Ban Ki-moon, Secretary General of the United Nations, stated in an October 15, 2007 address, "Climate change is a defining issue of our time. The science is clear. . . . We know what we have to do. We have affordable measures and technologies to do it." What we don’t have is the money – at least, we don’t have it under the current system of bank-created credit. What we also don't have is time. Ban Ki-moon went on:

Traveling in Chad recently, I saw first-hand the humanitarian toll of climate change. An estimated 20 million people depend on a lake and river system that has shrunk to a tenth of its original size over the past 30 years. In Africa right now, the worst rains in memory are washing hundreds of thousands of people from their homes. These are signs of what is to come. The problems our generation faces will be worse for our children, particularly if we do not act. . . . We must engage the private sector, stimulate economic activity, use new financing and market-based approaches, develop and transfer know-how, and create jobs.

The United Nations Development Program (UNDP) is currently seeking ideas for a debate to be held in Bali in December 2007, involving innovative ways to fund the costs of adapting to climate change in the developing world. Here is my submission.

Funding Public Projects With Publicly-Issued Money

Governments have the sovereign right to create money and to lend it. The United Nations could assume that right as well, just as the International Monetary Fund has assumed the right to issue credit in the form of "Special Drawing Rights" that are convertible into national currencies. As will be shown here, government-issued or U.N.-issued money could be used for sustainable energy projects without causing inflation, and this could be profitably done even by impoverished governments with weak legal structures and immature government accountability mechanisms.

Credit created by governments or the United Nations would have the advantage that it could be issued interest-free. Eliminating the cost of interest could cut production costs dramatically. Interest composes as much as 77% of the cost of capital-intensive goods and services such as public housing. The average is brought down by labor-intensive services such as garbage collection, for which interest makes up only about 12% of the cost; but the overall average cost of interest has been estimated at about half of everything we buy.1 If money for alternative energy projects were issued interest-free, projects that have been considered unsustainable because of the burden of interest could become not only self-sustaining but highly profitable for the funding governments.

In The Modern Universal Paradigm (2007), Rodney Shakespeare gives the example of the Humber Bridge, which was built in the UK at a cost of ₤98 million. Every year since the bridge opened in 1981, it has turned an operating profit; that is, its running costs (basically repair, maintenance and staff salaries) have been exceeded by the fees it receives from travelers crossing the river Humber. But by the time the bridge opened in 1981, interest charges had driven its cost up to ₤151 million; and by 1992, only 10 years later, the debt had shot up to a breath-taking ₤439 million. The UK government was forced to intervene with sizeable grants and writeoffs to save the local residents from bearing the brunt of these costs. If the bridge had been financed with interest-free, government-issued money, these costs could have been avoided and the bridge could have funded itself.2

The Inflation Objection

The argument against governments issuing and lending money for development projects is that it would be inflationary, but this need not be the case. Price inflation results when "demand" (money) increases faster than "supply" (goods and services). As economist John Maynard Keynes pointed out, when the national currency is expanded to fund productive projects, supply goes up along with demand, leaving consumer prices unaffected.3

Moreover, private banks themselves create the money they lend. Many authorities have confirmed this fact, including the Federal Reserve itself. The Chicago Federal Reserve exposed the mechanics of money creation in a publication called Modern Money Mechanics, in which it said:

Of course, they [commercial banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts.4

See also Money Facts, published in 1964 by Congressman Wright Patman, Chairman of the Subcommittee on Domestic Finance of the Banking and Currency Committee. Responding to the question "Do private banks issue money today?", he wrote:

Yes. Although banks no longer have the right to issue bank notes, they can create money in the form of bank deposits when they lend money to businesses, or buy securities. . . . The important thing to remember is that when banks lend money they don’t necessarily take it from anyone else to lend. Thus they "create" it.5

