Part 2: Limiting Government: Public Borrowing Exclusively
I remarked in Part 1 that there are several ways to fund government. Those most common are exclusively Taxation, and Taxation mixed with Borrowing. There have been periods in history in which the governing body opted for Borrowing exclusively, usually during periods of war or domestic disturbance, but it was rare and brief. There are several others methods of funding public expenditures that one may denote as malicious such as printing currency, printing money in that the Federal Government would hand its bonds to a central bank in return for cash transfers to its account. But those require an article of themselves.
The method that shall answer all the problems and ills of reckless, overwhelming, and proliferating Government expenditure is the abolition of all Taxation and the implementation of Borrowing, exclusively, from the community.
I shall discuss the composition of the balance sheet of a central bank as it is relevant to the subject. Briefly, the central bank possesses a balance sheet consisting of assets and liabilities, like any bank or corporation. However, central bank assets generally consist in bank or inside money exchanged for currency notes, loans to member banks, and Government bonds. Liabilities consist in currency notes issued by the central bank, accounts of member banks stating reserves, and the account of the Government.
One may simply say that if the Government should borrow directly from the people of a nation by issuing bonds, on the central bank’s balance sheet, bank reserves shall diminish as funds transfer from the buyers’ accounts at member bank accounts into the Government account. This occurs on the central bank’s Liability side only. Thus, with reserves depleted, or a decrease in the supply of money, interest rates should rise. It is the same scenario if the nation were to tax exclusively. Funds would transfer from the accounts of taxpayers at member banks to the Government’s account. However, the public receives no compensatory Government bonds. Again, interest rates should rise with the decreasing supply of funds.
If the central bank were to directly lend to the Government, Government bonds would appear as central bank assets, and funds credited to the Government’s bank account would appear as liabilities. One should note that this method of financing does not diminish bank reserves and rather increases them, increasing the supply of money and muting interest rates. When Government spends, money transfers to the various accounts of the member banks, leaving the banks flush with reserves.
It is a foolish prescription. Artificially depressing market rates deprives savers of just returns their conserved dollars should earn and enriches borrowers. The destructive policy has prolonged Japan’s recession for 25 years and the US recession for 6. There shall be no resolution until the US central bank restores markets to natural conditions by curtailing its Treasury holdings now standing at an unprecedented $3.5 trillion.
The means of paring those holdings is laden with financial hazards and perhaps great losses. Selling large amounts of bonds into markets while simultaneously withdrawing bank reserves will propel interest rates upwards and cause bond prices, purchased at the maximum possible price, to acutely fall, entailing massive losses for the Federal Reserve. If the Fed should maintain those holdings whilst prohibiting any more purchases, markets will take years to consume the reserves, leaving a return to normalcy protracted and sluggish. The only conceivable mode of divesting its holdings and avoiding market calamity is to sell into elevated demands for Treasuries. Market disruptions and crises elsewhere will compel money into the haven of the US. Such an opportunity, seemingly proximate, should be embraced.
If the community were to discard Taxation as its primary source of revenue, many wonder how would it then be able to make the necessary expenditures for vital and enriching public services? With what does the state replace Taxation?
The answer is quite simple, but the idea appears to lie beyond the bounds of rationality for a great many persons. The community would have the government borrow the whole of its required funds, discarding all Taxation or seizures of property forever.
The perceived irrationality that issues from such a proposal is no doubt prominent. However, in the sphere of economics, such a proposal is grounded in the same rationality that pervades the entire concept of money. I am simply extending the boundaries of an idea that has long been in practice. I have no illusions as to the fallibility of the innards of the conception proposed. Its instruments and components may undergo severe adjustment and conversion before it may reach a feasible if not definitive form.
The government must adhere to two conditions were it to adopt this novel concept. Firstly, it must borrow chiefly from the citizens resident within the country. Secondly, it must borrow solely in the currency of that nation.
In Canada, borrowing shall come from resident Canadians. Such persons have an attachment to this country that is lost upon foreign investors. Inhabitants benefit directly from investments made by government. If conditions seem unstable to a foreign lender, the refusal of funds to or the divestiture of community government would consequently harm citizens of the sovereign state.
By borrowing from the nation’s people, the country need never have to rely upon the capricious tastes or appetites of foreign lenders. Thus, instead of paying interest to foreign providers of capital, the people of the nation shall receive the premiums as well as the services subscribed for. At certain times and for specific purposes, foreign borrowing may be indispensable, such as the short-term procurement of foreign exchange to combat a currency crisis. But its scope and duration must remain severely limited.
