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My father discussed this over the holidays.  Since he doesn't have a diary here, I asked him to write it down and I would post it for your comments.

The economic problems facing our nation are not what they are made out to be.

The problems are invariably cast in the context of taxation: Republicans say the solution requires spending cuts, the Democrats say the solution requires additional taxation.

In fact, both Democrats and Republicans are pretending the national economy works in a way that it does not.  And both parties know better.  Or they are inordinately ignorant.

Prior to 1970 the Federal government needed to levy taxes to have money to spend, after 1970 the government did not need to levy taxes to have money to spend.  Simple as that.

The event that changed the condition of how the national economy works occurred when President Nixon decided to sever the relationship that existed between the dollar and gold.

In 1970 the nation’s economy was suffering from an inadequate supply of money, and the supply could not be expanded because the dollar had been tied legislatively to the value of gold.  President Nixon broke the tie that bound the dollar to gold, and thereafter our government, through the Federal Reserve System, could create or manufacture as many dollars as it might wish.  And they did.  And the nation’s economy recovered and flourished as more and more dollars were put into circulation.

In June of 1970 the nation had $265 in circulation per capita.  By June of 2011 the supply had grown to $3,302 per capita, according to the U.S. Dept. of the Treasury.

So, the economic problems facing our nation are not problems of taxation or spending.

The problems facing our nation are about money management.  Take, for example, the nation’s debt.

The national debt is nothing more or less than a promise to pay dollars at some future date for dollars received previously.  

Our government, through the Federal Reserve System, creates dollars.  Our government manufactures money.  The quantity of money our government can create or manufacture is without limit.  

The people who manage the Federal Reserve System manufacture money simply by entering a number, or series of numbers, in a ledger.  Just like that, out of thin air, no trees cut or cotton picked to make paper to print money, just an entry in a ledger, the money exists.

To get the manufactured money into circulation, the Federal Reserve System loans the money to commercial banks at a modest rate of interest.  The commercial banks loan the manufactured money to their customers and other varied interests at a somewhat higher interest rate, thereby making the bankers very happy.  The banks may make loans to the government by buying Treasury bills at the prevailing rate of interest, again making the bankers very happy.  Whatever the method used by the banks, the manufactured money is then circulating in the national economy.

When the money supply is increased, the nation experiences prosperity.  If the money supply is increased beyond what is needed to have a healthy economy, the nation experiences excessive inflation.  If the money supply is not sufficient to accommodate the needs of business, the nation will experience recession, or even depression.  Other factors, such as tax rates, may affect the condition of the national economy, but those factors are in the margin, not determinative in and of themselves.  The money supply is the determining factor of the economy.

In the course of business, our government has seen fit to borrow money it manufactured at a somewhat higher interest rate than what it charged the commercial banks for the same dollars, and doing so, our government created the national debt.

The type of money manufactured by our government is called fiat money.  Fiat money is backed by nothing but the good faith that we, the people, have for our government.  

Fiat money has a checkered history.  In many circumstances where fiat money has been used by governments, it became worthless.  Issuing governments had the mechanism to create the money, but they lacked a mechanism to control the amount of money in circulation, that is to say, they lacked the ability to tax the excessive supply of money out of existence.  And the lack of control often resulted in excessive inflation to a point that the fiat money became worthless.

Today, with sophisticated accounting methods, our government can control the supply of money in circulation and avoid unwanted inflation associated in the past with fiat money.

Paying the national debt is as simple as having the Federal Reserve System manufacture the money needed, placing the money in an account suitable for issuing checks drawn on the account, and issuing checks to retire the debt.

The problem in retiring the national debt, and it really is not much of a problem, given the way our national economy works today, is to control inflation by controlling the amount of money in circulation.  

To control the amount of money in circulation, our government needs to institute a monetary use tax or transfer tax that would apply to every monetary transaction, without exception, and our government needs to phase the new tax into operation as it phases the antiquated income tax system out of existence.  

The existing income tax scheme is a burden that sets one group of people, those who are working, against another group of people, those who are not working, and in doing so, it creates debilitating stress in the general population.

Taxes are a necessity, if the nation is to function as a nation, but the rule should be that those who benefit by using the nation’s monetary system should pay for the benefit they receive from its use.

Our government should reverse the process of tax and spend to a process of spend and tax.  A spend and tax process might work something like this: Congress and the President would formulate a budget; the Federal Reserve System would fund the budget, eliminating the need to borrow money and eliminating the various taxing schemes now in existence; our government would spend the money in accordance with the budget, and, concurrently, tax the money, by way of a monetary use tax or transfer tax, back to the Federal Reserve System.  