During the recent bank credit crisis in August 2007, the central banks of the United States, Europe, Canada, Australia and Japan collectively extended a $315 billion credit line to commercial banks. This credit was created out of nothing – something central banks assume the right to do as "lenders of last resort" – and the sums advanced were huge.6 For comparative purposes, a mere $188 billion would have been enough to repair all of the 74,000 U.S. bridges known to be defective, preventing another disaster like that in Minnesota in July 2007. The Carbon Trust, a well-known UK company dedicated to cutting carbon emissions, is responsible for reducing emissions by nearly 2 million tons per year on a 2007 budget of only £115.9 million (about $240 million U.S.). If central banks can create hundreds of billions of dollars to save floundering private banks, governments can create comparable credits to adapt to climate change, an even more pressing problem.

The sovereign right to issue money actually belongs to governments, not to private banks; but few governments exercise that right today. The only money the U.S. government issues are coins, which compose only about one one-thousandth of the U.S. money supply (M3). All of the rest is created by private banking institutions when they make loans. This includes the privately-owned Federal Reserve, which creates Federal Reserve Notes (dollar bills) and lends them to the government and to commercial banks.7

The process by which banks create money is inherently inflationary, because they lend only the principal, not the interest necessary to pay their loans off. To come up with the interest, new loans must be taken out, continually inflating the money supply with new loan-money. And since the money is going to the creditors rather than into producing new goods and services, demand (money) is increasing without increasing supply, producing price inflation. If credit were extended by governments interest-free, inflation might actually be reduced, by reducing the need to continually take out new loans to find the elusive interest to service old loans.

Historical Precedents

Government-issued money to fund public projects is not a new idea but has a long and successful history. Among other notable examples:

In the early eighteenth century, the colony of Pennsylvania issued money that was both lent and spent by the local government into the economy, producing an unprecedented period of prosperity. This was done not only without producing price inflation but without taxing the people.8

When Abraham Lincoln needed money to fund the American Civil War, rather than paying 25 to 36 percent interest charges, he avoided going into debt by printing Greenback dollars that were "legal tender" in themselves. Again, historians of the period attest that this issue of Greenbacks was not responsible for price inflation.9

The island state of Guernsey, located in the Channel Islands, has been funding infrastructure with government-issued money for over 200 years, without price inflation and without government debt.10

During the First World War, when private banks were demanding 6 percent interest, Australia’s publicly-owned Commonwealth Bank financed the Australian government’s war effort at an interest rate of a fraction of 1 percent, saving Australians some $12 million in bank charges. After the First World War, the bank’s governor used the bank’s credit power to save Australians from the depression conditions prevailing in other countries, by financing production and home-building and lending funds to local governments for the construction of roads, tramways, harbors, gasworks, and electric power plants. The bank’s profits were paid back to the national government.11

A successful infrastructure program funded with interest-free "national credit" was also instituted in New Zealand after it elected its first Labor government in the 1930s. Credit issued by its nationalized central bank allowed New Zealand to thrive at a time when the rest of the world was struggling with poverty and lack of productivity. According to a book titled State Housing in New Zealand published by the Ministry of Works in 1949:

To finance its comprehensive proposals, the Government adopted the somewhat unusual course of using Reserve Bank credit, thus recognizing that the most important factor in housing costs is the price of money – interest is the heaviest portion in the composition of rent. . . . This action showed . . . it was possible for the State to use the country’s credit in creating new assets for the country.12

Stan Fitchett, writing in the New Zealand Guardian Political Review in 2004, explored whether this approach would create price inflation today. He confirmed with bank officials that 97 percent of the New Zealand money supply is now created by commercial banks when they make loans. The year he was writing, the money supply increased by 18,527 million New Zealand dollars, or 16.8 percent; and 97 percent of this increase came from commercial bank lending. Fitchett confirmed with banking experts that if the Reserve Bank had created 100 million New Zealand dollars for new houses in New Zealand, the sum would have had no noticeable impact on inflation, since it was only one-half of one percent of what was already being added to the money supply annually by private commercial banks.13 Similar figures apply in the United States and other countries.14

Implications for the Current Climate Crisis

Development loans have become debt traps for many Third World countries, as interest has compounded annually on loans of money created by commercial banks with accounting entries. If governments or the United Nations would take over that function and advance credit created with accounting entries themselves, the crippling expense of compound interest could be eliminated. Interest-free loans could help ease the current crises not only of climate change but of housing, energy, infrastructure, food, and health care.

