structure.”16 Similarly, in their 2015 report Moreover, when these private operators Why Public-Private Partnerships Don’t do go bankrupt, it is taxpayers who are Work, Public Services International stated left holding the bag. “In America, unlike that “[E]xperience over the last 15 years

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shows that PPPs are an expensive and would again come in the form of tolls, inefficient way of financing infrastructure fees, higher rates, and payments from and divert government spending away state and local governments. from other public services. They conceal public borrowing, while providing long- The infrastructure bank idea has been term state guarantees for profits to pri- around for decades but has never been vate companies.”17 But rather than scaling implemented, largely due to concerns back public-private partnerships, the plan over which projects would get funded. suggested by President Trump’s advisors Like many existing PPPs, they could be will massively expand them, magnifying boondoggles that would need rescuing the costs, failures, and limitations already by the public sector when they failed to experienced under that approach by deliver on inflated use projections. Or states and localities across the country. the bank might authorize those projects most likely to pay back the loans, ignoring an infrastructure bank others that may not be moneymakers The president and his team have also but are critically necessary for the public reportedly discussed the possibility of and the economy (such as maintenance an infrastructure bank, but that proposal of existing structures). This is especially faces similar hurdles.18 Again the details problematic given that, with a national of the proposal are as yet unknown, but infrastructure bank, a wide variety of past conceptions of an infrastructure diverse projects would be competing for bank envision a quasi-bank (not a physi- funding—e.g. a water treatment facility in cal, deposit-taking institution) seeded by a rural area versus a lucrative toll road in a the federal government (possibly from major metropolitan area. taxes on the repatriation of offshore corporate profits). The bank would issue Ronald Klain, the former Obama aide re- bonds, tax credits, and loan guarantees sponsible for implementing the American to state and local governments to lever- Recovery and Renewal Act, has argued age private sector investment.19 As with that even with an infrastructure bank as the private equity proposal, an infrastruc- a “sweetener,” “the Trump plan would not ture bank would rely on public-private be a reasonable compromise—accep- partnerships and investors who would be tance of its huge tax breaks for construc- disinclined to invest in projects that did tion investors and profits for contractors not generate hefty returns. Those returns would be a wholesale concession.”20

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the magic of leverage: are made and extinguished when they depository banks expand are paid off. The Bank of England report the money supply when said that private banks now create nearly they make loans 97 percent of the money supply. Thus There is another way to set up a pub- borrowing from banks (rather than the licly-owned bank. Today’s infrastructure bond market) expands the pool of bank banks are basically revolving funds. A deposits that are officially counted as dollar invested is a dollar lent, which must “money” in M2. This is what the Federal return to the bank (with interest) before Reserve tried but failed to do with its it can be lent again. A chartered deposi- quantitative easing (QE) policies: stimu- tory bank, on the other hand, can turn a late the economy by expanding the bank one-dollar investment into ten dollars in lending that expands the money supply. loans. It can do this because depository banks actually create deposits when they The stellar (and only) model of a public- make loans. In fact, the vast majority of ly-owned depository bank in the United the money supply is now created in this States is the Bank of North Dakota (BND). way, as economists at the Bank of England It holds all of its home state’s revenues have acknowledged. In a widely-noticed as deposits by law, acting as a sort of March 2014 paper entitled Money Creation “mini-Fed” for North Dakota. According in the Modern Economy, they wrote: to reports, the BND is more profitable even than Goldman Sachs, has a better The reality of how money is created today credit rating than J.P. Morgan Chase, and differs from the description found in some has seen solid profit growth for almost economics textbooks: Rather than banks 15 years.22 In fact, the BND continued to receiving deposits when households save report record profits after two years of oil and then lending them out, bank lending bust in the state, suggesting that it is high- creates deposits … Whenever a bank ly profitable on its own merits because of makes a loan, it simultaneously creates a its business model.23 The BND does not matching deposit in the borrower’s bank pay bonuses, fees, or commissions; has no account, thereby creating new money.21 high paid executives; does not speculate on risky derivatives; does not have multi- Contrary to a great deal of conventional ple branches; does not need to advertise; wisdom, money is not fixed and scarce. and does not have private shareholders It is “elastic”: it is created when loans seeking short-term profits. The profits