Life would go on without the worry of recession, inflation, national debt, or personal income taxes at the Federal level.

Originally posted to Bluewater9 on Sat Dec 29, 2012 at 09:58 AM PST.

Also republished by Money and Public Purpose.

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Comment Preferences

  •  Interesting take. n/t (2+ / 0-)
    Recommended by:
    Azazello, HoundDog

    What is truth? -- Pontius Pilate

    by commonmass on Sat Dec 29, 2012 at 10:06:03 AM PST

  •  I'm sorry, but your dad is wrong. (4+ / 0-)

    Monetization is not 'fiat' money, it is placing a value on illiquid assets and putting that in circulation.  QE1, 2, 3 etc is not creating money, it is buying up existing, non-servicing debt to create a floor for other assets.

    Tying our money supply to gold was a dumb idea anyway.  Fine when we were hunters/gatherers.  A gold standard now would be institutionalized feudalism and the gold supply is probably being manipulated, so a small cabal could control the entire world from a place like Switzerland or Houston, etc.

    My best guess was a reflection that did not look back, an image lost in every mirror.

    by Zacapoet on Sat Dec 29, 2012 at 10:15:37 AM PST

    •  I'm guessing that this is from someone (1+ / 0-)
      Recommended by:
      cynndara

      who is part of the "debt money" movement, who would like to see bonds done away with -- or at least having private banks create the bonds.

      My take is that the guy recognizes that monetization is not fiat, but that fiat is used to monetize.

      And that there's no reason to issue debt instruments, thus no need to monetize.

      About that he's right.

      The problem I have with the "debt money" people is that we still would have accounting language to deal with:

      Every dollar is both a public liability and private asset.

      The "deficit" equals all dollars in the private sector.

      "liability" and "deficit" are accounting terms, neither of which signals a debt when speaking in terms of notional values, which is all a fiat currency is.

    •  . (0+ / 0-)

      "Tying our money supply to gold was a dumb idea anyway.  Fine when we were hunter/gatherers"

      The 'king' of fiat money disagrees with you:

      "The abandonment of the gold standard made it possible for the welfare statists (government bureaucrats) to use the banking system as an unlimited expansion of credit. In the absence of the gold standard, there is no way to protect savings from confiscation through inflation... Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process." - Alan Greenspan

      QE3 is creating money at a rate of $85 billion a month from this year till 2015.  It takes 'money' to "buy up existing, non-servicing debt" so QE IS creating money.... gobs of it.  It is estimated some $5 trillion in short term debt has to be refinanced in 2013.  Dilution reduces the value of fiat money in real terms.

      "History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance." -James Madison

      by FreeTradeIsYourEpitaph on Sat Dec 29, 2012 at 08:55:54 PM PST

      [ Parent ]

  •  A well written and thought provoking proposal. (0+ / 0-)

    Who is your father?

    The means is the ends in the process of becoming. - Mahatma Gandhi

    by HoundDog on Sat Dec 29, 2012 at 10:22:24 AM PST

  •  A Key Function of Taxation is to Prevent Wealth (11+ / 0-)

    concentration. Sufficiently steep progressive taxation of various types suppresses excessive compensation at the top end, the passing along of extreme wealthy estates, and more.

    Many of the problems we're facing today began when we eliminated compressive taxation in the early 1980's.

    There have to be heavy brakes on the top end of the economy regardless of any concept of individual fairness or government revenue and debts etc., for sheer national economic security. Otherwise excessively concentrated wealth has nothing to do but capture other wealth through vulture capitalism, or gamble on investors, at risk to the national & global economies.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Sat Dec 29, 2012 at 10:25:11 AM PST

    •  . (1+ / 0-)
      Recommended by:
      SouthernLiberalinMD

      excellent point regarding taxation to limit excessive compensation at the top end.  Few people get that.
      For some reason many people don't understand that high taxation rates for high incomes is to force money to be invested back into business to grow it instead being used to extract wealth from the business while the business itself withers and dies... vulture capitalists like Romney specialized in destroying businesses by loading them with debt with other people's money while they extract their profit before the business dies.

      "History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance." -James Madison

      by FreeTradeIsYourEpitaph on Sat Dec 29, 2012 at 09:06:07 PM PST

      [ Parent ]

  •  I heard this argument from my father, too. (3+ / 0-)
    Recommended by:
    a2nite, rmx2630, katiec

    And previous generations going farther back than time heard it from theirs.