Funds for public development could be advanced as "contingent grants." If the projects were profitable, the money would be returned to the government from profits. Private contractors could be hired to do the work, but the projects would remain public assets that continued to produce profits for the benefit of the government and the people. To prevent abuse, the money would not simply be given away but would have to be repaid on a regular payment schedule, just as private loans are now. The only difference would be that the credits would be advanced by the government or the United Nations rather than by private commercial banks, and they would not be burdened with interest.

Interest-free credit could turn alternative energy proposals that would have been priced out of the private credit market into profitable ventures, even for poor countries lacking financial and other resources. Among many interesting possibilities for local energy production is this one drawn by Rodney Shakespeare from the bio-fuel field:

[W]hile traditional crops have yields of around 50-150 gallons of bio-diesel per acre per year, it is today being claimed that algae can yield 5,000-20,000 gallons per acre per year. . . . The algae are grown in "solaroof" (plastic greenhouse-type) structures using a new, simple technology . . . [I]t is being claimed that the algae processes are financially viable even under the existing economic and financial system which uses interest-bearing money. If that is true, then the world can be saved from global warming and, even it if it is not true, there is obviously still the clear possibility that the use of interest-free loans for algae production . . . would be sufficient to make the outcome financially viable. Crucially, the localized production of the algae would enable the localized production of electricity thereby eliminating the need for huge electricity distribution networks. . . . [T]he new technological solutions are local and are part of a new attitude to life which can be summarized as sustainable living rather than sustainable development.15

1 Margrit Kennedy, Interest and Inflation-free Money (1995), discussed in Deidre Kent, "Margrit Kennedy Inspires New Zealand Groups to Establish Regional Money Systems," McKeever Institute of Economic Policy Analysis, (2002).
2 Rodney Shakespeare, The Modern Universal Paradigm (2007), pages 95-96.
3 Henry C. K. Liu, "Banking Bunkum, Part 1: Monetary Theology," Asia Times (November 2, 2002).
4 Chicago Federal Reserve, "Modern Money Mechanics" (1963), originally produced and distributed free by the Public Information Center of the Federal Reserve Bank of Chicago, Chicago, Illinois, now available on the Internet at
5 Congressman Wright Patman, Money Facts A Supplement to A Primer on Money (1964),
6 Ellen Brown, "Market Meltdown," (September 3, 2007); George Selgin, "Legal Restrictions, Financial Weakening, and the Lender of Last Resort," (1989).
7 Ellen Brown, Web of Debt (2007), chapter 2.
8 Alvin Rabushka, "Representation Without Taxation," Policy Review (Hoover Institution, Stanford University, August/September 2002).
9 Stephen Zarlenga, The Lost Science of Money (2002), page 464, quoting Irwin Unger, The Greenback Era (1964) and J. G. Randall, The Civil War and Reconstruction (1937, 2d edition 1961), pages 3-11.
10 Bob Blain, "The Other Way to Deal with the National Debt," Progressive Review (June 1994).
11 David Kidd, "How Money Is Created in Australia," (2001).
12 Ministry of Works, State Housing in New Zealand (1949), page 7, quoted by Stan Fitchett in "How to Be a Billionaire," Guardian Political Review (Winter 2004), page 25.
13 S. Fitchett, ibid.
14 See John Williams, "Alternate Data Statistics," (October 3, 2007).
15 R. Shakespeare, op. cit., pages 66-67, citing

Ellen Brown, J.D., developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust." She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Brown's eleven books include the bestselling Nature's Pharmacy, co-authored with Dr. Lynne Walker, which has sold 285,000 copies.