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return to the bank, which distributes them bank itself—enough to cover loan losses as dividends to the state. and costs and still leave a profit for the bank. Note that the entire 18 percent The federal government has massive would represent profit to public entities, revenues, which are currently deposited whether on public deposits, the initial at the Federal Reserve. Arguably, the Fed capital investment, or the profits actually itself could fund infrastructure without going to the bank. Meanwhile, state and even changing the Federal Reserve Act, local governments would be getting their as discussed below. But assume the infrastructure loans at 2 percent, saving government did set up a separate infra- their citizens from having to pay 12 structure bank chartered as a depository percent in user fees (the average return bank. Capitalization could come from expected by private equity26). The bank Social Security or another public agency would be a “win-win-win,” because the that had investment money seeking a federal government would be cutting good return. Deposits could come from out private investors and middlemen public revenues of various sorts. The and leveraging its own funds for its own bank could make loans equal to ten times public purposes. There is simply no need capital and 90 percent of deposits, hold- to hand over wads of cash to rentier ing back 10 percent in reserve. (It could finance. actually lend more, but for our purposes let’s stick to the textbook model.24) The A federal depository banking system deposits could be collateralized cheaply could also be set up that takes private with standby letters of credit from the rather than public deposits. This could Federal Home Loan Bank system.25 be done through the U.S. Postal Service (USPS), which has post offices in nearly Assume 2 percent loans were made to every community—and did in fact pro- state and local governments for infra- vide basic banking services from 1911 to structure projects, 7 percent were paid as 1967. In 2013, U.S. Senator Bernie Sanders a dividend or interest on capital, and 0.5 and U.S. Representative Peter DeFazio percent were paid on deposits (a good called for expanding the USPS to include return for deposits today). 2 percent x 9 non-postal services (such as banking).27 = an 18 percent return, less 7 percent for A national infrastructure bank could be capital and 4.5 percent for deposits (9 x funded by a system of postal banks, 0.5 percent) = a 6.5 percent profit for the with deposits invested in government

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securities used to finance infrastructure get much-needed new money into local projects.28 Besides financing infra- economies, governments should borrow structure, the plan could help save the from banks rather than on bond markets, embattled USPS itself, while providing since banks create the new money nec- banking services for the one in four U.S. essary to fund new economic activity.30 households that are currently unbanked Among other advantages, the borrowing or under-banked. rate would be substantially lower. Basel banking regulations give governments the borrowing from banks lowest risk-weighting (zero), so they can increases net spending borrow from banks at the favored-client and net hiring rate; and the banks will be happy to lend, There is another advantage to funding because with zero risk-weighting they will through a public banking system. Bor- need no new capital to back the loans. rowing from private investors on the To the objection that banks don’t have bond market or through private equi- sufficient money to fund governments, ty merely recirculates existing money, Werner observes: transferring it from one pocket to another, without creating the new money That may be true in one sense. But this needed to fund new production. As is true for any loan granted by a bank. investment advisor Paul Kasriel ob- Which is why banks do not lend money, serves, the private investors contributing they create it [emphasis added]: banks are the bulk of the funding would have to allowed to invent a deposit in the borrow- “get the funds either from some enti- er’s account (although no new deposit was ties increasing their saving, that is, by made by anyone from outside the bank) cutting back on their current spending, and since they function as the settlement or by selling other existing assets from system of the economy, nobody can tell their portfolios … [U]nder these circum- the difference between these invented stances, there would be no net increase deposits and “real” ones.31 in spending on domestically-produced goods and services.”29 qualitative easing for infrastructure Richard Werner, chair of international Better still would be to get the needed banking at the University of Southampton new money for infrastructure investment in the United Kingdom, argues that to interest-free from the central bank.

