Co-operative Commonwealth: De-commodifying Land and Money Part 3

Today we present part 3 from Co-operative Commonwealth: De-commodifying Land and Money a paper prepared by Pat Conaty for the 13th International Karl Polanyi Conference at Concordia University, Montreal on 6-8 November 2014. Pat is research associate of Co-operatives UK, a Fellow of New Economics Foundation and author with Mike Lewis of The Resilience Imperative Cooperative Transition to a Steady State Economy. We published Part 1 on Monday Dec 29th and Part 2 on Wednesday.

Cheap money’: Keynes and monetary reform to curtail usury

In 1931, Keynes concluded “that interest – or, rather, too high a rate of interest – is the villain in the economic piece”.1 He called his public policy antidote “cheap money”: intervention by the Treasury and central banks in the bond markets to ensure the long-term maintenance of low interest rates in order to curb the usurious practices of bankers and provide low-cost capital for housing, welfare services and industry.2

This policy was essential to the reforms with which the Roosevelt administration was to circumscribe private banking and vastly extend the reach of public development banking. Roosevelt acted immediately. His first act of office was to declare a three-day bank holiday. An Emergency Banking Act, passed on March 9 closed down and liquidated four in ten banks in the USA. That June, the Glass Steagall Act imposed tighter banking regulation than ever before experienced and rigorously separated commercial banking from investment banking. The new legislation gave the Federal Reserve strong powers to set maximum rates of interest. Deposit protection insurance was introduced. Banking was strictly regulated thereafter for almost fifty years.3

Roosevelt’s plan for ending the Great Depression included a public banking model. To address the difficulty that businesses had getting bank loans, the Hoover administration had set up the Reconstruction Finance Corporation (RFC) in 1932. Under Roosevelt from 1933 the RFC introduced mortgage and small business loan guarantee mechanisms. However private bank lending continued to decline. Finally, in 1938, Roosevelt approved direct public lending by the RFC to businesses.

A successful target of low-interest public lending was the rural electricity sector. In 1934 only one in ten rural households in the US had electricity, compared to nine in ten urban households. (Private sector energy companies could make far higher returns on urban than on rural investment.) To resolve this, Roosevelt set up the Rural Electricity Administration (REA) in 1935. Using capital from the RFC, the REA provided long-term, low-cost loans at a 2% fixed rate to enable the co-operative sector to develop a network of rural electricity co-ops.4 By 1939, 417 rural electricity co-ops had been established and 288,000 households and farms provided with power.5 By the early 1950s co-operative light and power was being delivered to 90% of farms. Today this movement has grown into a national network of over 850 co-operatives and a membership of 42 million. Long-term public bank finance at low-fixed interest was critical to their success to deliver power and light throughout the rural USA.6

The Bank of Canada – A central bank monetary policy for securing the Common Good

Canada also made monetary and banking reform a centrepiece of its strategic response to the Great Depression. While influenced by Keynes, Canadian measures also drew on many more radical ideas. Canadian innovations stand in striking contrast to those of the New Deal. A wave of root and branch change achieved some of the twentieth century’s most significant money and banking innovation.

The crash of 1929 created across Canada a ferment that gave rise to new political parties. The Co-operative Commonwealth Federation (CCF) was founded in 1932 in Calgary as a farmer-labour-socialist party. The CCF manifesto called for public ownership of key industries, universal health care and universal pension provision. The party’s ideas on money and banking were influenced by the public banking success of AC Townley. CCF thinking spread across Canada during the 1930s.

Gerry McGeer, a Liberal Party candidate, was elected mayor of Vancouver in 1934 at a time of huge industrial unrest. In his book, The Conquest of Poverty (1935), McGeer’s plan combined Keynes’ Cheap Money with Lincoln’s Greenback. He presented evidence to bankers, politicians and economists to show how a public bank could work for the common good. His timing was fortuitous. In 1935 Canada had opened its own central bank, the Bank of Canada, but as a privately-owned bank.7 There was a Government debt crisis with interest charges more than one third national expenditure.