Secondly, the community through its government should only issue bonds denominated in the native currency. By borrowing in foreign funds, we concede economic policy to other nations and, hence, economic control. Canada and each community thereof, by adhering to a rigid policy of internal subscription, would maintain control over the nation’s finances and not expose itself to the inherent dangers of divergent monetary policy of or currency fluctuations in foreign denominated currencies. Of course, a crisis originating elsewhere can have a powerful effect upon domestic monetary and fiscal policy, but better the source of the disturbance come from without than from within. With Government finances firmly held and controlled internally, the consequences emanating from external events as well as subsequent consideration and domestic action to quell them should be much muted.
The details of government borrowing and retirement of said debts may be explained with brevity. The majority of government borrowing would be in the form of direct appeals to the people and pension funds. Such borrowing would provide for the maintenance of government services, facilities, and existing debt. Thus, the borrowing required to staff water treatment facilities, administer various departments, enforce the law, and defend the nation would come under this category. They may be designated Maintenance Bills. Throughout the year the government would collect funds from the public and, in return, issue a note to the individual lender. Interest upon this amount would accumulate at a rate similar to the bank rate or the rate as determined in the capital markets.
The second category would be borrowing for capital projects such as the construction of a hospital or road, or perhaps a venture to exploit an invention, idea, or innovation, which demands the involvement of government, in some field of endeavour. For large capital investments, the restrictions may be eased to allow contributions from financial sources outside the community. If the project involved the expansion of an existing road system, funds should be solicited from within the locality. If the project had national implications, the area of solicitation may be broadened.
The majority of public investments are impervious to the production of revenue. Because the undertaking does not provide immediate or future monetary benefits to the bond issuer or community government itself, one need not question the utility of the investment. The benefits must be accounted by different means.
The failings of current methods of accounting have received mention previously. I shall repeat several here. As it is the people of a community that fund government, rightfully one should account the benefits of such investments with their finances in mind, not the government’s. This error has profoundly perverted the true nature of public finance for centuries. Government is fully reliant upon the taxpayer or community resident for funds for public expenditures, and public finance records and accounts should reflect this negligent omission.
In the case of a road, benefits arise in the reduced time for a vehicle operator to move from point a to b. Traffic congestion costs everyone, the public and those engaged in the business of transport, through the squander of prized time whilst comparatively stationary. If a road be poorly maintained, damage to vehicles should be aggravated and frequent. Thus, the construction of new roads eases the costs of vehicle maintenance and time consumed in the journey so that one may be better employed in fruitful labour or at leisure. The precise accounting of such investments would certainly give fruitful occupation to the minds of economists idled with the eradication of taxation.
Each year the aggregate owed by the community to individual resident lenders would grow with the addition of new lending and accruing interest. However, the actual interest and principal would exist only in the form of a notice. As a person aged and moved to the end of his working life, the outstanding debt and accruing interest would convert into an annuity or similar instrument.
A lender may at the end of his working life possess a stock of loans and interest in community government bonds amounting to a sum of say $2 million. The prevailing interest rate would fix the annual payments of the annuity. Payments to pensioners would be funded by the community government, by Maintenance bills, and continue until his death and the death of his acknowledged spouse. Then the debt expires. In effect, the government creates a pension plan for lenders throughout the community or nation imitating all pension plans.
The question is where the community obtains the funds with which to nullify the incurred debts for funding public investments?
Wealth and assets would be generated through initial public expenditures funded by loans. In the case of a capital project, the devisement and erection of a new road or school, or the establishment of a new police detachment or fire station would create assets in greater security, income, and lower operating costs, for community residents and firms. Perhaps lessening the costs of water treatment, law enforcement, or administration. Perhaps enlarging a medical facility to treat a larger population. At time of completion, the community should hold an asset of value exceeding all costs incurred in its creation.
Many astute and knowledgeable persons declare the unabated accrual of public debt a catastrophe. When have they not? Because a person or firm carries debt does not render their financial condition hopeless. We all bear such burdens. The question that must be asked in a proper assessment of one’s financial position is, “What assets does he possess?”
The level of public debt represents only a portion of the accounting of public finances. While concentrating one’s attention on the level of debt, the creation of wealth and assets unleashed by these debts is strikingly and unfortunately disregarded. Failure to consider the full scope of the question grotesquely distorts the true financial standing of the community or nation. This point is crucial in the understanding of my proposal. The returns of every investment should benefit the community or nation and provide the means with which to enlarge the public credit and invest for future efforts. The culprit in this heedlessness is Taxation, the confiscation of property. With the state wielding such a malevolent and hitherto inviolable right, it is a certainty that justification of public expenditures will be a remote concern for those entrusted with superintending public finances. With Taxation abolished, it is a certainty, with former slaves turned public bankers, such a crucial concern will be salient and dominant in all public endeavours.
