Public credit guarantees: The historic architecture required to finance the green transition

“ Although financing is an important hurdle in the best of times, this problem is exacerbated by the conditions in credit markets today. The unavailability of loans has already caused many clean energy companies to scale back their plans for expansion; after a record-setting year in 2008, the wind industry may cancel half of its projects in 2009.
Of course, when major projects like these are scaled back or canceled---when the factories that make wind turbines and solar panels to supply major renewable energy projects cut production or even shut down—green jobs are lost. ”

“ We note the views expressed by small island developing States that the financial resources available to date have not been adequate to facilitate the implementation of climate change adaptation and mitigation projects, and we also recognize that, at times, complex application procedures have prevented some small island developing States from gaining access to funds that are available internationally. ”

“ Each country must be separately studied. Primarily, there will be found a cry, sometimes desperate, for capital. Public works, concessionary and otherwise, have stopped for lack of funds from Europe. New developments in railroad building, mining, harbor works, plantations, are arrested. Where European credits have been customarily used to handle crops, there is distress, and no less so in cases in which such credit has previously been given by ostensibly American houses operating really with European capital. ”

“ Encouraging investment and developing financing opportunities for new clean energy projects will drive the development of the green sector of our economy. In order to draw investment to these crucial areas, spurring growth, innovation and job creation, the ARRA creates a new Clean Energy Finance Authority (CEFA) to help ensure the availability of financing for green investments. At the heart of the CEFA is a $6 billion loan guarantee program that will encourage banks to finance green investments with confidence, enabling green industries to continue their rapid growth. ”

“ One powerful mechanism by which the government can encourage the private sector to invest in areas that will create green jobs is by providing access to financing. Government assistance in securing financing, through programs like the Clean Energy Finance Authority described below, is critical to growing industries like renewable energy, which must borrow to fund their rapid expansion. And in today’s credit markets, where even creditworthy borrowers face real difficulty raising capital, such reliable financing is even more important. ”

“ The Federal government guarantees that banks will recoup their investment if they lend to clean energy projects. Because banks can be confident their loans will be repaid, they can confidently expand their lending, which gives clean energy companies reliable access to financing for their investments in new projects. New wind farms and solar power projects, in turn, provide business for wind turbine and solar cell manufacturers. By removing obstacles to getting financing for clean energy firms, this loan guarantee program leverages the private sector to drive green job creation. ”

“ The first is that the complaint of many farmers, merchants, politicians, and even scientific writers [Pg 517] that too much money and bank-credit are at the disposal of Wall Street and other speculators rests on a misunderstanding of causal relations. Wall Street does not, by using a large amount of bank-credit, take just that much away from ordinary business. Rather, it increases the amount available for ordinary business! Wall Street, and the other financial and speculative centres, supply the liquidity for bank assets, and so make possible loans on non-liquid paper. ”

“ He smote the rock of the national resources, and abundant streams of revenue gushed forth. He touched the dead corpse of the Public Credit, and it sprung upon its feet. ”

“ Government inspection.—The principal support of universal credit through banking is the assurance that uniform methods, honest in principle and accurate in execution, are followed. To secure these results a system of government inspection and guaranty seems absolutely necessary. If the public faith is to be maintained, the ground of that faith must be publicly established. The more complete the examination by trusted officials and the more frequent the publication of official reports, the better the public credit. ”

“ And if it begins to deposit this immense income as it accrues at any bank, at once it becomes interested in the welfare of that bank. It cannot pay the interest on its debt if that bank cannot produce the public deposits when that interest becomes due; it cannot pay its salaries, and defray its miscellaneous expenses, if that bank fail at any time. A modern Government is like a very rich man with very great debts which he cannot well pay; its credit is necessary to its prosperity, almost to its existence, and if its banker fail when one of its debts becomes due its difficulty is intense. ”

“ But banks do need a substantial margin of liquidity, to protect the rest. They get it from stock exchange collateral loans, and from ownership of listed and easily marketable bonds, primarily. They get part of it from true commercial paper. Thus, the director of a country bank in Iowa told the writer that banks in his section—where banks owned in large measure by farmers, and dealing largely with farmers, are very numerous and important—make a regular practice of buying, through brokers, a considerable amount of notes of outside merchants. They do this to protect themselves. ”

“ The banks also rendered invaluable service to the Government in making available their credit facilities with the Bank of England. “To increase their clients' ability and their own ability to invest in Government issues they would borrow from the Bank of England. These loans would increase their deposits with the Bank of England, which, as reserves, would increase their ability to grant to their own clients loans equivalent to, say, five times such deposits” (English Public Finance) . ”

“ Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for any purpose inconsistent with sound credit conditions, and shall give consideration to such information in determining whether to make advances to such member banks. ”

“ THE FEDERAL FARM LOAN ACT.—The growing need of credit facilities among farmers resulted in 1916 in the passage of the Federal Farm Loan Act. By the terms of this act, the United States is divided into twelve districts, in each of which a Federal land bank is established. A Federal Farm Loan Board has general charge of the entire system, but each Farm Loan Bank is allowed a large measure of freedom in its own district in the organization of local Farm Loan Associations. A local association is made up of a number of farm owners, or persons about to become owners, who desire to borrow money. ”

