Rising Tides Sink All Boats

By David M. Fields

So, what is the Fed’s deal? Has Jerome Powell fallen prey to inflationary paranoia and hysteria for all the wrong reasons? Or is a “strong’ dollar a manifestation of a particular response to a policy choice that is more calculated and direct? By facilitating aggressive monetary austerity, the Federal Reserve is ensuring the US dollar is a safety asset to insulate the global rentier from cost-push-markup inflationary unpredictability.

The US dollar is surging to new heights. For instance, the US Dollar Index, which values the greenback against a basket of currencies, has advanced considerably. One of the burning questions is whether this will last? For now, I think, yes, it will, simply because there is no alternative for global trade invoicing and financial accounting. Aggressive monetary austerity policy from the Federal Reserve, a project aimed at using unemployment to tame cost-push-markup inflation, is pushing rival currencies lower, particularly in emerging market economies that suffer from balance of payments constraints, as investors from around the globe rush to purchase US Treasuries for security in the face of world-systemic economic uncertainty.

This scenario is vastly different than the monetary policy from only a year ago or so. Then, to cope with the Covid-19 pandemic, central banks around the world cut interest rates sharply — to near 0 — and governments deployed aggressive fiscal support of their economies. As a result, Federal Reserve actions were important in stabilizing world financial markets, specifically with respect to Fed swap lines and the establishment of the Foreign and International Monetary Authorities (FIMA) Repo Facility, which ensured a “buyer of last resort” for foreign central banks desiring to sell U.S. dollar reserves. Capital flowed throughout the world and the dollar fell sharply. In a sense, this was to be expected, and was seen as temporary. Eventually, the dollar was bound to bounce back up. And now it is. And the post-pandemic world paved the way.

Indeed, as the world economy reopened from pandemic lockdowns, supply chain bottlenecks arosecoupled with pandemic profiteering, generating worldwide upsurges in inflation. The response from the Fed, as mentioned, has been to raise the federal funds rate, which has translated into a sharp dollar appreciation as a result of global capital inflows, as the US dollar is a reserve asset to cope with worldwide economic uncertainty.

Yet, is this influential role of the dollar in the world economy an indication of the United States’ core commitment to internal price stability and external cooperation for the deliverance of efficient world capital markets and global trade links? Or acute deposition of the monetary power of the United States? In my view, the answer is the latter.

Here’s why.

The Fed is the world economy’s central bank, which acts as the safety valve for mass amounts of international liquidity. The role of the US dollar in international markets, and the advantages that come with it, are the spoils of its monetary hegemony. The provision of this asset allows the United States to become the source of global demand, and to insulate itself from fluctuations and contradictions of perilous cumulative disequilibria that may arise in the world economy, like the adverse price effects of supply chain bottlenecks and financial contagion that stem from foreign currency devaluations. The US dollar is the numeraire currency in international markets, which is not emblematic of credible macroeconomic performance that fosters confidence, but an arbiter of authority that regulates and dictates the flows of international financial commitments for global economic activity.

Given the current state of world economic dynamics, along with the foreseeable future, there does not seem to be a direct challenge to the dollar’s preeminence, in the same vein as the Euro was not a likely contender given its fallout from the Great Recession. There is not any indication of the greenback’s fall from grace as the dominant international currency. This does not preclude, nevertheless, eventual dollar dethroning, just confirms that the process is (very) long-term.

Despite hysterical contestations of inflationary fragility, the US dollar insulates the United States from global fluctuations and contradictions that may arise. This provides the country the effective means by which the world economy can be stabilized with global demand expansion, without spurring assumed demand-pull inflationary spirals. So, what is the Fed’s deal? Has Jerome Powell fallen prey to inflationary paranoia and hysteria for all the wrong reasons? Or is a “strong’ dollar a manifestation of a particular response to a policy choice that is more calculated and direct? By facilitating aggressive monetary austerity, the Federal Reserve is ensuring the US dollar is a safety asset to insulate the global rentier from cost-push-markup inflationary unpredictability. As such, expectations of future dollar depreciation arising from a return to loose monetary policy is, unfortunately, unlikely.

I hope I am wrong.

***Republished from the Monetary Policy Institute Blog***

Austin Credits with Jonathan Wilson (White Paper and Podcast Interview)

For this special episode of Superstructure,  cohosts Will Beaman (@agoingaccount) and Andrés Bernal (@andresintheory) are joined by Jonathan Wilson (@DeficitOwl24601) to discuss his new white paper, “Proposal for a Local Currency Issued by the City of Austin,” which proposes a complementary currency for the city of Austin called Austin Credits.

Jonathan’s proposal contributes to a developing conversation in the Austin City Council, which was tasked by recent legislation with exploring possibilities for new public banking and payments structures by a resolution. The conversation delves into the proposal’s legal design and implementation strategy, while also contextualizing its political meaning and stakes for progressive politics. 

