Chapter 44 - How To Start A New State

Imagine that you have been asked to start a new state. It may be an island. You may have to give 'free land' to early settlers to entice them to your barren state. One of your first tasks will be to set up a money system and get an economy happening. By economy, we mean moving food from farmers to citizens, building houses, putting citizens in jobs and building infrastructure. Your treasury has the authority to create the money of your new state, so it would create official looking notes, which you call tokens, and spend them into society and tax them back out. You will tax them out at a lower rate than the rate of spending to account for people hoarding the notes and to allow for the economic activity to expand. Be aware that you should never try to balance the budget. The inappropriately named 'deficit' should never be zero. (Unless you want to contract the economy.)

You would create a new state public bank to handle the banking needs of the state. The state public bank would lend to people to build houses, start businesses and operate farms. It would conduct the banking for the government and lend and support smaller banks. Your government will have two sources of money. One will be the money your treasury creates as cash currency and the second will be credit borrowed from the state bank. Your government will spend freshly created money on current expenditure, upkeep, and maintenance. Your State Public Development Bank will lend virtual credit for new infrastructure such as roads, bridges, ports and public buildings. You will create a tax department to draw tokens out of society to prevent oversupply and to make people work hard to obtain tokens to pay tax to you. This will maintain the purchasing power of your money. You do not need to tax for revenue as you can print as much new money as you wish. However, as a rough guide, government current expenditure should only slightly exceed the volume of tax you collect. The extra is required to compensate for increased population, an increased volume of goods and services and to compensate for those that hoard money. Being smarter than the average politician, you decide to minimize Income Tax and Sales Tax and use taxes that do not damage the economy. You institute land tax based on some calculation of the rateable value. You institute a Transaction Tax of less than one dollar in one thousand (0.1%) on all transactions. You also institute a Demurrage Tax of less than 1% per month. One month is about the length of time a person should hold money before spending the money.

The citizens need two sources of money: earnable income and credit for traders and business people to enable them to trade. A business needs money or credit so that it obtain physical assets and trading stock so that it can earn income. Without start-up and trading money, business cannot operate. Government spending will not provide this. The State Development Bank or one of the small local banks, supported by the state bank, will provide this.

A New Migrant Arrives

A migrant, whose name you cannot pronounce, arrives from some country whose name you have never heard. He asks to borrow 10 000 tokens to buy a sausage making machine, so that he can make sausages in his back shed. So you say to him: "If we lent you 100 000 tokens at 2% interest, would you build a factory and supply the whole state with sausages? We will lease the land to you on a 99-year lease and assist you with whatever permissions that you need."

By this means, your new state will gain a meat factory and plentiful employment. You are lending him money that cost nothing to create and he creates a factory that feeds the state. Even though the tax is not revenue, the tax collected from the exercise exceeds any loss of interest. At no cost to the state, you have gained a sausage factory, plentiful food, and gainful employment. Never forget that money has no intrinsic value and is freely created by your new state to lubricate the economy by enabling transactions. You need to supply money in two forms: Earnable money and borrowable money. Most states in history forgot about the borrowable money. You do not need to operate your state development bank at a profit. You can even operate your state public bank at a loss without consequence. The aim is to provide enough freely created money to enable entrepreneurial activity without the people resorting to resorting to money scalpers. If groups obtain monopolised control of land, rent will appear and rise to take the bulk of the profit from enterprise and you will have introduced a layer of inefficiency to your state. If a business wishes to use a parcel of land for a productive purpose then it should be leased from the state. The rent then constitutes a significant portion of the tax collection reducing the need to collect taxes in ways that inhibit activity.

The State Public Bank is essential to the development of your state. Your state bank may operate on a non-profit basis. The interest rate will match the operating costs. If the state bank does make a profit, the profit will be returned to the state treasury and thus, no usury has occurred.

You have set up is a State Pubic Bank which either:

1. Creates Credit and Debt in equal quantities with a minimal interest rate. Or:

2. Freely obtains money from the Treasury and on-lends it at 2%.

Both allow the State Pubic Bank to promote appropriate business activity with support for entrepreneurial spirit. The figure of 2% is probably equal to the bank operating costs, however, any profit is given back to the government to spend back into society. Thus, no unpayable debt occurs.