    I think this analysis puts several themes together, and states some conclusions that don't make sense to many of us who missed, say, the return-to-the-gold-standard debates. For example:

    -  "The money supply is the determining factor of the economy". That's a statement of belief in a particular set of conditions, not a statement of fact. You have to believe away many factors to get to that conclusion. And, accept that every important thing about our economy is reduced to (1) money and (2) money supply.

    -  "The type of money manufactured by our government is called fiat money.  Fiat money is backed by nothing but the good faith that we, the people, have for our government." It's called "fiat" - which suggests "arbitrary" and "dictated" - by people who don't like it. And while it's true our currency is backed by the Full Faith and Credit of the United States, it's not just the "faith that we, the people, have for our government." That seems to be pretty low these days.

    -  "The problem in retiring the national debt, and it really is not much of a problem, given the way our national economy works today, is to control inflation by controlling the amount of money in circulation". Well, it's a relief it is "not much of a problem", so let's fix it ... but ... how?

    - "Our government needs to institute a monetary use tax or transfer tax that would apply to every monetary transaction, without exception ..." Ah, let's see, that would be a financial transactions tax and a VAT on consumer spending, for example? Is that a set percentage or would that vary by budget year? I ask because ...

    -  As for the process of government - change everything: "Our government should reverse the process of tax and spend to a process of spend and tax." The simple process that your Dad then describes, followed by the conclusion that "Life would go on without the worry of recession, inflation, national debt, or personal income taxes at the Federal level." is, well, pretty simple.

    Bless him, though. He's trying to grapple with today's reality in ways a lot more creative than many Senators and most members of Congress.

    2014 IS COMING. Build up the Senate. Win back the House : 17 seats. Plus!

    by TRPChicago on Sat Dec 29, 2012 at 10:31:03 AM PST

  •  Okay (2+ / 0-)
    Recommended by:
    katiec, Larsstephens

    I am suspicious.  Who is your dad? Maybe he's been hanging out with a few economists like these...

    Modern Monetary Theory

    Tipped and recc'd by the way.  I also edited yer tags.

    Loyalty to petrified opinion never yet broke a chain or freed a human soul in this world--and never will. Mark Twain

    by whoknu on Sat Dec 29, 2012 at 10:32:41 AM PST

  •  Money is controlled but by the rotten banksters (1+ / 0-)
    Recommended by:
    PowWowPollock

    And plutocrats who are hoarding money to create artificial scarcity so that they can continue the rape robbery & pillage of us. Austerity nor tax cuts for the plutocrat class don't create American jobs nor prosperity for us but only for them & their rotten overseer classes (political & police).

    Everyone who spends money pays taxes,  maybe not income taxes though.

    Higher taxes in the past enabled biz owners to reinvest in their companies while still having a good income. This is where the real prosperity was created. Work hard, follow the rules, do well. Now it is all a big fat lie. No it was always a lie. America was created for evil rich slave owners yesterday & it has resumed today.

  •  Here is a different approach to OP's point. (4+ / 0-)

    Before Nixon took us off the gold standard for good there was a relationship in value between the dollar and every other currency. Nixon severed that. Now what the standard is is not important. It is the move away from the standard that matters. Kevin Phillips in his book American Theocracy points out that the hallmark of many countries going into decline is an emphasis on the business of finance. Not making things but shifting and arbitraging money around.

    When Nixon took us of a standard he created a market for trading currencies for the sake and profit of trading currencies. Money that could have been used to build things or buy inventory was now in the business of trying to make a profit by buying selling currency for the sake of currency trade alone.

    How much of our nations resources have been wasted by bright minds trying to speed trade the yen against the euro against the dollar looking to pick up an eighth of a point here or there. As Phillips points out finance alone is the mark of a society going down.

    •  Yep, debt instruments should be done away (0+ / 0-)

      with.  They're no longer necessary anyway.

    •  . (0+ / 0-)

      Nixon took the US off the gold standard so he could ramp up vietnam which was sucking money out of the domestic economy.  France was taking gold instead of dollars for settlement of trade because DeGaulle knew about currency debasement

      "History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance." -James Madison

      by FreeTradeIsYourEpitaph on Sat Dec 29, 2012 at 09:09:53 PM PST

      [ Parent ]

  •  Your father understands (0+ / 0-)

    what's going on better than 99.9% of the population.  Is he a professional?

  •  taxation (0+ / 0-)

    is also (or used to be) used to regulate commerce between nations, that preserved manufacturing in this country which sorely needs much more of it.  The math of the 'service based' economy does not make any sense in the long term ... at least for nation that wants to be anything other than a 3rd world nation.

    "History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance." -James Madison

    by FreeTradeIsYourEpitaph on Sat Dec 29, 2012 at 09:14:10 PM PST

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