Proposal for a Local Currency Issued by the City of Austin: A White Paper by Jonathan Wilson

In 2022, the need and desire for alternative visions of economic organization is higher than it has ever been. Undemocratic national governments and international crises have taken agency and power away from local communities and diminished their ability to protect and nurture their citizens as they see fit. In the United States, the prevailing economic ideology at the national level has committed to trading quality of life for nominal price stability, pursuing policies which deliberately exacerbate unemployment and refusing to make robust use of programs to provide liquidity to local governments. The time to develop local alternatives to this system is now, and this white paper will explain one such vision. In addition to providing a basic means of funding and payments for local governments and their citizens, this proposal aims to provide a new lens for how people view cooperation and interdependence. By illustrating how valuable assets can originate from negotiated credit relationships, this white paper shows how communities can express their values among themselves and between each other, opening up new possibilities for local and global solidarity.

Resolution 20220324-057, passed by the Austin City Council on March 24, 2022, directs the City Manager to explore how financial innovations can improve government processes and better serve Austinites, through (among other things) public payments platforms, public banks, and local complementary currencies. This proposal outlines how  the City can (i) increase income and employment for Austinites, (ii) increase financial inclusion by providing a privacy respecting method of electronic payment for the unbanked and maintaining an affordable means of financing and emergency liquidity for low income Austinites, and (iii) allow the City to fund public works. One way to accomplish these goals is to issue a valuable electronic financial instrument called the Austin Credit or “AC”. In order for Austin Credits to be valuable enough to supplement incomes, allow the City to create employment, and serve as a vehicle for financial inclusion, the City must ensure that they are in demand and marketable. To ensure that Austin Credits increase financial privacy, the City will provide an option to load Austin Credits onto an anonymous stored value card. Finally, in order for Austin Credits to serve as a source of financing and emergency liquidity, the City itself will serve as a lender of first resort for Austin Credits.

Of all these requirements, the most important is that Austin Credits are demanded by members of the public. The primary demand for Austin Credits will stem from the fact that the city will accept Austin Credits for all payments to the city, including utilities, public transport, local taxes, fines, and fees for any city-sponsored events on a one-to-one basis with the dollar (moving forward, I will use the term “City Bills” to refer to these payments and “City Services” to refer to actions by the City that people are paying for). To further encourage use and widespread acceptability of the Austin Credit, the city will offer a small discount of 5% for paying City Bills in Austin Credits rather than in dollars. Historically, there is precedent for a credit towards taxes or government services at a local level retaining its value so as to become a fungible, money-like object. In the 1930s, American cities which were  short on dollars circulated tax anticipation scrip which could be used to make any payment to the city. Additionally, during the Civil War, until the government stopped them, individuals used United States Postal Service stamps as a replacement currency, knowing the stamps would always have some real value so long as the post office accepted them.

To give Austin Credits value beyond paying for City Bills, the City needs to encourage acceptability of Austin Credits by businesses. The easiest way to do that is by offering businesses which agree to accept Austin Credits a small discount on their City Bills. For example, a grocery store that agreed to accept Austin Credits as payment would register with the city and receive a 5% discount on their City Bills. Additionally, businesses that agree to pass any part of this savings onto their customers would receive an additional discount on their City Bills. For example, a store that offered its customers a 2.5% discount when they pay in Austin Credits would receive an additional 2.5% discount, for a total discount on City Bills of 7.5%. Additionally, Austin Credits would be free to transfer within the Austin Credit system, meaning stores would save money whenever someone paid in Austin Credits instead of credit or debit cards. This not only gives the grocery store an incentive to accept Austin Credits but it gives their customers an incentive to acquire Austin Credits and save them.

To respond to this incentive for Austin Credits, residents would be able to buy Austin Credits directly from the City, but Austin Credits would also exist on a web and app based platform that would allow users to request and transfer from one another, similar to pre-existing payment apps, like Venmo, Paypal, and Square. Users would have the option of connecting their bank accounts or credit cards, and there would also be a market function in the app and website called the Austin Credit Online Marketplace where users could buy and sell Austin Credits with dollars, similar to a foreign exchange market. Just like with Venmo and Paypal, users would pay no fees for transfers within the AC system, and if users wanted to take money out of the AC system by transferring it back to their bank accounts, they could do so for free if they the standard option which goes uses the Automated Clearing House and settles in three days, or they could make instant transfers for a small fee. The purpose of this market is to give the recipients of Austin Credit a way to convert to dollars if they need to, which enhances the liquidity and desirability of the Austin Credit. Additionally, several public buildings in the City would have indoor and outdoor machines that dispensed stored value cards carrying Austin Credits in various denominations.

