The NEW USA…. A Thought Experiment

By J.D. Alt

Since there seems to be general agreement that our current economic system is fatally bankrupt, it might be interesting to try a simple thought experiment to see if we can forge a more perfect union. Let’s quickly visualize a new nation from scratch—and set it up properly, so we don’t find ourselves, ever again, facing a “fiscal cliff.”

First, there’s a lot of things we can just skip over because we already basically agree on them. We’ll have a House of Representatives and a Senate, for example. We’ll elect our president every four years. We’ll have a Supreme Court with nine justices, etc. In fact, we could just reassemble almost everything we already have (maybe a few changes here and there) and mostly be in agreement on a basic structure for the “NEW USA.”

There is one important issue, however, we need to give some fresh consideration: Money. How shall we deal with money? Right now, in our thought experiment, WE don’t have any money and our Federal Government doesn’t have any money either. So what should we do? We all understand and agree that a monetary system will be useful, but how should we create it?

Here are a couple of options:

  1. Each of us could print our own dollars. The ultimate libertarian fantasy! Obviously, however, that wouldn’t work, because there’d be no reason for me to accept your dollars for my services when I have the ability to print my own dollars as needed. That set up would be essentially the same as having no money at all.
  2.  We could declare that we’ll use gold and silver for money. Having made that declaration, we can all put on our dungarees and boots and go out prospecting. Some of us will likely succeed, finding a bunch of gold and silver nuggets. Those of us who don’t find any gold or silver (or don’t bother looking) will then have to sell goods or services to those who did in order to obtain some of the nuggets. Pretty soon, everyone will have a few nuggets, and then the Federal Government could begin levying taxes so it can have some of the nuggets too, enabling it to pay for the things we’ve agreed our Federal Government ought to pay for. (Army uniforms, for example.)

Option two seems to work pretty well, except it has an obvious limitation. As our population grows, and entrepreneurs invent more and more goods and services that we can buy and sell to each other, the amount of gold and silver nuggets will have to increase to keep up. If the amount of gold and silver nuggets stays the same (or grows too slowly) while the number of goods and services increases, each good and each service will have to be provided for fewer and fewer nuggets. So if I mow your lawn for two nuggets today, next month I might have to mow it for only one nugget! The only way we could prevent this “deflation” of gold and silver would be if our prospectors found more and more of it to keep pace with our expanding economy.

What should we do?

Here’s another approach we might consider: Let’s forget gold and silver entirely (except for our jewelry) and, instead, create a Federal Treasury to which we assign the task of issuing the “legal dollars” our nation will use in its commerce. This solution immediately solves the problems inherent in our first two proposals:

  1. Since I can’t legally print my own dollars, I’ll now accept the “legal” dollars you want to pay me for my services, because that’s the only way I can get them.
  2. The Federal Treasury can issue additional dollars as they are needed by an expanding economy. This means I’d get two dollars for mowing your lawn today, and my labor would still be worth two dollars next month, or next year, when there’s a lot more lawns and a lot more mowers.

Problems solved! Except there’s still a problem, isn’t there? Do you see it? The problem is when the Federal Treasury issues the legal dollars—for now let’s assume it’s going to print them—we need a way for it to get those dollars into OUR hands so we can use them to buy products and services from each other. So how will all those dollars, stacked up in the Treasury’s printing house, get into OUR pockets? The floor is open to suggestions….

One obvious solution would be for the Treasury to simply GIVE each of us a certain number of dollars. It could announce that its doors will be open from 9 to 5, Monday through Friday, and we could all stand in line, wait our turn, and be handed our share of the issued dollars. Now the dollars the Treasury created are OUR dollars and we can go about our business of buying goods and services from each other. When our population and economy grows, and we need more dollars (so we can continue to earn the same amount of dollars for the same services), the Treasury can simply do another hand-out. That would work, right?

Here’s a further improvement I think we might agree makes a lot of sense. What if, instead of simply handing out the dollars, the Federal Treasury purchased goods and services from us—paying us dollars in return for goods and services we provide to the Federal Government? That would get the dollars stacked in the Treasury’s printing room into our pockets the same as the give-away, but it could ALSO accomplish things we’d all find useful. For example, the Treasury could pay us to build highways, or schools for our children—or could even pay some of us to teach in those schools. So now, theoretically, we’ve got a monetary system that kills two birds with one stone: it gets legal dollars into our pockets so we can buy goods and services from each other, AND in the process of doing that, it pays us to build things and provide services we’ll all benefit from. Sounds like a pretty good system, right?

It does have some strange aspects, however, that some people might be uncomfortable with. Two really strange ones in particular. The first is this: If we keep a balance sheet tally of the number of dollars the Federal Treasury spends to buy goods and services from us, we’d notice an odd correlation: The number of dollars the Federal Government spends would be exactly equal to the number of dollars WE have in our pockets. We can spend them back and forth amongst ourselves, but they’ll always add up, in total, to exactly the number of dollars the Federal Government has spent in the first place. Odd, isn’t it? But when you think about it, when we set up our Federal Treasury as the ONLY source of legal dollars, it couldn’t really balance out any other way, could it? The Treasury prints the dollars, stacks them in the printing room, then spends them to pay for services and goods we provide. So the dollars we end up with are the same dollars the Treasury has spent.