When money has been loaned to the government by way of Maintenance bills, some lenders may decide after a period to withdraw a portion. A secondary market, similar to that for bond markets, could be established to trade pension holdings among those seeking to increase holdings perhaps after a windfall and those seeking to reduce holdings perhaps for the purchase of a new home. Some small fee could be applied to complete each exchange. The trading of existing government bonds in the capital category would continue in the existing secondary market.
The community government should set up its own market for the subscription of bonds and maintenance borrowing in order to avoid considerable fees being charged by private concerns such as banks and investment houses. Such a system could be set up through a designated government agency such as the post office or through accounts set up at local banks.
There are great advantages from the implementation of such a system of exclusive Borrowing, distinct from those emanating from the termination of Taxation, that deserve comment and explanation.
Firstly, there is the idea of accountability in government expenditure. Presently, the government may do as it pleases with the nation’s funds protected by a temporary impunity. When the electoral day of judgement approaches, it is often assumed, sometimes erroneously, that a period of frivolous spending shall erase the previous blunders and assure re-election. The government perceives the money under its control as its property. When remitting funds to the community, often with prominent public display, the commanding political element expect favour and rank praise. The ambitious sharpers seem oblivious to the discontent caused by the expropriation of wealth and its subsequent squander.
With bond sales to underwrite public projects, the public shall instead directly lend their money to deserving projects and ignore the others. If the project meets the standard of worthiness, the public shall subscribe. If it fail, then the public shall withhold funding until the complaints are addressed and remedies applied. The public shall secure a great measure of control over the mercenary aspirations of the politically ambitious and parasitic concerns of the bureaucratically minded. Projects within a locality would be funded by the public within its bounds. Thus, bonds sold for dubious projects intended to sway voters within a particular region should be rejected by those in another. Hence, money would no longer be stripped from one part of the country and squandered in another region for the purpose of purchasing electoral support or repaying political debts.
With Maintenance bills funding existing projects, the public are free to sell holdings if they should witness mal-administration or nefarious dealings, a peril to the trust of lenders and security of their money. Either the government investigates the perceived offence and punish the malefactors, or the government finds itself bereft of public lenders. With such rigid and unforgiving controls placed upon the fiduciaries of public finance, prevalent corruption and squander inherent in public expenditure shall dwindle to the negligible.
Secondly, the system may be implemented with ease. The community government need not dedicate enormous resources and labour to ensure the procurement of funds. The public, eager to obtain an adequate return and mindful of their civic duty to lend, shall loan without compulsion. The rate of return shall be a major factor in determining whether the project obtains funding. If it be too low, a scarcity of funds shall induce an increase in the rate offered. And repeated adjustments may have to be made until the bill or bond is fully subscribed. If the rate demanded be too high to justify the expense of the project, then it must await a decline in capital costs unless of course the need is urgent.
Thirdly, borrowing funds is not filled with the incomprehensibilities present in Taxation. It requires little understanding upon the part of the public. They offer a reasonable portion of their earnings to the community government and expect at some future date the return of the principal as well as compounding interest. There is no need for intricate rules and regulations, masses of paper, experts, intrusive forms, and bewildering thought and planning.
Fourthly, as the community is borrowing with inducement, not confiscating by penalty, there is no frenzied and costly effort to conceal income. Requests for funds bearing favourable returns would graciously meet with subscriptions by the public. If one’s financial circumstance does not permit lending, he or she may decline freely, whilst one who wishes to offer more may do so. There is no need for deception, concealment, influence, or criminal activity. The government submits requests and the nation responds as long as rates are competitive.
Fifthly, as the community government will have created a pension plan, the present Canada Pension Plan or foreign equivalent would be transformed and Old Age income programs terminated. The elderly after working throughout their lives would welcome the security of retirement. The wealth acquired by lending to the community government would combine with that obtained through private pension plans, guaranteeing substantial payments and promising comfort in retirement rather than uncertainty and apprehension. In fact, as the elderly need greater assistance for health, considerable pensions, enhanced by government annuity, would permit an increased level of spending for these requirements, thereby easing the demands upon the health-care system for the rest of the nation. The elderly could devote more of their wealth to ensuring comfort and health through private insurance rather than demanding an excessive share of the attentions of the existing public health system. The elderly would flourish rather than endure the uncertain and precarious financial circumstances and impoverishment that many now face.
