We Are Not Dependent on Foreign Countries for Our Own Money
Conservatives say that the United States cannot afford to spend money on bridges, roads, schools, parks and other public works even though we clearly need them. More stimulus, they claim, will be inflationary.
14.5 million Americans are out of work. 8.8 million are working part-time but want full-time jobs and millions more are so discouraged that they have stopped looking for work. U.S. steel production is down 47 percent from last year and cement output is down 30 percent. Consumers and businesses have cut spending so their purchases won't put people and plants back to work. The government has to do it.
Conservatives argue, however, that the government does not have the money to undertake projects that would employ people and reopen plants and offices: Borrowing and increasing the deficit, they claim, would be a disaster. To get more of our own money, they say, the U.S. would have to borrow from and pay interest to China and Japan. This whole line of argument is wrong. Ask yourself how the American government can be dependent on others for American dollars. It is impossible.
The U.S. government can have as many or as few dollars as it wants. In the modern age, money is a human construct: governments and banks empowered by governments create it. Article 1 section 8 of the Constitution says that Congress can "coin money" and it does not limit the amount. Foreign currencies can be scarce or expensive, and this is an important issue, but U.S. dollars to spend in the United States can only be scarce if the government makes them scarce.
It would be foolish to create more money if prices were rising and labor and goods were scarce. That would be inflationary. The great inflations in history occurred in times of such scarcity. But there is no scarcity when 14.5 million people are unemployed and factories and offices closed. Modernizing America's infrastructure at a time when scarcity is not a problem therefore will not raise prices.
History should be our teacher when it comes to money. In the early 19th century private banks created it to supplement gold and silver coin. Paper money was in the form of "bank notes" for this reason. The government in the early 19th century allowed the organization of two Banks of the United States that played a large role in the money-creating process. President Andrew Jackson thought these banks were monopolies so he ended the government's special relationship with the last of them. Over the next few decades many more banks got into the profitable but risky business of issuing bank notes. When the U.S. government needed money to fight the Civil War, however, the Treasury created it by issuing "greenbacks," in effect by-passing the private banks, and the Greenbacks worked fine.
In 1913, President Woodrow Wilson and the Congress shifted the money-creating role from private banks to a hybrid government-private entity called the Federal Reserve Bank. Hence today's bills say "Federal Reserve Note" at the top. So when the government needed money to fight World War II, it did not issue its own Treasury notes as it had during the Civil War. Instead, it told the Federal Reserve to buy government securities with money the Fed could create and paid the latter no more than 2.5 percent interest to do so. The Fed, discredited at the time by its role in creating the Great Depression, did what it was told. As a result, Americans were fully employed and prospered during World War II although over 20 percent of the Gross Domestic Product was going to military expenditures that created no civilian economic benefit.
The Federal Reserve's Chairman, Ben Bernanke, knows this history. He knows that the Fed's unwillingness to create enough money was a cause of the Great Depression. He knows that the money it created to finance World War II not only defeated the Axis but created prosperity that made memories of the Great Depression fade. Based on this history, the Fed is purchasing the securities of public and private entities as well as government debt with Fed-created money as it did during World War II. It should buy more government debt to finance programs that would put America's unemployed, as well as its steel mills and cement plants, back to work and modernize our decrepit infrastructure.
It hesitates to do so largely because history-blind conservatives scare the country by saying that creating more money is a slippery slope to runaway inflation. This is not so. The real danger is the opposite. It is that the U.S. will repeat what happened after the Civil War. Then despite the collapse of a speculative expansion of railroads like the recent collapse of speculation in real estate, the government abruptly withdrew the "greenbacks" it had created to fight the war. It further decreased the money supply at the same time by de-monetizing silver. This caused prices to fall sharply, especially for farm products, and led to a severe and prolonged depression. In contrast, after WWII the government withdrew money more gradually and adroitly so that the U.S. economy continued to prosper. That should be our model when we get to full employment again.
History tells us that good things happen when the government is skillful in its use of the constitutional power to create money. The next time a conservative who is ignorant of history says that the U.S. government is short of dollars and can not afford to put people and unemployed resources to work, ask them what history they are citing. It is not American history.
Without a sustained effort, we will likely end 2009 with the same system of financial regulation that suffered near catastrophic failure -- and that is in nobody's best interest.
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Another point if I may - the unseen effects of inflation hurt those amongst us who are poor or on fixed incomes the worst. Those closest to the money creation process are the beneficiaries of new money, which includes bankers and politicians.