McGeer’s proposals were supported by the Prime Minister, fellow Liberal William Lyon Mackenzie King. Graham Towers, the first governor of the Bank of Canada, was also persuaded.8 Inspiration came from the new Reserve Bank of New Zealand, a public central bank that began life in 1936 advancing loans at 1% to fund a broad range of infrastructure including hydro-power, the railways and public housing.9 Mackenzie King made a mission statement of political intent in 1935:10

Once a nation parts with control of its currency and credit, it matters not who makes the nation’s laws. Usury, once in control, will wreck any nation. Until the control of the currency and credit is restored to government and recognised as its most conspicuous and sacred responsibility, all talk of sovereignty of Parliament and of democracy is idle and futile.

1938 the Bank of Canada was converted into publicly-owned corporation and curtailed private bank borrowing by creating most of the money supply until 1945.11 After the war, monetary policy was structured to assist long-term reconstruction and job creation. The Industrial Development Bank was set up as a subsidiary of the Bank of Canada. Loans were advanced at a nominal 1% rate and this practice continued until the mid-1970s. In addition to investment for industry and business, cheap money funded Canadian infrastructure including housing, the Trans-Canada highway, the St. Lawrence Seaway and a broad range of social programmes including financial aid for veterans to attend university, assistance for veterans to acquire farmland, the development of federal health care system and to finance as well the Canada Pension plan and Medicare.

Until the mid-1970s the federal government created enough new money to monetise 20-30% of the national deficit. Moreover, cheap money forced the mainstream banks to keep their commercial rates low in order to compete. As a consequence of a combination of public banking and cheap money Canada had a total national debt of only $37 billion in 1975. The policy underpinned four decades of Canadian security and stability.12 All this changed in 1974 – the year the Basel Committee on Banking Supervision was set up within the Bank for International Settlements (BIS). Canada was among the committee’s founding members. To encourage monetary stability and fight stagflation, BIS discouraged governments from borrowing from their central banks interest-free. Instead it was recommended that they borrow from the private sector and from international banks.13

This was instigated after the election in 1984 of a Progressive Conservative government. Public debt soared to $581 billion by 2012. Interest payments by taxpayers on the debt topped $1 trillion and became the single largest budget item, higher than health care, national defence and senior citizen entitlements.14 It has been estimated that if Bank of Canada practices had not been changed, there would be no national debt and indeed a surplus of $13 billion.15

Public development banking: KfW a ‘cheap money’ system operating in Germany

The Kreditanstalt für Wiederaufbau (KfW) was established after World War II to act as a development bank for reconstruction. It continues to operate today and plays a strategic role in the implementation of German’s carbon reduction and green economy programmes. Germany has been an EU leader in green energy since the 1990s and KfW has been at the core of its implementation practice.

KfW provides capital at 1% to the German retail banks for on-lending.16 The German municipal savings banks and the co-operative banks comprise the majority of this market. Loans at 2.65% are provided for both homeowners and small businesses to retrofit housing and commercial premises.

Packages of energy conservation and renewable energy measures are tailored to secure rigorous carbon reduction savings. Borrowers are incentivised to achieve the targeted savings by a bonus that reduces the capital sum advanced if the carbon reduction levels are met.17 The impact of these rebates can reduce the net interest charged to less than 2%. KfW commitments amount to €10 billion a year and attract an additional €17 billion in energy efficiency investment.

KfW programmes have created employment year on year. Today it supports 368,000 construction jobs in both new build and high-standard retrofits to Germany’s housing and commercial infrastructure. Since 2001 more than 2.5 million homes have been upgraded to high-energy savings standards. The current annual upgrade volume is more than 358,000 units. Germany is on target to cut carbon emissions from homes and commercial buildings by 40% by 2020 and by 80-95% by 2050.