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Timothy Canova, professor of law and municipal government debt with matur- public finance at Nova Southeastern ities of six months or less that is backed University, is an expert in Federal Reserve by tax or other revenue—a form of debt law and history who was appointed in that makes up less than 2 percent of the 2011 by Senator Bernie Sanders to an overall muni market.33 advisory committee on Federal Reserve reform. He contends that the Fed could But statutes can be changed; and they capitalize a national infrastructure bank are changed, routinely, by Congress. If the with money generated on its books as Fed cannot lend to the states, however, a “qualitative easing”—central bank-gen- case can be made that it can lend directly erated money that actually gets into to private companies engaged in infra- the real economy.32 The Federal Reserve structure. This is not a radical idea. It has could purchase shares, whether as been done before, and the Dodd-Frank common stock, preferred stock, or debt, Wall Street Reform and Consumer Pro- either in a national infrastructure bank or tection Act amends the Federal Reserve in a system of state-owned banks that Act in a way that leaves that possibility funded infrastructure in their states. This open now. could be done without increasing taxes, adding to the federal debt, or inflating direct federal reserve prices. (More on that below.) loans for infrastructure In 1934, Section 13(b) was added to the Could it be done under existing legisla- Federal Reserve Act, authorizing the tion? In 2009, President Obama proposed Fed to “make credit available for the that the Fed lend directly to cities and purpose of supplying working capital to states battered by the banking crisis. The established industrial and commercial proposed municipal bond facility would businesses.” This long-forgotten section have been based on the Fed’s program remained in effect for 24 years. Accord- to buy commercial paper, which had ing to David Fettig in a 2002 article on almost single-handedly propped up the the Minneapolis Fed’s website called market for short-term corporate borrow- “Lender of More Than Last Resort,” 13(b) ing. Investors welcomed the muni bond allowed Federal Reserve banks to make proposal; but Fed Chairman Bernanke loans directly to any established busi- said he lacked the statutory ability to do nesses in their districts, and to share in it. The Fed is limited by statute to buying loans with private lending institutions if

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the latter assumed 20 percent of the risk. But Section 13(3) was applied selectively. “No limitation was placed on the amount The recipients were major corporate of a single loan.” players, not local businesses or local governments. The section was therefore Fettig wrote that “the Fed was still amended in the 2010 Dodd-Frank Act to less than 20 years old and many likely read: remembered the arguments put forth during the System’s founding, when Discounts for individuals, partnerships, some advocated that the discount win- and corporations: In unusual and exigent dow should be open to all comers, not circumstances, the Board of Governors of just member banks.” the Federal Reserve System…may authorize any Federal Reserve bank…to dis- Section 13(b) was eventually repealed, but count for any participant in any program Fettig argued that the Federal Reserve Act or facility with broad-based eligibility, retained enough vestiges of it to allow the notes, drafts, and bills of exchange when Fed to intervene to save a variety of non- such notes, drafts, and bills of exchange bank entities from bankruptcy: are endorsed or otherwise secured to the

satisfaction of the Federal Reserve bank.36 Section 13(b) may be a memory … but Sec- tion 13 paragraph 3 … is alive and well in the Macroeconomic policy specialist Marc La- Federal Reserve Act. … [T]his amendment bonte summarizes the change in a recent allows, “in unusual and exigent circumstanc- Congressional Research Service report, es,” a Reserve bank to advance credit to stating that “the Dodd-Frank Act replaced individuals, partnerships and corporations ‘individual, partnership, or corporation’ that are not depository institutions. 34 with ‘participant in any program or facility with broad-based eligibility,’” ensuring that In 2008, the Fed bailed out investment “assistance be ‘for the purpose of provid- company Bear Stearns and insurer A.I.G., ing liquidity to the financial system, and neither of which was a bank. Bear Stea- not to aid a failing financial company.’”37 rns received almost $1 trillion in short- term loans, with interest rates as low as What exactly does that mean? Professor 0.5 percent. The Fed also made loans to Canova interprets the amended section other corporations, including GE, McDon- to mean that lending solely to a specific ald’s, and Verizon.35 auto company (GM) or to a specific

