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.