Another migrant arrives and asks where to live, so you lend the migrant enough to build a new house, again at 2%. The land will not cost her anything except you will lease it to her permanently at a small percentage of its assessed value. This prevents the land acquiring speculative value. It prevents persons buying land expecting its value to rise. It prevents the capitalization of expected future rent in the hands of speculators and ensures that land only goes to those that are going to do something useful with it. Another view is that she is paying lease fees on the land rather than interest to a bank on it's perceived future value. The demand for land near places of employment is great enough for land to be bid up in price. When there is no land tax and there being no limit on the volume of available credit, the land value increases to take a major portion of a person's income. It is better that the money goes to the government as land tax than to banks as interest. When the government gets income from land, it does not need to tax areas that are damaging to the economy. This is quite logical. We set up the government to manage all the resources for the citizens and thus it is better to tax the use of the resources rather than labour and the products of labour.

Impose tax on land and resources and business and labour flourishes.

Impose tax on labour and you discourage production and employment.

Impose tax on the output from labour and you discourage production and employment.

Impose tax on sales and you discourage production and employment.

Tax transactions with sales and Income Tax and you will pull money from the circulating component of the money supply.

Fail to tax land and you get land speculation.

Fail to tax resource damage and depletion and you get resource depletion.

If you tax transactions you will finish up needing welfare as the rich will commandeer the resources and land.

Your State Pubic Bank will be prohibited from lending for the purposes of speculation which includes land speculation, resource speculation and investment speculation.

Your State Pubic Bank will also allow the government to embark on large Public Works such as roads, bridges, ports, government buildings and more. This should be done at a sensible rate to avoid distortion of the employment market by drawing employable labour from farms and factories to your state projects.

The allocation of resources should be closer to the system used for pegging of mining plots. The government grants mining leases on the basis that the minerals are going to be mined by the prospector and royalties paid on the minerals removed. Thus, no one can peg ground and on-sell the rights for profit. You will use similar for land and resources. You do not grant land that is to be rented to someone else for profit. You lease the land at close to its rental value. This then becomes a major part of your tax take.

The tax system should not inhibit wealth creation. Singapore and Hong Kong both had a land tax system, as did Australia. Money does its job of creating transactions when it is unfettered and freely flowing. If 30 to 40% is removed at each transaction, money will disappear rapidly when it is doing what it does best, creating transactions. Each transaction moves goods or services from one citizen to another. Haircuts and houses will proliferate. If Sales Tax and Income Tax is imposed, these transactions are reduced. Taxing land does not do this. If the hairdresser pays 100 tokens in land tax a week, they are encouraged to cut many heads, but if taxes take money at every transaction the activity is minimalized.

The other issue you will have with your money system is that those with more money than they can spend will hoard the money. Saving is a huge problem which takes your money out of circulation. To prevent this, you need to ensure financial security for your citizens so that they do not feel the need to hoard. Thus, you will need adequate government provision of medical facilities and aged pension. With pensions, there is a mismatch of resources. Retired people eat food and use services provided by those that are currently working. Irrespective of where the money comes from, the goods and services come from those currently working. Hoarding of the vital circulating medium causes damage to the flow of your money tokens and creates instability. You need to stop people from hoarding your tokens by charging a wealth tax and Hoarded Money tax. They may only rent land if they are going to do something useful with it and they can only have money if they are going to use it. Hoarding and saving for a rainy day are bad for your economy. Your citizens can store wealth in other ways. They can grow trees and enhance their property or business facilities. Never forget that hoarded money has no value as any spending of hoarded money requires an equal amount of circulating money to be hoarded. Any major movement of hoarded money will destroy the value of all money.

Those with 'more money than they can spend' to feed and keep and house themselves will play around with purchases of stocks and shares. The ownership of shares is not a large problem except that the companies could have been set-up more easily with your State Pubic Bank. The problem occurs when they buy and sell shares for rapid gain in a casino like manner. Money swashes from one share to another bidding one up and rapidly reselling it as it falls. To limit this damage, a Transaction Tax is needed. This is similar to a Robin Hood tax. Your version of a Transaction Tax tax will be a minor tax on all transactions. This tax will be about $1 in $1000 (0.1%) or less. This is preferable to a Sales Tax of around 10%. There will also be a Share Trading Tax of 1% on all share purchases. This will not inhibit share purchases for long term investment, but will curb speculative trading. It must not be forgotten that you are running a new state and you need those with 'more money than they can spend' to pass it to those with an entrepreneurial spirit who will do something useful with it.

