Funding Infrastructure: The Principle of Federal Credit

By Nancy Spannaus

March 9, 2019—The March 6 House Ways and Means Committee hearing on transportation infrastructure put the crucial problem which is blocking vitally-needed action on this topic, squarely on the table: the lack of understanding of the Hamiltonian principle of credit. From Representative Peter DeFazio, Chairman of the House Transportation and Infrastructure Committee, to the representatives of industry and labor, no witness put forward a means for funding the infrastructure we need.

“We need real investment,” Rep. DeFazio began, and the costs of not repairing the bridges, tunnels, and highways get greater with each passing day. Public Private Partnerships (PPPs) won’t solve the problem, as a report prepared by a Congressional bipartisan Select Committee on the subject demonstrated five years ago, he added, waving the report in the air. Increasing the gas tax, as proposed by many institutions, is necessary but will only alleviate a small part of the problem. He then turned to the option of an infrastructure bank:

You could create an infrastructure bank, but that again is only going to lend itself to things that have revenue… no transit system in the world makes money … We need real Federal investment…

DeFazio’s conclusion? Prepare to go to a “user-funded” system that will raise sufficient revenues. He is proposing to add to his gas tax increase proposal, a national vehicle-miles-traveled (VMT) pilot project, which he and many others hope will ultimately have drivers pay for the maintenance and incremental repairs on the highway system. (His full testimony is here.)

In reality, this is no solution at all. No such scheme is going to provide the trillions of dollars required to upgrade the nation’s transport system with high-speed rail, magnetically levitated trains, and the dramatically expanded electrical power grid needed to supply them. And that’s just dealing with one side of the infrastructure problem, which also includes waterways, ports, urban waterworks, broadband, and more.

The Principle of Credit

DeFazio is among the best on Capitol Hill on the issue of funding infrastructure, but he is showing a major blind spot.  The solution to the lack of investment in infrastructure lies in putting Federal credit into action. That is the principle which was pioneered by Treasury Secretary Alexander Hamilton, and carried forward in larger and larger dimensions by the administrations of John Quincy Adams, Abraham Lincoln, and Franklin Delano Roosevelt. The principle involves putting the full faith and credit of the Federal government behind an institution, or program, which lends on a long-term, low-interest basis to projects which increase the productivity of the economy as a whole. Significant payback will come through user fees (cf. the Tennessee Valley Authority’s electric power generation) over time, but the bulk of the benefit will come through the improvements in efficiency, greater value produced, and increasing the tax revenue base through raising living standards and employment.

Take the First and Second Banks of the United States, for example. Both were capitalized primarily by Federal government bonds, owned by private investors, which were used to purchase bank stock—thus requiring no additional major Federal outlays. Those banks promised a small dividend to their stockholders (no more than 6 percent), and themselves received the interest on their capital stock from the Federal government—a guaranteed revenue stream from a dedicated source, in those cases the tariff. These banks then had the basis to lend to the public, often in cooperation with local institutions, for needed projects. The Second Bank, for example, helped to create, and fund (up to 50%)  more than 20 new rail lines across the nation.

Under President Lincoln, Federal credit was also key to the dramatic upgrading of the nation’s economic infrastructure. The Transcontinental Railroad, for example, was heavily funded by government bonds and Federal land grants to the railway companies. The bonds were issued upon proof of progress in construction, and were actually loans that were eventually paid back. Lincoln’s reforms of the banking system with the National Banking Act provided a stable financial environment. The greenback system, supported by the Treasury, was another major source of Federally-backed credit into the economy, which underwent a virtual explosion of productive investment in industry and agriculture, as necessitated by the war effort.

President Franklin Roosevelt found a multiplicity of ways to fund the infrastructure boom under his Administration—all of which relied on the financial backing of the Federal government through credit. Most instructive for us today was the functioning of the Reconstruction Finance Corporation (RFC), which was able to utilize Federally-backed bonds for its wide swath of lending, including to other agencies of the Federal government, and which effectively functioned as a national bank. While a large percentage of RFC lending resulted in the loans being repaid over the long term, other projects only paid back the economy in terms of higher productivity and living standards.

Rural Electrification

Rural electricification presents a perfect example of the principle.

Before FDR took up the cause of bringing electricity to rural areas around the country, the standard argument (by the utility companies) was that it was uneconomical to do so.  Why, those rural people couldn’t afford to pay for the construction!  The lines wouldn’t pay for themselves.  So what!, FDR said in effect.  He laid out his argument in a September 1932 campaign speech  in Portland, Oregon. The productivity and prosperity of the nation (and all its people) depend upon a universal electric grid, so the Federal government will undertake to fund it, he said. The result was a major boost in productivity, not to mention the ability to win World War II.

Ultimately, the cooperatives set up by FDR’s Rural Electrification Administration (REA) did yield income to pay back the government, which had funded construction largely through the RFC. That payback was possible over time because bringing electricity to rural areas involved a broad upgrading of living conditions—including roads, improved farming methods, schools, and the like.

FDR’s argument could be successfully used today against those who complain that we shouldn’t build infrastructure that won’t “pay for itself.”

A 2017 U.S. Treasury Report has identified a series of major infrastructure projects demanding Federal funding, which its analysts believe will pay back as much as seven to 10 times the Federal outlay in improvements to the economy over the long term.

A National Infrastructure Bank Today

What I have just summarized is the effective action of the American System of Economics over the history of the nation. My recent book, Hamilton versus Wall Street, elaborates its principles in much more detail, as do other articles on this blog.

The American System depends upon transforming debt into credit, which is then put to work employing people to build necessary infrastructure (among other things), to produce a more productive economy. It doesn’t work with just any investments, of course.  Funding thousands of windmills and solar parks which cost much more than they produce and operate intermittently and inefficiently , while destroying acres of forest or farmland, is a losing proposition, especially compared with funding safe, reliable nuclear power plants.

Of course, there are powerful forces in the United States and Europe who strongly oppose that American System. Many of them are lodged on Wall Street, which does its best to control our politicians in Washington. Wall Street was a major opponent of our earlier national banking systems, but courageous politicians such as Lincoln and FDR rallied popular support to put them in their place.

Today, the national debate on infrastructure has to start from our successful history.  Friends of this blog have put together a model bill which applies Hamiltonian American System principles for a National Infrastructure Bank.  Study it, ask questions about it, and spread it around. This is an issue people have to understand.

As Rep. DeFazio says, the costs of doing nothing are more than we can bear.

Tags: Alexander Hamilton, Congress, credit, Franklin Roosevelt, Hamilton Versus Wall Street, infrastructure, Nancy Spannaus, National Bank, Peter DeFazio