100% money and Citizens Income: a Commons Solution

During the Great Depression, it was acknowledged quite widely that banks create money as debt every time they make a loan. In other words they do not lend out their deposits but multiply money in circulation simply by exercising their fractional reserve freedom to expand the level of debt. A 100% reserve requirement enforced by central banks would remove this freedom and the issue of money and liquidity would become a role for governments to reclaim fully. In 2014, The Bank of England officially confirmed in their Quarterly Bulletin 2014 that the banks create money simply by lending.18

Former World Bank economist Herman Daly has proposed reconceptualising money as a commons based on the 100% money proposed by Frederick Soddy and later advocated in 1934 by Irving Fisher. Fisher proposed to remove from banks the power to create money as debt by setting up a Currency Commission to provide the money supply debt-free. He argued for a partnership between the Currency Commission, the central bank and the national retail banking network, to act as the delivery system. Fisher and the proponents of the The Chicago Plan and The Program for Monetary Reform in 1939 highlighted that the impact of 100% money would restrict debt comprehensively.19

Under the fractional reserve system, any attempt to pay off the Government debt, whether by decreasing Government expenditures or by increasing taxation, threatens to bring about deflation and depression……the fundamental consideration is that whatever increase in the circulating medium is necessary to accommodate national growth could be accomplished without compelling more and more people to go into debt to the banks, and without increasing Federal interest-bearing debt.

To implement 100% banking effectively, Fisher drew the important distinction within commercial banks between checking accounts and saving accounts. The former could and should be operated on the basis of fees for service, not interest. By contrast, saving accounts are not part of the means of circulation. They are loans borrowed from banks from savers. To pay any return to savers as a share of investment, the banks would need to invest these deposit funds in productive enterprises.20

Joseph Huber in Germany and James Robertson in the UK have made the case for creating 100% money by extending the government money supply from the marginal areas of coins and banknotes (about 3% of money) by replacing bank generated debt money with a universal basic income that could be spent directly into the economy interest-free.21 This would be a pre-distribution of income replacing as well the other forms of redistribution by the state, including state pensions, tax allowances and other welfare benefits. Robertson proposes a 3-year period to phase in the transfer from a debt-based national money supply to a 100% debt-free money system.22 He calculate that the UK government and taxpayers would secure £75 billion in savings annually and a one-off savings of £1500 billion by replacing bank debt money with national, interest-free money. The latter figure could fully repay the UK’s national debt that has continued to rise relentlessly since the 2008 bank bailout.23

Co-developing Commonwealth: The strategic need for a public-social partnership agenda

Community Land Trusts, JAK, CoopHab and the WiR Co-operative Bank demonstrate today that there are viable ways to deliver access to land and money as a democratic commons that eliminates usury. The struggles of working class movements to develop land reform and interest free money systems has led to dynamic innovations that work but have been marginalised. Where breakthroughs have been made, public-social partnerships have been forged and firm foundations established. This is evident in emergence of the Bank of North Dakota, the rural electricity co-operatives in the USA and the growing Community Land Trusts (CLTs) movement in the USA and the UK. Frequently the public-social partnership operates only at a local government level as is still the case with the CLTs today. Where national policy can be influenced as with the Bank of Canada from 1938 to 1984 and with KfW currently, the impacts can become both systemic and transformative. Such periodic breakthroughs demonstrates how the co-operative movement’s innovations for money and land as ‘commons’ operating system can succeed and in partnership with public banks co-deliver pathways out of austerity including permanently affordable housing, renewable energy systems, green public transport and solutions to the rising costs of social and health services. Securing political will from the state to tackle social inequality by directly targeting the roots of enclosure, would enable paradigm shifting changes like 100% money and Citizens Income to be implemented.

1 Geoff Tily (2010) Keynes Betrayed: The General Theory, the Rate of Interest and ‘Keynesian’ Economics, Palgrave Macmillan, page 135.

2 Keynes persuaded UK government to implement this policy in 1932 by cutting the British bank rate from 6% to 2%. Apart from one year, this guidance and low rate was maintained until 1950 (Tily 2010: pages 59-60).

3 Unlike what has happened since 2008, banker salaries declined massively and bonuses shrunk after March 1933. Pay in the industry remained in decline for decades.