If you are a strong believer in equality and have the view that everyone is born equal. Each person has equal rights to the facilities of the nation. Thus, a Death Tax system and Inheritance Taxes are needed. No person at birth should be able to exclude others, by use of inherited wealth, from the use of the nation's facilities and resources. The Death Taxes should exclude genuine family farms and family businesses.

Your state government may be unable to create its own money because this activity may have been ceded to a federal government. The only method for releasing fresh money to the citizens is by the government spending slightly more than it taxes or the state bank lending more money into society. If the government treasury is spending through the state bank, then a debt will build up between the Treasury and the state bank. The debt is owed by the government to the government and thus is somewhat irrelevant. Usury has not occurred as there are no unpayable debts.

If you allow private banks into the state, they may try to convince you that they should do all the banking. They will take over the state bank. This may appear sensible but this will create some big problems:

When the private banks create a loan of one million dollars, they will write one million dollars with a plus sign against it and they will write one million dollars with a minus sign in the borrowers account. They will have created one million dollars more money for the state and one million dollars more debt. Because the money is simply numbers in accounts, no physical cash currency was involved. The bank then adds interest to the amount borrowed with the result that there is now more debt than money. The debt becomes unpayable.

To increase the money supply of the state, you more debt will have to be contracted by someone. The money supply of the state will need to increase slightly each year to accommodate: increase in population, increase in factory and farm output and to cover for money hoarded.

In the limit, anything that can hold a debt, will hold a debt. The interest will mount in an exponential fashion. To pay the banks, your government will need to sell all state assets. The banks will own the bulk of the shares in these private companies. This is convenient as the banks will take no part into he day to day running of the companies. The citizens will be led to believe that anyone can own shares, but the bank will own most of them.

When the asset stripping reaches its limit, the system will collapse as there are no more vehicles to carry debt.

The banks will control the money supply. When they cut back on the issue of credit, whilst continuing to collect repayments, the money supply will fall creating a recession of depression. They will blame you, the government.

The banks will become the issuers of money and will use this to influence the political system and the media system.

The banks will issue credit for profit. This will bias credit toward boom-bust investment, rather than the productive real economy. Thus, new money will be introduced but it will simply inflate certain classes of assets. A class of assets will be inflated to unsustainable levels, whence credit will dry up and the asset class will collapse in value. This will create a cyclical boom-bust cycle that will be harmful to the economy.

The banks will loan for profit which is quite different to a government public bank. Public banks lend to develop industry and infrastructure.

The private banks will lend for speculation of real estate. this will escalate costs for business to the point that business becomes unviable. In the limit, the only businesses that will operate are those that are essential, such as bus drivers, shops, hairdressers. Any business that can operate overseas, will close or move to other climes.

As you will not be able to create your own credit, you will need to borrow money from credits in a system that involves the issue of bonds. To obtain bank credit, you will issue certificates called bonds that are repayable in bank credit at some fixed date in the future and pay interest during the time.

You will be borrowing bank credit rather than using your constitutional duty to create the money of the nation.

Your creditors, collectively, will be in a position to blackmail you by refusing to roll over the bonds when they become due. They will blame you for mismanagement of the economy.

These problems do not occur when your government runs a public bank. The logic is not easy to comprehend:

When a bank lends credit, it magnifies the debt with interest making the debt greater than the available money. The citizenry collectively owe more money to the bank than there is money. When a government-owned bank lends money, it also magnifies the debt. However, there is one huge difference. The government is constantly spending money into society and collecting tax. Thus, the unpayable debt and asset stripping does not occur.

The government does not get into an unpayable debt bind necessitating selling off of all assets in an asset stripping scam.

A government-owned development bank can ensure that credit is available for all entrepreneurial exercises from the small home based operator to the largest enterprise.

The government can control the money supply.

When a public bank loans money to a government department, the government owes money to the government. The debt is somewhat irrelevant.

You will not be put in a position where you can be blackmailed by bondholders who refuse to roll over bonds at maturity date.