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utility company (GE) is prohibited; but injected directly into the economy via lending to all auto companies or to all public spending, tax cuts, or direct utility companies might be allowed.38 payments to individuals.41 Helicopter Arguably, very-low-interest loans could money is a relatively new term for an old be extended to any business engaged and venerable solution. The American in infrastructure (broadly defined) that colonies asserted their independence demonstrated creditworthiness and the from Britain by issuing their own money; ability to pay the loans back, so long as and Abraham Lincoln, our first Republi- everyone in that category had access to can president, boldly revived that system the lending facility on equal terms. during the Civil War. Indeed, this “radical” solution is what the founding fathers helicopter money evidently intended for their new govern- There is another possibility for funding ment. The Constitution provides, “The a large-scale infrastructure investment Congress shall have Power… To coin mon- plan, one that is gaining traction in Eu- ey [and] regulate the Value thereof...”42 rope: simply issue the money. President The Constitution was written at a time Trump himself has expressed some open- when coins were the only recognized le- ness to that idea, at least with respect gal tender; so the Constitutional Congress to federal deficits. In May 2016, when effectively gave Congress the power to challenged over the risk of default from create the national money supply, taking the mounting federal debt, he said, “You that role over from the colonies (now the never have to default because you print states). By reclaiming the power to issue the money [emphasis added].”39 This money, the federal government would could be done by Congress or the Feder- simply be returning to the publicly-issued al Reserve. The Fed has already created money of our forebears, a system they more than $16 trillion in nearly-inter- fought the British to preserve. est-free credit for Wall Street.40 It could create another trillion for infrastructure The invariable objection to “helicopter that benefits all Americans. money” is that it would cause runaway price inflation; but that monetarist theory Drawing on an analogy by Milton Fried- is flawed, for several reasons. First, there man, economists call this “helicopter is the multiplier effect: one dollar invested money”—new money created by the in infrastructure increases gross domestic government, issued electronically, and product by at least two dollars.43 And that

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means an increase in tax revenue. Accord- old loans, shrinking the money supply. ing to the Heritage Foundation, total tax They are doing this although credit is revenue as a percentage of GDP is now very cheap, because they need to rectify 26 percent.44 Thus one new dollar of GDP their debt-ridden balance sheets just to results in about 26 cents in increased stay afloat. They are also hoarding money, tax revenue; and $2 in GDP increases tax taking it out of the circulating money revenue by at least fifty cents. One dollar supply. Economist Richard Koo calls this a spent pulls fifty cents or more back in “balance sheet recession.”46 the form of taxes. The remainder can be recovered from the income stream from The Federal Reserve has already bought those infrastructure projects that generate $3.6 trillion in assets simply by “printing user fees: trains, buses, airports, bridges, the money” through QE.47 When that toll roads, hospitals, and the like. In any program was initiated, critics called it case, adding money to the economy does recklessly hyperinflationary; but it did not not drive up prices until demand exceeds create even the modest 2 percent inflation supply. Before that, increasing demand the Fed was targeting. Combined with (money) will trigger a corresponding ZIRP—zero interest rates for banks—it increase in supply (goods and services), encouraged borrowing for speculation, so that both rise together and prices driving up the stock market and real es- remain stable. tate values; but the Consumer Price Index, productivity, and wages barely budged. Today we are actually in a deflationary As noted on CNBC in February 2016: spiral. The economy needs an injection of new money just to bring it to former Central banks have been pumping money levels. In 2012, the New York Fed posted into the global economy without a whole an updated staff report showing that the lot to show for it. … Growth remains money supply had shrunk by about $3 anemic, and worries are escalating that trillion since 2008, due to the collapse of the U.S. and the rest of the world are on the shadow banking system.45 The goal of the brink of a recession, despite bar- the Federal Reserve’s quantitative easing gain-basement interest rates and trillions was to return inflation to target levels in liquidity.48 by increasing private sector borrowing. But rather than taking out new loans, Before we start worrying about hyper- individuals and businesses are paying off inflation, we need to get a little inflation

