THE UNIVERSAL ECONOMY UNIT III: SUMMER CAMP AND FIAT MONEY
Imagine boy scouts at summer camp. They are living in the “Buffalo” cabin and “Sam” is their adult troop leader. Camp is fun, but there is much to be done to ensure the cabin functions smoothly. Floors swept, beds made, trash carried out, bathroom cleaned, food prepared, dishes washed, fire wood split and so on. Sam spends lots of time cajoling the scouts to do their chores.
Tired of the “battle,” Sam decides to create a “money” system that allows his scouts to earn payment for doing their chores which can then be exchanged for things each boy wants. The cabin will be the “Nation of Buffalo” with a fiat currency called the “Dubin.” Sam will be the “Government”/ “Treasurer” that creates and signs the dubins (slips of paper) and “spends” them into circulation so the “citizens” have money and the nation can function.
Sam fears the boys may not take the dubin seriously, so he institutes a “national tax” which can only be paid in dubins. If the scouts wish to have free access to the whole cabin when indoors rather than being confined to their assigned bed and chair, they are required to pay the “government” one dubin per day. Only dubins will be accepted for tax payments so the boys must gain access to them.
The economy of Buffalo begins operation. Obviously, nothing can happen until the government creates dubins and spends them into circulation by paying for the scout’s “services” (doing their chores). Only then will the boys be able to exchange dubins for candy bars, hot dogs, or among one another (private business) for the things they want. The government is also collecting the daily tax and the only way the boys will have this “money” is if the government has spent it into existence. Of course, if the government taxes as much as it spends – balances its budget – there will be no money in circulation and the Buffalonian economy will collapse. So, by definition, the government must operate in a “deficit.” Government deficit is private sector operating funds and savings.
Does it matter that the government of Buffalo is operating in a deficit? Of course not. It is the sovereign issuer of the nation’s currency and can create all the money it needs to pay the scouts for their services. Obviously, the government does not need to collect taxes to pay for its own operation. Taxes simply reinforce the legitimacy of the “Dubin” and dubins collected as taxes will be used to start fires in the wood stove.
So, the Buffalonians begin conducting “business” in dubins. Sam, the government, has assigned a value to the various chores and purchasable commodities. Carrying out the trash earns 2 dubins, washing the dishes 12, cleaning the bathroom 15 and so on. Candy bars cost 1 dubin, hot dogs 2, scrambled eggs and ham with fried potatoes 4, etc. The scouts initially agree to rotate the chores so for a while dubins are distributed equally.
All goes well but eventually the individual talents and preferences of the scouts create opportunities – and complications. Billy doesn’t mind washing dishes and Joe can tolerate cleaning the bathroom. The other scouts hate these tasks, so Billy and Joe take them over permanently. But these are the highest paid “jobs” in Buffalo and soon Billy and Joe have surplus dubins. Both have families coming to visit later in the summer and they are happy to have the extra “savings” so they can treat mom, dad, brothers and sisters, to good meals and treats (cake and ice cream is 4 dubins). However, they need to store their extra dubins somewhere. Joe has a lock box he brought to camp, but Billy (Billy is well like by the other scouts and because he is of Asian descent, they have affectionately nicknamed him “China”) decides to talk to Sam about safekeeping for his dubins.
Sam is happy to help China but doesn’t want to be troubled storing a lot of paper dubins (China has saved 100 dubins from services provided to the nation of Buffalo). Luckily Sam has his laptop computer, so he creates an electronic savings account showing China has purchased a 100 dubin “Treasury” from the government of Buffalo and then throws China’s dubins in the wood stove. Sam also agrees to pay China an interest fee of 1 dubin per week on his Treasury Note.
Technically speaking, the government of Buffalo is now in debt to China. It owes China 100 dubins plus another 1 dubin in interest for every week China keeps his money in a treasury account. On top of this, when Joe hears China is earning interest on his savings, he also decides to buy a Buffalonian Treasury worth 100 dubins. So, Sam creates a computer account for Joe and throws his paper dubins in the fire. The government is now in debt to Joe for 100 dubins plus interest.
Buffalonian government debt is “skyrocketing!” It owes 200 dubins plus another 2 dubins per week in interest fees! How will it ever get out from under! On top of this the government is operating in a deficit! Buffalo is broke and must impose austerity on the scouts. Sam cuts wages to reduce government spending and taxes are raised to pay off the debt. So, even though the camp is stocked with plenty of supplies (natural resources*) the scouts will have to go without. They will have to “tighten their belts.”
Would the above austerity budget reaction be ridiculous? Of course! We already know the government of Buffalo must operate in a deficit if there is to be money in circulation, and government “debt” is simply a record of account on a computer screen. When the families of China and Joe arrive a few weeks later, Sam, the treasurer, simply keeps track of the supplies they use and deducts the correct amount from their Treasury accounts. No paper dubins exchange hands. China’s government Treasury is now worth 23 dubins and Joe’s is worth 19. All is well.
In a sovereign nation using a sovereign fiat currency:
- The government must operate in a deficit to provide operating funds for the society.
- The government never needs to collect taxes to pay for its own operation. It created the money people use to pay taxes in the first place.
- Government debt is simply an accounting record on a computer screen. The “debt” could be “paid” any time the government chose to do so by clicking keys on a computer, but “balancing the budget” would be economically devastating for the society.
- The government never has to borrow money to fund its own operation. U.S. Bonds or Treasuries are simply the world’s safest savings accounts for huge sums of money.
- “Austerity” imposed in the midst of plenty is always unnecessary and always economically destructive for average, working citizens. Austerity is an economic manipulation imposed on a nation and its people by the financial power structure through “paid” politicians. Its sole purpose is to privatize and transfer ownership of the true physical wealth of the nation to the hands of the richest, oligarchic few.
- The budget of a sovereign nation using a sovereign fiat currency is not like a household budget.
A wonderful source on the functioning of economics in the USA under a fiat currency system is Warren Mosler’s book, SEVEN DEADLY INNOCENT FRAUDS OF ECONOMIC POLICY. It can be read on line at http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf While I do not personally agree with Mosler’s closing statements regarding the US military, his work is an otherwise excellent, clear presentation.
*Planet Earth was richly endowed with all its natural resources by the Sun and stars. This includes all the mineral deposits and chemical elements, all the coal and oil, and all the plant, and thus animal, life enabled by the photosynthetic conversion of the Sun’s energy to organic matter. The Sun and stars have never asked to be paid for their gifts. In our summer camp scenario, parents are the “stars” who provided the groceries, toiletries, and all the other “natural resources” the scouts need for the summer. “Stars” never ask to be paid for their gifts.
Unit IV will discuss: The Folly of the “Balanced Budget”