THE UNIVERSAL ECONOMY – UNIT II: FIAT MONEY
In 2003 the United States invaded Iraq. Since then the ongoing wars in the Middle East and Africa have cost trillions of dollars. The money appears out of nowhere. Virtually no legislators ask, “How are you going to pay for it?”
In 2008 U.S. and world financial systems were on the verge of total collapse. Wall Street banks had been gambling in trillions of dollars of fraudulent loans and “exotic financial instruments” and the bets had gone bad. The banks were corrupt, but to avoid total financial devastation to America, we were told they had to be made whole again. The U.S. Congress authorized a signed, blank check at the U.S. Treasury, and over 16 trillion dollars magically appeared to bail out the banks. Hardly a legislator asked, “How are you going to pay for it?”
The U.S. military budget was already at 600 billion dollars per year when President Trump authorized an additional 116 billion dollars per year for the Pentagon. Congress signed the check and the Treasury provided the money. No legislators asked, “How are you going to pay for it?”
A majority of Americans now support a national single-payer public healthcare system providing coverage for all. Legislators scream, “How are you going to pay for it? America is broke! You’re going to mortgage our grandchildren into infinity! In fact, we have to cut Medicare and Medicaid to pay off the national debt.” So, in the face of adequate, existing medical facilities, adequate, existing medical personnel, and adequate, existing medical equipment and supplies, millions of Americans go without healthcare. Not because we don’t have the physical resources to provide it, but because there isn’t enough “money.”
America must rebuild its infrastructure. Congress erupts! “How are you going to pay for it? America is in debt! Government has over spent! Infrastructure must be privatized! You must tighten your belts!” So, in the midst of adequate Portland cement, adequate structural steel, adequate construction equipment, adequate manpower, adequate engineering expertise, and adequate resources of any needed sort, Americans watch as their infrastructure crumbles. They watch as the public domain, built by their parents and grandparents at a time when America had far less wealth than today, is turned over to Wall Street hedge funds, banks, and billionaires through so-called public/private “partnerships.” Not because we don’t have the physical resources to provide it, but because there isn’t enough “money.”
Fiat money is a currency without intrinsic value established by government regulation. It has an assigned value only because the government uses its power to enforce that value. Parties exchanging goods and services are required to use the currency doing business and in paying all required taxes. In economies utilizing fiat currency approximately 97% of money in circulation does not physically exist. It is entries on a computer screen. The U.S. Treasury creates money by clicking keys on a computer.
There is no limit to the amount of money a sovereign government using a sovereign fiat currency can create. The practical limit is the circulating money supply must approximate the actual physical productive capabilities of the society to avoid devaluing or overvaluing (inflation/deflation) the currency. The U.S. dollar is fiat currency.
The ramifications of fiat money are enormous and they challenge everything we have been taught to believe about how the economy of any sovereign nation using a sovereign fiat currency works. These are some of the implications:
- The U.S. Government can never run out of money. It would be the equivalent of a carpenter saying he could not finish building a house because he ran out of feet and inches. If congress chooses to fund a new war or bank bailout, the Treasury creates the money to do so.
- The U.S. Government never has to default on its “debt.” It can create all the money it needs to pay for all services required by society. In fact, government debt doesn’t actually exist. Government “debt” is simply a computer record of the money created by the Treasury and injected into the economy to allow the nation to function. Government “debt” is private sector operational funds and savings.
- The U.S. Government never has to borrow money. It is the constitutionally authorized creator of the nation’s money. Within the constraints of productive capability (inflation/deflation) the government can supply itself with all the money it needs.
- The U.S. Government never needs to collect taxes to pay for its own operation. It created the money people and corporations use to pay their taxes in the first place. Congress can authorize the Treasury to create any money needed for ongoing operations. The reason the government collects taxes is to enforce the legitimacy of the dollar as the nation’s currency, to exert some control over inflation/deflation, and to maintain a degree of societal equity. In the past, extreme inequality was mitigated by progressive taxation.
It must be understood that none of these operational abilities apply to state and local governments, private business, or households. Only a sovereign nation using sovereign currency can create its own money. However, revenue sharing by the federal government can offset shortages in state and local funds.
Much of the current work being done on the subject of fiat currency and “Modern Monetary Theory” emanates from the Economics Department at University of Missouri – Kansas City. Their work and the work of other economists and universities around the globe can be found at New Economic Perspectives.
Unit III will discuss: Summer Camp and Fiat Currency