How States Normally Lack the Money Creation Capability of Federal Governments
Executive Summary
- States, or countries that join a monetary union, normally cannot create money.
- The peculiar thing about this is it places private banks as more senior in responsibility and rights over state governments.
Introduction
As one example, California has high state taxes and high fees from living in the state. This includes even high parking ticket fees that many residents will say are deliberately designed to maximize revenue rather than serve as a simple deterrent. However, the only reason California needs to charge income taxes or impose usurious fees is that the US has a private central bank.
What a State Public Central Bank Would Do
Under a public central bank, California — as part of the US, could have the right to use the US debt-free new currency to pay for the expenses of the state. As it does not, then the states are in the position of raising money in the form of taxation.
This is explained in the following quotation.
“Just a quick reminder that our state and local governments are users of the U.S. dollar, and not issuers, like the federal government is. In fact, the U.S. states are in a similar position as the rest of us: we both need to get funds into our bank accounts before we write our checks, or those checks will indeed bounce. In the parent/children analogy, we and the states are in much the same position as the children, who need to get first before they can give.”
Source: Mosler Economics
Why Keep States Out of Money Creation?
A natural question that arises is why doesn’t the federal government share its money creation ability with the states?
For example, the currency could be controlled by a federal public central bank, but then each state would have a central bank that is an extension of the federal central bank. Furthermore, the Post Office could provide federal central bank services everywhere in the country. Post office banking has the potential to offer government-created money in all countries where post office banking exists.
Should States Be Subordinate to Banks in their Money Creation Abilities?
There seems to be little point to make states subordinate to the federal government as money is a public monopoly and public good, and all people eventually reside in some state. After all, it is the money of the government, not of banks. Banks can create money out of thin air by virtue of being empowered by the federal government. This means that Bank of America is considered more senior in its right to create money over any state.
How Countries Become States
Any government is not limited in creating money unless it has become part of a confederation like the EU and given up its money creation to another entity.
Greece or Germany no longer have their own money but have given it up for the Euro. In terms of banking, all member countries are no longer countries but are now “states” as they are children in the EU central banking construct. Although Germany is so influential in the EU due to their economic size, they do not face the same loss of control as smaller countries.