Once Austin Credits become widely accepted in the City and their demand and value is established, the City can begin offering personal loans in Austin Credit, providing an affordable source of financing for Austinites. Because the purpose of these loans would be to enhance the purchasing power of Austinites, the terms of these loans do not need to be structured with the goal of maximizing revenue. Rather, the terms should be geared towards encouraging Austinites to demand and save Austin Credits. To those ends, Austin Credit loans should have three essential features. First, the rate of interest should be zero. Keeping this rate at zero ensures that consumers will prefer to borrow Austin Credit. Because legal tender laws would require the City to accept dollars in payment for public debt, to incentivize people to pay loans in AC, the zero-interest rule would be contingent on people paying the loans back in AC. Second, instead of charging interest, to encourage frugal use of this credit facility, the City can simply charge small late fees for missed payments. Third, all loans in Austin Credit issued by the City must be collateralized by surrendering Austin Credit in an amount equal to 10% of the loan value prior to the loan being issued.

For example, if someone wanted to borrow 200 AC, he would have to surrender collateral of 20 AC and would receive the loan at 0% interest. Because the loan would carry no interest, he would prefer this loan over a payday loan, and because he needs to keep at least 20 AC on hand to qualify for the loan, he is encouraged to save at least some of the Austin Credits he receives. This feature of Austin Credit loans capitalizes on people’s natural tendency towards precautionary saving. To prevent the potential for abusing this loan facility, each resident would only be allowed to have one of these loans outstanding at any given time. In this way, residents who take out these loans will be encouraged to pay them off, not only to receive their collateral back, but also so they can qualify for another loan. Additionally, although anyone would be able to set up an AC account, only permanent residents of Austin would be able to access these loan facilities.

The value of personal loans would be capped at 5,000 AC, but eventually, the goal should be for the City to offer secured loans to allow residents to finance the purchase of large items, such as cars and homes. For these consumer loans, there would be a much higher maximum loan value, but there would be a minimum down payment amount of 35%, and the loan would be secured by the asset being purchased. Because saving for large purchases is empirically the second most important reason people save money, incentivizing Austinites to save Austins Credit by offering them a 0% loan in exchange for a large down payment will be a very powerful way to bolster demand for Austin Credits.

Once this system of acceptability, transferability, and loans has been established, leading a private sector demand to hold and save Austin Credits, the City can start using Austin Credits to supplement income and create employment. The City should establish a system that allows residents to vote on new public works projects which will pay workers in Austin Credits. As the Austin Credit system gains adoption, the City can gradually increase the amount of projects offered until it can guarantee a job paying in Austin Credits for all Austinites who want such a job. The revolutionary potential of allowing local residents to vote on spending projects that are not tied to direct and immediate taxation or borrowing cannot be understated. As long as there is idle labor and the demand for AC is not exceeded, such a program would create a means for residents to democratically participate in non-zero-sum development, motivated by the needs of communities and not merely the profit motive, strengthening the City’s economic environment and its sense of community. Moreover, the Austin Credit can be used to recognize work that is already being done but is currently undervalued or uncompensated by issuing AC to community service organizations. Additionally, the City can issue Austin Credits to the elderly, the disabled, and parents of minor children to supplement their income.

The structure of the Austin Credit system should allow people who receive income from the City in Austin Credits (either from public works jobs or from supplemental payments) to sell them for dollars if they wish. Because Austin Credits grant residents a discount on their City Bills of 5% and a discount at participating businesses of 2.5%, if enough people are using Austin Credits, they should trade in the Austin Credit Online Marketplace for around $1.00. The logic here is that if I have 100 Austin Credits, I should be able to use it to buy products valued at $105 from the City and at $102.50 from participating businesses. If I want to buy something from outside Austin, I may want to sell my Austin Credits for dollars, but unless there is an emergency, I will avoid selling my Austin Credits for significantly less than the value I transferred to pay (either in dollars or in labor) for them. Let us assume that I offer to sell 100 AC for $101. If Austin Credits have not been over-issued, other Austinites who want to buy something from the City or from a business who accepts AC should accept the offer to buy 100 AC for $101 for two reasons. First, 100 AC will allow them to buy products valued at $102.50, so they have essentially gained $1.50 in value simply by doing the transaction if they spend their Austin Credits in Austin. Second, the $101 price I offered is less than the $102 ($100 plus $2 transaction fee) they would have to pay the City if they purchased the 100 AC directly from the City. The only people who will insist on paying less than $1.00 to buy 1 AC in the secondary market will be people who do not have an immediate need to buy something from the City or from a business  that accepts AC. For this reason, encouraging private sector adoption is key because the more places people have to spend AC, the less need there will be to sell AC at a discount. 

