The Political Economy of Financing Large-Scale Transformations: Off-Balance-Sheet Fiscal Agencies in Wars, Reconstruction, and the Green Transition

• Applicant: Dr. Steffen Murau
• Subject Area: Political Science ; Economic and Social History
• Term: since 2022
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 499921148

The Green Transition—a politically desired large-scale transformation of physical capital stock to reach net-zero carbon emissions—is the greatest challenge of our age. We broadly know what technically needs to happen, but one question remains unsettled: Where should the money come from to pay for it? The established answer—using the triad of taxation, treasury borrowing, or central bank money creation—is incomplete. Rather, public authorities need to mobilise the entire ‘monetary architecture’ for this task. The guiding hypothesis of this interdisciplinary project is that off-balance-sheet fiscal agencies (OBFAs)—hybrid public-private institutions which uniquely combine traces of monetary and fiscal policy—played a crucial role in past large-scale transformations and are best suited to do so again in the Green Transition. OBFAs’ role in financing past transformations is under-researched and not well understood. This research group will advance a definitive account of how large-scale transformations were financed that is historically informed and uses an up-to-date theory of modern credit money. Module I of the project (Economic History) entails case studies on war and reconstruction finance in the UK, the US, and Germany in the 20th century. Via the lens of Critical Macro-Finance, the group will study how historic monetary architectures—webs of interlocking balance sheets in which OBFAs intersect with treasuries, central banks, and private institutions such as banks and non-bank financial institutions—were mobilised by OBFAs in a systemic financing process that entails three different phases: initial balance sheet expansion; long-term funding; and final contraction. Module II (International Political Economy) will link those findings to today. With a historic dataset, we will test if OBFAs are a necessary condition for governing large-scale transformations and assess their implications for democratic governance. Using historic best practices, the group will further develop a proposal for using OBFAs to finance the Green Transition and will engage with stakeholders to probe its feasibility in today’s monetary architecture. Module III serves to disseminate the findings to a broad audience and maximise impact. To this end, the group will develop an innovative interactive online tool and publish a book on the political economy of financing large-scale transformations.

• DFG Programme: Independent Junior Research Groups