Consider - we print a trillion dollars of new money. That money is printed by the Federal Reserve and is given to the government and banks as deposits upon their reserve requirements. Government uses the money to fund its stimulus and other functions - guns and butter. The government gets the money and purchases goods and services. This increase in the quantity of demand for the goods and services increases prices. Those businesses then use their increased money to buy goods and services, and so on through the economy so that prices will rise to new levels throughout the economy.
The very last people in this chain of events are the poorest and those on fixed incomes. They dont see any benefit from an increase in the money supply, but only higher prices. Their standard of living has just decreased. Why? To fund more government programs and to offset bankers losses.
Those who encourage inflation should be ashamed - in effect it is a terrible regressive taxation on the poorest and those most unable to bear the vicious increase in prices.
Amazingly, the author quotes the constitution which lays the responsibility for minting US currency directly upon the Congress. And yet, he does not bat an eye in the next paragraph which describes the Federal Reserve as a private entity. I know the history, and even given the Federal Reserve Act of 1913, doesnt the author wish to ponder the constitutionality of such an enterprise?
Well, the article is about inflation - higher prices given the context. He cites numerous times historical incidents, which other commenter have correctly pointed out, as periods of increasing prices. I think the author may wish to actually look at CPI data for the last two hundred years in America.
Lets be succinct - $1.00 in 1780 bought about a $1.20 worth of goods in 1910. $1.00 in 1913 buys about 5 cents worth of goods and services in 2009. That is what the Federal Reserve has done to the currency.
At one time, you could save up for a rainy day. No longer the case, given our imperial leadership in DC and at the Federal Reserve.
Mr. London, your recollection of history is patently false. The creation of money out of thin air has not facilitated the wondrous things that you assume that it does. Initially inflation (which is properly defined as an increase in the money supply) does provide a small boost to certain sectors of the economy. This is the boom stage. However, a bust inevitably follows the boom since the inflation fueled industries that would not have survived if not for the newly created money. This is how central banks create the boom/bust cycle.
Your argument that history shows money creation is beneficial is downright fallacious. If every time someone's investment goes bad or someone loses money and the government could just print the difference so that there is no net loss - then why would we ever have recessions or depressions or unemployment? You argue that because of the reality of these phenomena that we need the government to create inflation. What you do not understand is that it is because of money creation in the first place that we have these problems on the scale that we do.
PS- The US prospered during WW2? Are you kidding me Mr. London? At what point in the history of civilization did a people prosper when consumer goods were rationed by the government? Absolutely insane.
The ECONOMY prospered, that's the Beauty of the GDP and the stock market, people don't matter.
Here is a tin hat...
here is a drum.
The money is controlled by foreign businesses
most likely...
or by native people who have made their businesses foreign...
but if Obama wants...
we could start working AROUND the money...
and use our resources.
(they are also owned by foreign businesses
You didn't read the article, did you?
Sane economists define inflation and deflation by the money supply, not prices.
Any revisionist perspective of history will disagree with you. It is central banks that cause all these problems, including the mess we're in now. Only keynesian fools blame the Great Depression on the Federal Reserve raising interest rates to reflect real market risk, it is the Federal Reserve's inflationary policy of WW1 and the subsequent 'roaring 20's' (think 90's) that led to the malinvestment (bubble).
If the Fed had risen interest rates to stop senseless debt creation (which it should have) and the government reduced taxes and liabilities (which it didn't) the Depression would have ended a lot sooner than it did. I think it's a well established fact that FDR prolonged the Great Depression, just like Obama is prolonging this depression by not allowing natural market forces to occur.
This revisionist version of history is fantastic, in that it never happened. And fantastic also is the notion that FDR prolonged the Great Depression, except insofar as he listened to BANKERS in the late 30's and removed some of the restraints and restructuring devices in place so as to restore banking practices to 'normalcy'( a neologism of Harding's)-- the resulting downturn in the markets was all anybody needed to see before the training wheels were reattached. And then came WWII...
It is important to keep an essential point in mind. Modern governments create money in order to facilitate the exchange of goods and services. Some suggest that there is only one way to create money, but history tells us that this is not true. Legal tender and credit can take many forms.
The goal now should be to use the government's ability to create money --- the facilitator of economic activity ---- to put people to work producing goods and services. Why? Because if people are out of work the political consequences, as the 1930s made clear, can be very serious. The thing to keep in mind in trying to solve this economic and political problem is that money is a human construct to facilitate economic activity not as King Midas and many today believe, an end in itself.