The promise of redemption from the city will guarantee that Austin Credits have some value, but to protect this value, the City must avoid issuing too many Austin Credits. If the private sector has a net desire to save 1,000 AC, and the City net issues 1,200 (net issuance being the remaining outstanding Austin Credits after redemption), then residents will begin selling Austin Credits at a discount for dollars. If this happens, the first person to sell his Austin Credit–the person who receives the 1,001st AC–will receive a good price for it, but the last person to sell his Austin Credit–the person who received the 1,200st AC–will suffer a significant loss. That first seller might be able to sell his Austin Credit for 99 cents, but the last seller might only get 80 cents. Consequently, if the private sector has a net desire to redeem and save 1,000 AC, and the City Issues no more than 1,000 AC, each recipient of an Austin Credit will have a financial asset valued at approximately one dollar. However, if the City issues more than this net redemption and savings desire, then at least some recipients of Austin Credits will find themselves holding a financial asset valued at less than what they exchanged for it. Either they will have bought Austin Credits directly from the City that are now worth significantly less than one dollar, or they will have provided labor to the city that is now worth less than the value they placed on that labor. For example, if the City pays workers 20 AC per hour but issues too many AC, causing the value of the AC to drop by 25%, those workers might have valued their labor at around $20 per hour, but they now hold a financial asset worth only $16.

Similarly, in order for this value creation not be a net loss for the City or an indirect transfer from some citizens of the City to others, the private sector must save a number of Austin Credits that is greater than the discount given to those who pay City Bills in Austin Credits. For example, imagine the citizens in total have a City Bill of $100, and the city issues 95 AC in exchange for $95 of goods and services and offers a 5% discount on City Bill payments. If the citizens redeem all 95 of their Austin Credits to pay their $100 City Bill, then the City has essentially foregone $5 in value. In this scenario, if the city had simply never issued the Austin Credits, they could have simply accepted $100 to pay off the $100 City Bill, paid the same $95 for the goods and services, and had $5 left over. Avoiding the problem of foregone revenue is important for the City because it still has bills and liabilities denominated in USD (for example, it must pay payroll tax to the US Federal Government, and it must purchase garbage trucks from Waste Management, Inc., which is headquartered in Houston, Texas and will likely not accept AC in payment). On the other hand, if the City issues 100 AC, and the private sector redeems only 90 AC at the standard 5% discount, then the City has effectively gained about $5 in value. A City Bill of about $95 would require 90 AC to pay at a 5% discount. If the City pays for $100 of goods and services with Austin Credits, then provides $95 of City Services, which the private sector purchases using 90 AC, then the difference between the value received by the City (the $100 of goods and services) and the value given by the City (the $95 of City Services) results in a net gain by the City of $5. Because the City and its citizens benefit if not all of the Austin Credits are redeemed, some of the value from the Austin Credit System can be thought of as partially analogous to breakage revenue, the profits businesses recognize when their gift cards are purchased but not redeemed.

Therefore, to protect the financial health of the City and to maximize the value of the financial assets given to Austin residents, the City must structure the economy of the Austin Credit  to maximize the desire to save Austin Credits. As stated above, there will be a basic underlying precautionary motive to save Austin Credits because they will allow residents to benefit from a small discount on their City Bills. Additionally, residents who want to take out loans in Austin Credits will be incentivized to save Austin Credits to surrender as collateral to allow them to qualify for larger loans. In addition to these precautionary and financing motives, the City should encourage saving Austin Credits by only selling Austin Credits in predetermined amounts with a small, fixed transaction fee of $2. At any point, a member of the public should be able to buy Austin Credits at the price of one Austin Credit per dollar, but if they can always buy the exact number of Austin Credits they need for every transaction, they will never need to save any. To remedy this, the City should only sell Austin Credits through its online platform or at its stored-value card dispensing machines in moderate but equitably sized lots. To illustrate, let’s assume the lot size is 50 Austin Credits for the sake of simplicity. In that case, if a person has a monthly City Bill of $25, they will have to purchase 50 Austin Credits at once by spending $52 dollars. After paying 23.75 AC to extinguish their City Bill (leaving them with 26.25 AC), this person will have about 1.25 more Austin Credits than they need to pay their next City Bill. They could spend those AC on something else, but this would mean that the following month they would need to purchase additional Austin Credits and pay another $2 fee. 

Additionally, any one person or common enterprise will only be able to use USD to purchase a maximum of 1,000 AC directly from the City using its online platform in any given month. This minimizes arbitrage opportunities and limits people’s ability to buy AC immediately before redeeming them in payment of City Bills, which would otherwise diminish any need to save AC. Together, these elements form a structure that incentivizes residents to save at least some of their Austin Credits or to seek Austin Credits from sources other than the City, which means they will request Austin Credits in payment from other members of the public, further fueling the demand for Austin Credits.

The aforementioned fixed-lot issuance, loan policy, AC purchase limit and transaction fees are best described as non-interest monetary policy, meaning they influence the volume of Austin Credit financial transactions without primarily relying on charging interest to borrow money or paying interest to those who already have money. However, the City must also have rules for fiscal policy, meaning it must have a rigorous system to decide how many net Austin Credits it will issue in any given period. Because the measurement of value created by the City and held by its residents will be the residents’ desire to save Austin Credits and value them at or near the price paid for them, the City will know that it has issued too many Austin Credits if the number of Net Austin Credits Saved, or “NACS”, does not increase from one period to the next. NACS will be defined as the number of Austin Credits issued by the City minus the amount of Austin Credits accepted in payment by the City, and if this number is positive, it is multiplied by the fair market value of the Austin Credit as a percentage of a USD, as determined by sales on the Austin Credit Online Marketplace.