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going, the sort that creates the money The problem is that Congress then feels needed to fund new economic activ- compelled to “balance the budget” (and ity. “If we have to do QE again,” Daily its checkbook) as if it were a household, Telegraph International Business Editor something it does by issuing bonds. But Ambrose Evans-Pritchard has written, Congress is not a household. It could “it would surely be better to inject the simply leave the books unbalanced—as money directly into the veins of the real the Chinese do with the massive “non- economy.”49 performing loans” carried on the books of their state-owned banks. Or it could This could be done through the Treasury, have the Fed buy its bonds, as was done which has the constitutional power to in the Fed’s quantitative easing pro- “coin money” and regulate its value; but grams. The interest was returned to the the more likely vehicle is the central bank, Treasury. An interest-free loan from the which has already done the audacious central bank that is never redeemed is with its $3.6 trillion in quantitative easing. the equivalent of issuing money. The central bank is technically independent of political interference and control. If the president were unable to get either But the president appoints its Board of Congress or the Fed to act, he would Governors, Chair, and Vice Chair, with the still have a card up his sleeve. He could approval of the Senate; and the Trump resort to a “radical” alternative already Administration is now questioning the authorized in the Constitution: an issue Fed’s independence, so it might compel of large-denomination coins. In 2013, the Fed to act.50 the proposal was made to mint a single trillion-dollar platinum coin to avoid an Failing action by the Fed, however, an artificially imposed debt ceiling.52 injection of new money could be made by Congress directly. As has been historical precedents pointed out by Randall Wray, professor For evidence that infrastructure could of economics at the University of Mis- be funded in this way without creating souri-Kansas City, Congress effectively hyperinflation or running up the federal issues money every time it authorizes a debt, we need only to look to our own federal budget. New money is “spent” largely-forgotten history. Under the Legal into existence whenever Congress writes Tender Act of 1862, Abraham Lincoln, our checks on its Federal Reserve account.51 first Republican president, printed $450

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million in greenbacks (U.S. Notes). This In another bold precedent, President doubled the circulating money supply, Franklin Roosevelt funded massive infra- which went from $484.4 million in 1861 structure and development in the 1930s to $931.3 million in 1863.53 Yet hyperinfla- and 1940s, through a publicly-owned tion did not result.54 Doubling the money financial institution that also turned a supply today would mean injecting $13 profit for the government. The Recon- trillion into the economy. struction Finance Corporation (RFC) be- came America’s largest corporation and The same year, Lincoln chartered two the world’s largest banking organization. companies to build the transcontinental It was a remarkable credit machine railroad (the Central Pacific and the that allowed the government to fund Union Pacific). The government was the the New Deal and World War II without lender, not the borrower, on this massive turning to Congress or the taxpayers for infrastructure project. The two rail lines appropriations. First instituted in 1932 by finally met in Utah in 1869. As reported President Herbert Hoover, the RFC was by Clyde Prestowitz, former counselor to continually enlarged and modified by the Secretary of Commerce during the President Roosevelt to meet the crisis of Reagan Administration, in The Betrayal of the times. Its semi-independent status American Prosperity: let it work quickly, allowing New Deal agencies to be financed as the need Amazingly, although the government had arose. The RFC Act of 1932 provided the loaned the companies more than $64 RFC with capital stock of $500 million million, it earned more than $103 million and the authority to extend credit up in return and did so by the end of 1869. to $1.5 billion (subsequently increased More significantly, the railroad led to the several times).56 The initial capital came creation of huge new markets and cities from a stock sale to the U.S. Treasury, and transformed the country into a true and additional funds were raised by continental powerhouse of a nation.55 selling bonds to the Treasury that were then sold to the public.57 This enormous feat of engineering not only transformed the country but gener- With those resources, from 1932 to 1957 ated a 60 percent profit to the govern- the RFC loaned or invested more than ment in just 15 years. $40 billion.58A small part of this came from its initial capitalization. The rest

