11/14/2009 05:12 am ET Updated May 25, 2011

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.