Now that I have defined what I mean by Net Austin Credits Saved, I will explain how the city will adjust its number of Net Austin Credits issued (Austin Credits issued excluding loans given) in response. The process is very simple: in any given period, the City may issue an additional number of Net Austin Credits equal to the change in Net Austin Credits Saved in the previous period. To illustrate, consider the following example. In Year Zero, before any Austin Credits exist, NACS is zero by definition. If in Year 1 (the first year of the Austin Credit program) the City issues 400 AC, people spend 300 AC and AC are traded on the Austin Credit Online Marketplace for $.95 each, then the NACS for Year 1 is 95 (400 minus 300, all multiplied by .95). The difference between NACS for Year 1 (95) and NACS for Year Zero (0) is 95; this means that the City can safely increase the number of Austin Credits it issued by 95 in Year 2. If in Year 2, the City follows this advice and issues 495 AC, and the NACS for Year 2 is 180, then the net change in NACS will be 75 (180 minus 95 equals 75), and the City can increase spending by 75 in Year 3. If the City issues an additional 75 AC in Year 3 (for a total of 575), but NACS for Year 3 remains at 175, then the net change in NACS is zero, and the City should not increase the rate of Austin Credit issuance in Year 4. 

The purpose of adjusting the total issuance of Austin Credits in this way is to ensure that issuance of AC increases when the citizens desire to save AC increases and that issuance of AC decreases when the desire to save AC decreases. It is impossible to perfectly predict the net desire to save Austin Credits going into each new year, but aligning the additional issuance with the actual saving desire of the previous period should be an acceptable proxy. Initially, the net issuance of AC needs to reflect the availability of real resources which can be purchased with AC and grow gradually. The City should start by limiting AC issuance to some small fraction—perhaps 5%—of the combined revenue of the City and the businesses that agree to accept AC. This would ensure that even if no one wanted to save AC at the outset, the supply of AC would not exceed the supply of things one can buy with AC, so people can become accustomed to viewing the AC as a stable unit of account. As the use of AC grows among the population, this formula will allow the supply of AC to naturally grow around the same pace as the people’s desire to hold it.

Because the goal of this project is to increase income for Austinites, if the change in NACS is ever negative from one period to the next, the City should not immediately reduce the number of Austin Credits it issues in the next period. It should first adjust non-interest monetary policy for at least 1 year. For example, if in Year 4, NACS declines from 175 to 140, instead of reducing Austin Credit Issuance by 35 in Year 5, the City should increase the collateral requirement for Austin Credit Personal Loans and the down payment requirement for Austin Credit Consumer Loans to encourage more saving. These increases should be proportionate to the negative change in NACS. For example, if NACS declines from 175 to 140 from Year 3 to Year 4, this reflects a decrease of 20%. Consequently, in Year 5, the City should increase the collateral requirement and the down payment requirement by 20%. For example, the collateral requirement might rise from 10% to 12%, and the down payment requirement might rise from 35% to 42% (each a 20% increase from baseline). Only if this does not work in Year 5 should the City be allowed to reduce the number of Austin Credits it issues in Year 6. Once the change in NACS resumed being positive, the down payment and collateral requirements would revert to their original values.

In addition to protecting the value of the Austin Credit, the City must ensure that the AC system benefits low income people and increases financial inclusion by giving access to financial services to those who do not already have it. The primary reason people are unbanked is a lack of income; public jobs programs and supplemental income paid in AC will help address this concern. Another reason some people remain unbanked is the combined effect of having no permanent addresses and no identifying documents. To address this concern, the City should partner with shelters and other facilities that service the unhoused to verify resident-status for people who want to open AC accounts with permanent resident privileges. Another reason that people are unbanked is physical distance from a bank, and a distrust of traditional financial institutions. To address this concern, the City should maintain manned or automated kiosks where people can purchase AC stored value cards and troubleshoot problems with their AC account at every City building that is open to the public.

As well as increasing financial inclusion at the local level, the City can use the Austin Credit to create economic solidarity with other cities or organizations. As this form of local complementary currency becomes more popular, the City can make agreements with other currency issuers. These could come in the form of swap lines, some form of reciprocal receivability of their currencies, direct exchange of surplus resources, or other forms of cooperation. Such agreements between two local communities could strengthen both and emphasize the interdependence of their residents.