4 Roosevelt based his plan for rural electrification in part on electricity co-ops that had been set up in Scandinavia.

5 University of Wisconsin Center for Cooperatives:

6 While the co-ops have benefited from government provision of ‘cheap money’, the subsidies per consumer to the energy co-op sector from Government has been less than those provided to private sector utilities.

7 Before then the Bank of Montreal had operated as the government’s principal banker.

8 Connie Fogal (2011) ‘How the debt-based monetary system functions in Canada’, COMER, the Journal of the Committee on Monetary and Economic Reform, Vol. 23, No. 9, September 2011.

9 Rodney Shakespeare (2007) The Modern Paradigm, The Christian Council for Monetary Justice and Islamic Economics and Finance.

10 Ellen Brown (2013) The Public Bank Solution – From Austerity to Prosperity, Third Millenium Press, chapter 17.

11William Krehm (1993) A Power Unto Itself – The Bank of Canada: the Threat to our Nation’s Economy, Stoddart Publishers. In the years 1935 to 1945, Canada’s monetary base – that is the supply of legal tender – was increased from $259 million to $2,017 million…….Because the central bank created most of the money itself and lent it to the government in the form of treasury bills as low as .37 percent, the bank was able to keep the interest paid on Canada Savings Bonds bought by the public to 3 percent or less. Without the low-rate financing provided by the central banks, the Allied powers could not have won the war (Krehm 1993: page 56).

12 No other central bank since has pursued monetary reform in such a social economy way to secure the common good.

13 Brown (2013 chapter 17.

14 In 2012 austerity measures were introduced to address the debt burden: 19,200 job cuts, a higher retirement age of 67 and a reduction of federal programmes by $5.2 billion a year.

15 Harold Chorney, Associate Professor of Political Economy and Public Policy, Concordia University, Montreal; John Hotson, Professor of Economics, University of Waterloo; Mario Seccareccia, Associate Professor of Economics, University of Ottawa; The Deficit Made Me Do It!, “Introduction,” CCPA Popular Economics Series, Editor: Ed Finn, Canadian Centre For Policy Alternatives, 2010.

16 Gudrun Gumb (2012) ‘Financing Energy Efficiency in Buildings – the German Experience’, KfW paper presented at the International Workshop on Financing Energy Efficiency in Buildings, Frankfurt, 16-17 February 2012.

17 Homeowners and businesses that demonstrate they have saved energy can get capital repayment rebates of 2.5% to 17.5% from the different KfW programmes that encourage maximum carbon reduction performance.

18 See the Bank of England (2014) report Money Creation in the Modern Economy at:

19 Paul H. Douglas, Irving Fisher, Frank D. Graham, Earl J. Hamilton, Wilford I. King and Charles R. Whittelsey (1939) A Program for Monetary Reform, memorandum July 1939.

20 Fisher advocated banking reform that would establish a decentralized system of utility banking. It would benefit smaller banks and thereby increase competition. Fisher argued that smaller banks faced an increasing trend towards more concentration of power in the hands of the big banks. Under the 100% system, the demand deposits of the smallest and the largest banks would be absolutely secure. The pressure towards the concentration of banking would thus be greatly reduced.

21 Joseph Huber and James Robertson (2000) Creating New Money – A Monetary Reform for the Information Age, New Economics Foundation. In Switzerland, the Vollgeld Initiative has secured in 2014 enough signatures for a national referendum on the introduction of a Basic Income of $2800 per month. This program is based on monetary reform and on the arguments of Huber and Robertson for a Citizens Income.

22 James Robertson (2012) Future Money – Breakdown or Breakthrough?, Green Books, pages 111 – 113.

23 Gar Alperovitz (2013) What Then Must We Do?: Straight Talk About the Next American Revolution, Chelsea Green, page 146: He points out that inequality in the USA is not an economic problem, it is a political problem. He highlights that if gross US income was divided equally, each American household (based on four people) could be provided $200,000 and full employment or $100,000 for a 20 hour week if they preferred to work less.

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