The relationship between the real economy of goods and services, and money that obviously can be created by governmental decisions, is difficult to grasp, but it is essential to try to do so.
The benefits of government-created money rather than bank-created debt is about a trillion dollars every year. For details: http://www
This is why i keep saying that we need a national investment bank, funded by the Federal reserve, to fund, industry, technology, infrastructure, research and education in THIS country, and also to aid the state and local governments facing bankruptcy. Yes, it would be inflationary, but the main danger today is deflation and stagnation that will last for years.
I don't care if this national investment bank prints up a trillion dollars and spends it, as long as we get a number of useful things in the end.
I definitely do not think they should try to get another stimulus bill through Congress, or borrow more money from China and other foreign countries. I doubt that Obama and Geithner have the gumption to try anything like this, however.
Thank your, please keep explaining money and the economy, the people need to understand.
Green Backs were the way to go, that's why the bankers did everything they could to stop Lincoln.
See my profile for money and market primer.
My suspicion for what will happen is that there will be some shift in the feeling of "safety," in T-bills, and hence dollar denominated assets. People bought huge amounts of T-bills when real estate and corporate stocks and bonds were both tanking. Eventually the investors who own those bonds will want to sell to get back into higher yield investments. If that happens too quickly (or what I describe is sparked by a move by the Chinese or others to get off the dollar standard for reserve currency), the T-bill prices would decline enough to make the historical "safety," of bonds seem false. This would probably spark fear sales, which would further depress the value of T-bills. If there was enough of a hit to the bonds and the dollar, we could see action by foreign banks to diversify their reserve currencies, which would involve dumping billions of US dollars on the market to purchase other currencies.
This would result in inflation on a scale best compared to weimar germany...
Amusingly, the government stimulus would be about neutral in the odds and damage of this scenario (increase in debt would increase stress, and higher yeilds because of declining demand would devalue existing debt, but the yeild difference would give "cover," to declining bond values...)
That is the exist strategy. Inflation is your friend when you are swamped in debt. Too bad it's going to destroy the responsible ones. And ultimately our entire economy.
I feel that you should tell "The rest of the story," however.
Historically, we are in about the same situation that Britain was in just after WW2. We are a declining super power with a horribly unfavorable balance of trade borrowing huge amounts from the up and coming super power to finance our spending. Look at what happened to the pound sterling (and Britain) once the problems became evident.
To some extent our situation is worse because we are further in the hole, our excessive spending was fueled by monetary tricks once it could no longer be supported by military might and "colonies.
Con't
Hum... a very insightful article. I never thought of it from this perspective. Is what you are saying true then, we can just print and print money til our heart's content without fear of runaway inflation (at this time that is)?
Is it not also true that the Constitution, which empowers the government to coin money, also sets the value of its coined money in specific amounts of gold and silver? The dollar, for example, was defined, according to what I've been told, to what at the time was known as a 'Spanish milled dollar', and was suposed to be its equivalent in purity and weight of silver. I would be very interested to hear from readers who know more about this Constitutional definition of our money....
It is not true:
The congress shall have the power to lay and collect taxes...
To borrow money on the credit of the United States;
To regulate commerce..
To Coin money, REGULATE THE VALUE THEREOF, and of foreign coin, and fix the standard of weights and measures;
To provide for the punishment of counterfei
Before you say something about the constitution, just read it, it is available online:
http://www
That's why I was asking the question. And I have read ithe Constitution,and recently, to verify or refute the notion that our money is tied to specific weights of precious metals, and could find no more than what you did-- yet this notion persists. So, thanks, for telling me-- although where the idea comes from, re the 'milled dollar',etc. continues to elude me.
quoted from recession.
http://rec
1873 - 1879
The 1870s recession, also known as the Panic of 1873, was caused primarily by economic problems in Europe. This trouble ignited problems in the U.S., and brought about the failure of the Jay Cooke & Company, which at that time was the largest bank in the United States of America.
This helped to depress a post Civil War speculative bubble which had been helping the U.S. recuperate from the devastating civil war which raged only a few years before. Another contributor to the Panic of 1873 was the Coinage Act of 1873. This really contributed because it depressed the price of silver, which really hurt the North American mining interests since silver was a product of those mines.
^^^^ Why didn't this source mention what Paul London did? That the government was deflating the money suppy?
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