If the City takes these steps in the correct order (establishing the value of the AC, protecting the demand for it, then slowly expanding issuance to meet that demand), it can create a financial instrument that enriches the population of Austin and increases financial inclusion. The combined result of all these measures will be an economy where use, exchange, and value of the Austin Credit gradually increases over time, allowing the City to increase income, employment, and credit access for Austinites while reducing its own costs, fulfilling the vision set out by the City Council when they passed Resolution 20220324-057.

Appendix: Is any of this legal?

Federal Constitutional Issues

Article I, Section 10, Clause 1 of the U.S. Constitution forbids states from issuing “bills of credit.” This is sometimes referred to as the clause which prevents states and localities from issuing their own money. However, the term bill of credit does not simply refer to any note or debt-like instrument, or indeed any instrument which circulates between individuals. The Supreme Court, in Briscoe v. The Bank of the Commonwealth of Kentucky, 36 U.S. (11 Pet.) 257, 314 (1837), held that a bill of credit is “a paper issued by the sovereign power, containing a pledge of its faith, and designed to circulate as money.” This definition contains three parts, (a) issued by the state, (b) containing a pledge of the state’s faith, and (c) designed to circulate as money, and an instrument must meet all three to be considered a bill of credit. The simplest way for the Austin Credit to be constitutional will be if it avoids meeting the second and third part of the definition.

We will begin by examining part (b) of the definition; Briscoe goes into great detail on what is meant by a pledge of the state’s faith. Id. at 320. One issue before the court was whether the notes issued by the Bank of the Commonwealth of Kentucky, of which the state of Kentucky was the sole shareholder and provider of capital, were issued on the faith of the state. Id. The Court held that the capital of the bank, even though it was in part derived from the state, had its own income stream, and together with the contributions of the state “constituted a fund to which holders of the notes could look for payment, and which could be made legally responsible” for redemption of the notes. Id. The fund was in possession of the bank and under the control of its president and directors, not under the control of the state. Id. Most importantly for the purposes of the Austin Credit, the Court held that “whether the fund was adequate to the redemption of the notes issued, or not; is immaterial to the present inquiry. It is enough that the fund existed, independent of the state, and was sufficient to give some degree of credit to the paper of the bank” (emphasis added). Id. at 321. Additionally, every holder of the bank’s notes had the legal right to sue the bank to enforce payment. Id. For these reasons, even though the state of Kentucky accepted the notes of the bank in payment of taxes, and in discharge of all debt to the state, the notes were not bills of credit. Id.

From Briscoe, we can derive the general rule that an instrument is not a pledge of a state’s faith if there exists some fund which is legally distinct from the state, which has any source of income independent of the state, and which holders of the instrument can sue to redeem the notes. To conform to the requirements of Briscoe, the City, through statute, will establish a permanent, charitable trust called the Austin Credit Trust whose stated purpose is to aid in the economic development of the City of Austin by redeeming Austin Credits for U.S. Dollars forty years after the date of their issuance. In Texas, under Brazos County Appraisal Dist. v. Bryan-College Station Reg’l Ass’n of Realtors, 419 S.W.3d 462 465, “providing services to aid in economic development for a local community” is that a valid purpose for a charitable trust. The trustee will not be authorized to make payments to the City. The terms of the trust will also state that holders of Austin Credit are persons with a special interest in the enforcement of the charitable trust and will have the right to bring suit to enforce the trust by redeeming the notes. The City, in a separate statute, will be required to place money in the trust every year, but, the trustee will be directed to invest the money in the trust in U.S. Treasury Bonds, so that the trust will have its own stream of income, independent of the City. Because the trust will be a separate legal entity with its own stream of income from investments which cannot be sued and from which the City cannot withdraw funds, the Austin Credit will not be a pledge of the faith of the City of Austin. Instead, it will be a pledge of the faith of the Austin Credit Trust.

We now turn to part (c) of the definition, which requires that an alleged bill of credit be designed to circulate as money. The case preceding Briscoe, Craig v. Missouri, 29 U.S. 4 Pet. 410, 432 (1830), which Briscoe relied upon without overruling, explained that an instrument which circulates as money is one which is “intended to circulate between individuals, and between government and individuals, for the ordinary purposes of society” (emphasis added). Additionally, a later case, Houston & Texas Central Railroad. Company. v. Texas, 177 U.S. 66, 89 (1900), holding that a warrant issued by the state of Texas was not designed to circulate as money, relied partially on the fact that “when the warrants once came back to the treasurer of the state, they were not to be reissued.” From these two cases, we can derive the general rule that an instrument cannot be described as intending to circulate as money if there is no circulation between government and individuals because the instrument is redeemed without being reissued. Austin Credits will be extinguished once used for payment, therefore they cannot be reissued and will consequently not circulate between government and individuals. Thus, Austin Credits are not designed to circulate as money.