Sixthly, Unemployment Insurance systems would be completely reformed. Presently, the state offers the recipient little spur other than a reduction in income, usually tolerated by the ensuing liberation from labour, to regain employment or to secure enhancement of one’s training or education. Under the new system the government would abolish the insurance plan since the unemployed, after working and contributing to government pension funds and purchasing government bonds, would have a reserve of wealth to redeem in periods of economic distress or turbulence. The bearer could sell bonds or pension funds on a secondary market, borrow funds from a bank against his holdings, or borrow from the government against the holdings, depending upon the rates of interest earned by the reserve and those demanded by the lender. Thus, the unemployed would have a potent incentive to secure new employment: mitigating the loss of personal savings to sustain person and family during an interval of inactivity.
To the improvident, lacking foresight to contribute to public debt instruments or savings of any kind, the government could advance funds at preferred interest rates for education, training, or subsistence, an amount to be remitted when employment resumes and wages flow.
The Welfare system would undergo a reformation as radical and beneficial. Instead of ensnaring unfortunate individuals in perpetual subsistence and dependence, an assessment of the needs of each could be made and funds equal to the task of removing them from state dependency could be advanced. Whatever is required, be it counselling, education, apprenticeships, treatment for addiction, or physical assistance, to manoeuvre the constantly inert to a condition of providence and productivity the nation will supply. When funds are expended and the results obtained, the recipient would return the principle and interest to the state. If the efforts yield little return, which may occur in a minority of instances, then greater exertions must be made or the community must accept that some persons shall never recover from their predicaments no matter how much is expended.
To convert liabilities into assets is the profitable aim of any corporation, a community being no exception. It is deplorable that a modern society compels unfortunate souls trapped by circumstance in squalor, drudgery and idleness to persist without hope of overcoming obstacles overt or concealed. To convert these people to an existence laden with industry and achievement is far more humane, beneficial, and profitable for society and for those in receipt of such good will.
The depletion of personal assets rather than the assets of the whole shall be a formidable weapon in compelling people to profitable endeavour and prosperity.
Seventhly, by borrowing only from Canadians, interest payments shall remain with Canadians and primarily within Canada, not with investors quartered in foreign lands. The people of this nation shall benefit from the largesse, which is as it should be.
Eighthly, government budgets must be prepared in advance and money allocated and dispersed. When disaster appear or irrupt, government is often paralyzed by the unforeseen challenge or sluggish to confront and remedy the crisis. At times, when relief is sought, various departments act confusedly and, infrequently, in opposition to one another, initially and throughout the event. If disaster smite the nation or a region, there need be no delay in gathering and distributing relief to the afflicted. To accommodate, mitigate, and remedy disaster in timely fashion, the government may turn rapidly to the capital markets.
Ninthly, as a result of acquiring government debt an individual has a financial asset which may be used to finance the purchase of a home, the acquisition or creation of a business, or a loan. Community bonds would permit the individual bond or pension holder immediate access to capital when the need arises. It is never the wise to jeopardize one’s financial security, but a person must be master of his life regardless of the advice and exhortations of others.
Lastly, the government has an irrational but compulsive desire to expand spending during prosperous times and austerely reduce spending during periods of hardship. This because the revenues of Taxation abound when the economy expands and contract with the retreating economy. With Taxation abolished and the bank rate the lever, the government will be compelled to reverse this inveterate and insipid practice. By introducing a capital cost, the government would have to evaluate its expenditures not by the availability of tax revenues, but by the interest costs affixed to the borrowing for each undertaking. If the construction of a highway during vigorous expansion be necessary and vital for a community, then a premium in interest will have to be paid. If not, then the project must await a decline in commercial activity. The bank rate will proceed upwards during periods of prosperity and decline during recessions. Hence, the authorities would tend to borrow less during brisk economic activity and more during sluggish periods. Therefore, government participation would run counter to that of the private sector and not tend to needlessly amplify and aggravate economic conditions as it does presently. Government borrowing would be greatest when interest rates are minimal and least when interest rates are at a maximum. This factor alone could save enormous amounts of funds from expenditures wasteful and inflationary.
If implemented, it is the people who would truly govern, not a representative system repeatedly prone to the challenges posed by individual and privied relationships. The government leaders would have to face the electorate with every request for capital. The public would make the financial decisions as to what is necessary, not the cloistered and protected bureaucrats that appear to possess high and manifest disdain for those they serve. When decrepit roads receive the incurious glance of bureaucrat or politician, mired in projects of great promotive but pitiable commercial value or benefits, all suffer regardless of the clamour or protest. Without taxation, the roads would obtain sound and hasty repair. The corruption, deceit, indifference, and arrogance of those entrusted with public office and their avaricious associates would find formidable opposition if control of the public purse remained with the public. Violate the public trust or offend the majority, the government would immediately discover itself impotent and devoid of all practical authority. How preferable a state of affairs this must be in comparison with what the majority must endure presently.
The next instalment shall explain the idea in operation.