“ In the provision against distress during this winter, the great private agencies of the country have been mobilized again; the generosity of our people has again come into evidence to a degree in which all America may take great pride. Likewise the local authorities and the States are engaged everywhere in supplemental measures of relief. The provisions made for loans from the Reconstruction Finance Corporation, to States that have exhausted their own resources, guarantee that there should be no hunger or suffering from cold in the country. ”

“ But at the outset the traditional English preference for private enterprise was just as strong there as it was at home, and it was only the fact that the whole of the available private capital was absorbed in the development of the gold fields and that, therefore, if railroads were to be built at all, public credit must be pledged and English capital must be obtained, that caused the state to go into the railroad business. ”

“ Government debts.—An important part of government machinery is connected with its ability to make use of borrowed capital. Under the pressure of heavy expenditures in case of war, or in undertaking permanent improvements in a new country, or in carrying on various enterprises for common welfare, the demand for means is greater than the supply from ordinary modes of taxation. Not even the special devices of war taxes can meet at once the burdens of a defensive war. The rightfulness of such expenditures upon the credit of the government depends upon the object to be secured. ”

“ A municipality raises money on public credit, and thus gains an advantage over every private competitor. It also fixes scales of charges and rates of wages without reference, or, at all events, without exclusive reference, to considerations of profit, and thus makes it impossible for any competing trader to earn a legitimate commercial profit. And to make it possible to do this it uses the power of taxation, and levies rates on the competing traders themselves, so that the municipal business can be carried on without the commercial profit which the private trader must earn in order to live. ”

“ As regards the effects of credit, we may remark, that it is as powerless directly to produce new capital as is the division of labor to produce new workmen. To every credit of the [pg 271] creditor corresponds a debit of the debtor. As Turgot said: Tout credit est un emprunt.537538539 But, on the other hand, credit [pg 272] facilitates the transmission of the elements of production, especially of capital, from one hand to another.540 When, therefore, the debtor employs the capital that he has borrowed, more productively than the creditor would have done, the whole country is a gainer ”

“ We will make good use of policy-backed and development-oriented finance, and strengthen the role rural credit cooperatives play in meeting the needs of agriculture, rural areas, and farmers.
We will deepen the reform of the multi-tiered capital market, improve the basic systems of the main board, actively develop the ChiNext stock market and the new third board, and see that regional equity markets develop in a well-regulated way. We will expand channels for using insurance funds to support the real economy. We will make major efforts to develop green finance. ”

“ And if it be urged that to the undue expansion of credit is traceable the greater number of our financial disasters, it may be said with still greater force that all our impetus to industrial achievement has been and still is dependent upon the generous exercise of credit. The construction of our railroads and canals, the operation of our mines, the improvement of our great farm areas, the building of our towns and cities, and the development of our extensive manufacturing interests are all the result of the trust reposed in men and the industrial interests they represent. ”

“ Expanding credit.—All the machinery of credit tends to bring the floating capital of a country within the reach of great enterprises. If a body of men have faith in some great undertaking, like a continental railroad or a Panama canal, their faith in the enterprise is easily made a basis for the faith of others. Even the small accumulations, the savings of day laborers, may be turned to account in such great enterprises if the popular expectation of success is thoroughly aroused. ”

“ Then a panic occurs and a readjustment of production.
The last of these theories regards a crisis as essentially due to a failure of credit. It is seen that a large part of modern industry is carried on by borrowed capital, by roundabout processes and for a distant market and not upon order. That is, the success of a business depends upon its ability to sell its goods when produced. Now the aggregate volume of transactions that can be carried on in a year, so runs the theory, depends upon the efficiency of the credit system ”

“ Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men who, even if their action be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who necessarily, by very reason of their own limitations, chill and check and destroy genuine economic freedom. ”

“ However it has come about, it is more important still that the control of credit also has become dangerously centralized. It is the mere truth to say that the financial resources of the country are not at the command of those who do not submit to the direction and domination of small groups of capitalists who wish to keep the economic development of the country under their own eye and guidance. The great monopoly in this country is the monopoly of big credits. So long as that exists, our old variety and freedom and individual energy of development are out of the question. ”

“ The damper put on the inventive genius of America by the trusts operates in half a dozen ways: The first thing discovered by the genius whose device extends into a field controlled by a trust is that he can't get capital to make and market his invention. If you want money to build your plant and advertise your product and employ your agents and make a market for it, where are you going to get it? The minute you apply for money or credit, this proposition is put to you by the banks: "This invention will interfere with the established processes and the market control of certain great industries. ”

“ Finance-capital, concentrated in a few hands and exercising a virtual monopoly, exacts enormous and ever-increasing profits from the floating of companies, issue of stock, State loans, etc., tightening up the grip of financial oligarchies and levying a tribute on the whole of society. ”

“ In private enterprises, the man who assumes the headship of a business organization in which the funds of others are invested as capital, and who then makes a show of prosperity by drawing on that capital to pay what he represents as dividends, is charged with running a "get-rich quick" scheme, and in most States is, by law, held personally liable. I commend to your consideration the consistency of applying that principle where there is involved the capital of all the people—the Nation's resources. ”