Because the Austin Credit will neither be a pledge of the city’s faith nor designed to circulate as money in the specific context of the constitutional prohibition on bills of credit, the Austin Credit will not violate the United States Constitution. Requiring the existence of a separate fund which will pay out in dollars will require the Austin Credit Trust to have some dollars on hand, but this will not eliminate spending flexibility for two reasons. First, Austin Credits are designed with various incentives to save them built-in. Second, the City could make the face value of AC significantly below the purchase price for AC. For example, the City could sell AC for $1 that had a cash redemption value of $0.05 while still accepting AC at $1.05 when tendered in payment of City Bills. Because they would be accepted by the City at the $1.05 price in payment of City Bills, AC would trade with a fair market value much higher than $0.05, but the chance of a cash-run on AC would be virtually eliminated.

State Constitutional Issues

The City of Austin is a “home rule” city, meaning it is authorized by the State of Texas to do anything which Texas law does not prevent it from doing. Because Austin Credits will carry some legal obligation by the state, they will be classified as “public securities,” which are defined by Texas Government Code § 1201.002 as “an instrument, including a bond, certificate, note, or other type of obligation authorized to be issued by an issuer under a statute, a municipal home-rule charter, or the constitution of this state.” Because they are public securities, Austin Credits must conform to the requirements of the Texas Government Code.

There are certain types of public security which the Texas Government Code authorizes all local governments–even ones that do not have home rule powers– to issue, under certain limitations. For example, Section 1431.002 of the Texas Government Code authorizes municipalities to issue anticipation notes. However, this statute places restrictions on anticipation notes that make it not the best means of issuing the Austin Credit. Fortunately, because Austin is a home-rule city, it does not have to rely on Section 1431.002’s anticipation note authorization. Instead, it can rely on Section 1201.002’s authorization to grant an instrument authorized under a municipal home-rule charter. Article I, Section 3 of the Austin City Charter is incredibly broad and grants it the ability to “pass ordinances and enact such regulations as may be expedient for the maintenance of the good government, order, and peace of the city and the welfare, health, morals, comfort, safety, and convenience of its inhabitants.” The Austin City Charter regulates the issuance of bonds, but nothing within it governs the issuance of notes, so there are no city-level prohibitions on the Austin Credit in the Austin City Charter. If there were, the charter would need to be amended by a majority vote before the Austin Credit program could be established.

At the Texas State level, the relevant statute is Texas Government Code § 1202.003, which requires the issuer of a public security to submit a proposal to the Texas Attorney General, who must confirm that the public security was issued in conformity with the law before it can be issued. Many of the legal requirements surrounding public securities govern the calculation of interest. However, since Austin Credits will not pay interest, these regulations are inapplicable. The one that is applicable is Texas Government Code § 1202.021, which requires that the public security authorization designate a registrar who will keep records of the public security. This statute states that “a home-rule municipality with a population of more than 100,000” can be the registrar of its own security, so this will not be an issue. The City merely has to designate itself as registrar for the Austin Credit.

Texas State Law grants immense discretion as to the terms of a public security. Tex. Gov’t Code § 1201.021 and 1201.022 read as follows:

§ 1201.021

“A public security may:

(1) be issued in any denomination;

(2) bear no interest or bear interest at one or more specified rates;

(3) be issued with one or more interest coupons or without a coupon;

(4) be issued as redeemable before maturity at one or more specified times; and

(5) be payable:

(A) at one or more times;

(B) in installments or a specified amount or amounts;

(C) at a specified place or places;

(D) under specified terms; and

(E) in a specified form or manner.

§ 1201.022

(a) A public security may be:

(1) issued singly or in a series;

(2) made payable in a specified amount or amounts or installments to:

(A) the bearer;

(B) a registered or named person;

(C) the order of a registered or named person; or

(D) a successor or assign of a registered or named person;

(3) issued to be sold:

(A) at a public or private sale; and

(B) under the terms determined by the governing body of the issuer to be in the issuer’s best interests; and

(4) issued with other specified characteristics, on additional specified terms, or in a specified manner.

(b) The governing body of a county or municipality that issues bonds that are to be paid from ad valorem taxes may provide that the bonds are to mature serially over a specified number of years, not to exceed 40.”