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was borrowed. The RFC ended up bor- bank as “lender of last resort.” Less rad- rowing a total of $51.3 billion from the ically, the cost of Trump’s infrastructure Treasury and $3.1 billion from the public.59 plan could be cut in half by the simple Although it was not a depository bank, expedient of funding it through a govern- borrowing from the Treasury was the ment-owned depository bank or net- functional equivalent of a bank borrow- work of such banks in the states. None ing liquidity from its depositors, or of of these options would require raising the Bank of North Dakota borrowing taxes, selling off public assets, driving up the revenues of its captive depositor, the federal debt, or hyperinflating prices, the state of North Dakota. As with the as has been shown. They would also not transcontinental railroad, the government line the pockets of private investors at was the lender, not the borrower, in this public expense. Indeed, that may be why arrangement. The loans produced a total these cost-effective solutions are not net income of $690,017,232 on the RFC’s being pursued. “normal” lending functions (omitting such things as extraordinary grants for As Goethe is quoted as saying, “What- wartime). The RFC generated the funds ever you can do, or dream you can do, for roads, bridges, dams, post offices, begin it. Boldness has genius, power, and universities, electrical power, mortgages, magic in it.” Congress has always man- farms, and much more; and it funded all aged to find the money for war and other this while actually making a profit for the life-threatening emergencies. The Oro- government.60 ville Dam poised to burst near California’s capital Sacramento is emblematic of the the power of boldness infrastructure crisis threatening us today. That is how a sovereign nation rebuilds It is time to overlook partisan differences, its infrastructure—or how it can. The U.S. seize the moment, and authorize one of government has the authority, as do all the low-cost options available to the gov- governments with monetary sovereignty. ernment for funding the long-overdue There is simply no need to go to private infrastructure investment our country so investors and capital markets for funding. desperately needs.• A $1 trillion infrastructure plan could be implemented that was effectively free to the government, using the power of the Treasury to “coin money” or of the central

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Engineers, accessed 3/15/17, http://www. 6 “Press Release,” Board of Governors of infrastructurereportcard.org/. the Federal Reserve System, January

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ELLEN BROWN: REBUILDING AMERICA’S INFRASTRUCTURE 21 THE NEXT SYSTEM PROJECT: POLICY BRIEF about the author ELLEN BROWN is President Emeritus of the Public Banking Institute and the author of Web of Debt and The Public Banking Solution. She is a Fellow with The Democracy Collaborative, and is working with the Next System Project on banking issues.

about the next system project The Next System Project is an ambitious multi-year initiative aimed at thinking boldly about what is required to deal with the systemic challenges the United States faces now and in coming decades. Responding to real hunger for a new way forward, and building on innovative thinking and practical experience with new economic institutions and approaches being developed in communities across the country and around the world, the goal is to put the central idea of system change, and that there can be a “next system,” on the map. Working with a broad group of researchers, theorists, and activists, we seek to launch a national debate on the nature of “the next system” using the best research, understanding, and strategic thinking, on the one hand, and on-the- ground organizing and development experience, on the other, to refine and publicize comprehensive alternative political-economic system models that are different in fun- damental ways from the failed systems of the past and capable of delivering superior social, economic, and ecological outcomes. By defining issues systemically, we believe we can begin to move the political conversation beyond current limits with the aim of catalyzing a substantive debate about the need for a radically different system and how we might go about its construction. Despite the scale of the difficulties, a cautious and paradoxical optimism is warranted. There are real alternatives. Arising from the unfor- giving logic of dead ends, the steadily building array of promising new proposals and alternative institutions and experiments, together with an explosion of ideas and new activism, offer a powerful basis for hope.

Design & typography by Kate Khatib / Owl Grammar Press.

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