#state banking

Will you tell me why a government with power to create money, should give that power away to a private monopoly, and then borrow that which parliament can create itself, back at interest, to the point of national bankruptcy?

The present banking system was founded on the idea that the many were created for the few to prey on. Debts are contracted for land, labour, products, and other commodities. When interest rises government bonds depreciate, holders sell to secure ready money to benefit by rise in interest. High rates of interest rapidly increase the indebtedness of the people.

As I described in the first “Treasury Notes” column, colonial governments legislated “emissions” of paper money (that is, quantities to be printed). Each county was given a portion of the emission to lend to people seeking mortgages and other loans. Public entities known as “loan offices,” or “land banks,” issued these mortgages, which were designed to provide cheap credit, primarily to small farmers (referred to as yeomen). Legislatures set uniform interest rates on all mortgages made, and if debtors defaulted, the county was responsible for using taxation to pay the bank back. One of the most important features of this system was how early Americans handled interest. Today there are no public requirements for how banks should spend interest income (or even that they should spend it at all). But in colonial America, the interest from the land bank loans was an important source of government funding. As historian Theodore Thayer explained in his classic account of colonial mortgages, colonies used the interest earned on the loans to help governments cover their expenses. In New England, towns usually kept part of the interest, which they used for relief for the poor, as well as schools, public buildings, and other public goods. For example, in 1724 New Jersey passed its first land bank emission. In the original legislation, bills received for interest payments were to be retired and burned. Legislatures, however, quickly realized that this did not make sense: Burning those bills would leave none in circulation to repay the interest on them. So they decided, instead, to use the interest income to pay government employees’ salaries and other public expenses. This proved quite popular as it reduced the tax burden. In this way, governments purposely kept paper money in circulation and ensured that there was enough money circulating to repay principal and interest on mortgages. No such control or planning goes into modern bank loans, which is obvious when you look at the foreclosure crisis of the past decade.