In the early 19th century, the little British Channel island of Guernsey faced a problem. Its sea walls were crumbling. its roads were too narrow, and it was already heavily in debt. There was little employment and people were leaving for elsewhere.
Instead of going still further into debt, the island government simply
issued 4,000 pounds in state notes to start repairs on the sea walls as
well as for other needed public works. More issues followed and twenty
years later the island had, in effect, printed nearly 50,000 pounds.
Guernsey had more than doubled its money supply without inflation.
A report of the island’s States Office in June 1946 noted that island
leaders frequently commented that these public works could not have been
carried out without the issues, that they had been accomplished without
interest costs, and that as a result “the influx of visitors was
increased, commerce was stimulated, and the prosperity of the Island
vastly improved.” By 1943, nearly a half million pounds worth of notes
belonged to the public and was so valued that much of it was being
hoarded in people’s homes, awaiting the island’s liberation from the
Germans.
About the same time that Guernsey started to fix its sea walls the town
of Glasgow, Scotland, borrowed 60,000 pounds to build a fruit market.
The Guernsey sea walls were repaid in ten years, the fruit market loan
took 139. In the first part of the 20th century, Glasgow paid over a
quarter million pounds in interest alone on this ancient project.
How did Guernsey avoid the fiscal disaster that conventional economics
prescribed for it? First and foremost by understanding that when you
build roads or sea walls or colleges or houses, you are not reducing
your society’s wealth. In fact, if you do it right, you are creating
something that will add to its wealth. The money that was created was
simply backed by public works rather than gold or “full faith and
credit.” It was, in fact, based on something more solid than the dollar
bills in our wallets today. In contrast, tacking on an interest charge
to public works — as we do in the US — creates no new wealth, but
merely transfers claims on existing wealth from debtors to creditors.