These sections grant a great deal of flexibility to the issuer of a public security. Particularly, the fact that public securities may be payable under specified terms and in a specified form or manner necessarily means that the city can limit their redemption to credits against City Bills. This section also implies that a public security must have some maturity period and redemption, which out of an abundance of caution, we interpret to mean that there must be some way for holders of the public security to get cash, but there is no maximum statutory maturity period that applies to all forms of public security. At the longer end, maturity dates for bonds tend to be 40 years, which is why 40 years is the period at which Austin Credits may be redeemed for cash from the Austin Credit Trust. Although the Austin Credit is not a bond, the 40 year maturity provides a failsafe in the event that the Texas Attorney General does decide that Austin Credits are a type of bond secured by the ad valorem taxes of the municipality. However, because Austin Credits are ultimately payable from the Austin Credit Trust, it’s not clear that the regulations surrounding bonds apply. Most likely, because Austin Credits are not direct promises by the City to pay money, they are public securities which do not fall into any statutorily defined subcategory, but the 40-year maturity is intended as a show of good faith that should bring them into general compliance without causing them to be restricted by provisions which are more specific to certain types of public security. In the worst-case scenario, we would use the authorization to issue Anticipation Notes. However, since Austin Credits would be used for general operating expenses, under Tex. Gov’t Code § 1431.009, they would need to mature within one year of receiving approval by the Texas Attorney General. This would limit flexibility, but would not be fatal. As described in the section above, dealing with Federal Constitutional issues, Austin Credits are designed with various incentives to save them built-in, and the City could make the cash redemption value of AC significantly the City Bill redemption value. For example, people could buy 1 AC for $1, but the cash value would be $0.05, although the City would accept them at $1.05 when people paid their City Bills. This would effectively make them anticipation notes with a negative 95% base interest rate and a conditional 5% interest rate; the relevant statutes only define a maximum interest rate, not a minimum one. Because they would be accepted by the City at the $1.05 price in payment of City Bills, AC would trade with a fair market value higher than $0.05, but neither the City nor the Austin Credit Trust would ever need to worry about a cash run on AC, and the AC would qualify under the anticipation note provision.

Monetary Austerity as Social Conflict

By David M. Fields

Monetary austerity, like fiscal austerity, is a top-down offensive. A monetary assault on working people is being waged in the name of fighting inflation. In similar fashion to the demagoguery that surrounds government expenditure cuts that lead to significant losses in social provisioning, a political climate of inflation hysteria has engulfed the US Federal Reserve, engendering a reactionary policy stance of protecting the wealthy at the social cost of maintaining a precarious working class.

The Fed has concluded that inflation is now its biggest challenge, but admits having no control over the actual factors underlying the current inflationary surge. Nonetheless, it defends raising interest rates as necessary “preemptive strike” to excessive price distortion, whereby severe “market imperfections” in the long run could undermine the dual mandate of price stability and maximum sustainable employment. In central bank jargon, such so-called forward-looking acumen conveys the message that anchoring inflationary expectations is the primary means to ensure market confidence or “credibility” for effective macroeconomic balancing.

The notion of an independent and knowledgeable technocratic Fed constitutes naïve faith. Monetary policy choices support some interests over–even against–others. So, contrary to what we are told, contractionary monetary policy is NOT a conventional tool to soothe market confidence in light of unpredictable inflationary expectations; it is an embodiment of social conflict, a coordinated attack on the working class to protect and maintain profit extraction. Raising interest rates, thus, is not “sound” policy in the truest sense of the term; it reduces consumer spending and economic activity at the behest of the rentier to insulate this social group from any possible unsavory transgression that may arise from economic uncertainty.

I am sure this seems like heresy to many, but let me try to convince you. The economy, as determined by the need to expand output depends on banking; the capacity for firms to purchase necessary amounts of labor and material inputs necessary for satisfying expectations of profit and for workers to receive wages is assigned by the availability of credit. Without banking, economic growth comes to a halt, since business investment expenditures stem from the need to borrow in excess of any pre-existing amount of financial resources. Credit provides deferred payment, which allows firms to manage sales, and, thus, facilitate long-run operational expansion. If there is a restriction on credit, as a matter of course, any attempts for increased production are futile.

Credit allows firms to pay out money for materials and wages to keep production and distribution going in advance of receiving profits from expected sales of goods. The implication is that firms will have to deduct interest payments from profits, which will be relegated to the banking sector. The cost of available credit from the banking sector is set by the rate of interest, which is determined by the Fed; this, by definition, determines the parameters of firm profit. A high rate of interest, for instance, would induce firms to forgo productive investment because access to credit is expensive. This would encourage firms to suppress wages, e.g. layoffs, which triggers recessionary pressures resulting from decreased production — this raises the level of unemployment, which is antithetical to working-class interests.

The decision by the Federal Reserve to raise interest rates by the largest percentage point since 1994 is, therefore, quite treacherous for working people. US Economic growth is well below full employment. The economy confronts headwinds from developments that constitute cost-push-markup inflationary processes, so we are not seeing the manifestations of so-called demand-pull inflation, that is, too much money chasing too goods, or too much wage growth, resulting from an overheating economy or overspending for which monetary austerity is requisite. There is an economically destructive rationale at play, wherein interest rates are hiked to the point that they depress wages to compensate for causes outside of the direct reach of the Federal Reserve, to put a stop to workers from taking advantage of unique historically-specific social circumstances to effectively bargain for receiving their fair share.

***This post is heavily drawn from my entry on ‘Credit Money” in the soon to be published Encyclopedia of Post-Keynesian Economics, edited by Loui-Phillipe Rochon and Sergio Rossi, see here.***

***Republished from the Monetary Policy Institute Blog***