This strange correlation is only a problem, of course, if you happen to be a politician or op-ed pundit who makes his living by scaring people with the story that government spending is saddling our grandchildren with a debt they’ll never be able to repay. So people who make their living telling that story are not going to be happy with the monetary system we’ve envisioned. For everyone else, though, it still seems like a pretty good system, right? We get the dollars we need to buy goods and services from each other, and in the process of getting those dollars, the Federal Treasury pays us to create goods and services that we all benefit from together. This is almost sounding utopian!

Except now we get to the really, really strange aspect of what we’ve envisioned: You’ll notice that the Federal Treasury, as we’ve set it up in our thought experiment, doesn’t have to collect taxes in order to have dollars to spend. Why would it need to collect dollars from us when it is the source of all the dollars in the first place? And if it doesn’t need to collect taxes in order to have dollars to spend, that means there’s no reason why it would ever need to borrow dollars from anyone either. What sense would it make for the Treasury to borrow dollars when, in order to do that, it would have to print them first, and then pay them to someone, in order to turn around and borrow them back? Why would our Treasury engage in such a senseless exercise?

The strange fact that neither Federal taxes—or Federal borrowing—are necessary for the Federal Treasury to spend dollars, shouldn’t be a problem though. Unless, of course, you happen to be a politician or pundit who makes his living by arguing that we have to lower taxes on the middle-class and raise taxes on the wealthy in order to reduce our “deficit”. If you make your living with that argument, you’re really not going to like the monetary system we’ve envisioned here either.

Now there may well be good reasons why we’d want to have the Federal Government levy taxes—to create special incentives or disincentives, for example, or to take dollars OUT of the economy if inflation became a problem. But with our new monetary system, levying taxes to pay for Federal spending isn’t one of those reasons. What our thought experiment seems to be telling us is this: If we could just get rid of the politicians and pundits who make their living by (a) scaring people with the story that government spending is saddling our grandchildren with debt, or (b) arguing that taxes should be lowered for some and raised for others to pay down something they’re calling a “deficit”—if we could just somehow get past those folks, the rest of us might be very happy with the theoretical monetary system we’ve just envisioned.

But don’t get your hopes up. While thought experiments are fun, the reality is we could never create—or reap the benefits of—a monetary system as ingeniously dynamic as the one we’ve just envisioned. Nope, we’re sadly saddled with the one we have.

15 responses to “The NEW USA…. A Thought Experiment

  1. While I appreciate waxing nostalgic for capacities that seem to be out of reach, perhaps they are not so remote. The Twin Oaks Intentional Community has been successfully using a very MMT/FF like “labor credit” system for about 25 years. Its labor credit system operates in a subordinate sovereignty of a voluntary association. I am still trying to find more details on the banking processes of the Mondragon Federation of Cooperatives, and I expect to find a high degree of isomorphism with MMT/FF there as well. My hope is that through these subcultural contexts people can experience MMT/FF directly to have some experience with MT/FF as an alternative interpretation of economic participation. Part of this derives from a systems analysis regarding the degrees of isomorphism in comparing one system and set of assumptions and structures of one model to another. Part of it is out placing MMT/FF in the context of systems which share various assumptions and objectives.

  2. casino implosion

    You guys seem to be catching on. This is about the level at which MMT needs to be popularized.

  3. Now there may well be good reasons why we’d want to have the Federal Government levy taxes—to create special incentives or disincentives, for example, or to take dollars OUT of the economy if inflation became a problem.
    Who gets to make these decisions? Does a popular vote decide that some individual is qualified to determine incentives or disincentives? What if he screws up? Prints up a whole bunch of money or doesn’t print enough? Sets tax rates too confiscatory or too lenient? What if he runs off with the baby sitter or gets into cocaine or starts playing black jack at Indian casinos? Why not let each of us decide how we want to run our own lives? Maybe have a competition in private currencies, like we have with automobiles, corn flakes and TV channels. Those private currencies could be based on gold, its relative scarcity would be an advantage, which is why governments favor fiat money. They can create as much as they want to purchase votes that keep them in power while destroying the value of what others have earned in the past. What’s so good about that?

    • Those private currencies could be based on gold, its relative scarcity would be an advantage, chuck martel

      Why just gold? Bitcoin has a absolute limit on how many may be created while more gold can always be mined. Or is some money creation desireable? But at what rate? The mining rate of gold? But that’s absurd. Rather, let those who use a private currency be able to vote on how much new money is created. Hence common stock as a potential private money form.

      which is why governments favor fiat money. chuck martel

      Inexpensive fiat is the ONLY ethical government money form else someone (gold owners, gold miners, money lenders, etc) are getting a free ride via government fiat (intentional irony). However, government money should ONLY* be legal tender for government debts, not private ones.

      *Exception: A universal bailout for the entire population, including non-debtors, should be financed with full legal tender fiat to force the banks to accept it. But after the bailout period, fiat should be demoted to legal tender for government debts only. However, fiat could still be used voluntarily for private debts too.

  4. John McDonough

    It may be a poor analogy to the thought experiment, but the European Central Bank issues Euros and the European Union cannot tax anyone directly. From a Wikipedia article on European Union withholding tax: (The European Union has no taxation powers, so the name is strictly a misnomer). The individual nations in the EU turn over a portion of the EU Value Added Taxes to the EU to fund its operations. So there is an existing case where a government issues money, but doesn’t collect taxes, or at least enough taxes to equal the issued money. MMT in practice!

  5. “Each of us could print our own dollars. The ultimate libertarian fantasy! Obviously, however, that wouldn’t work, because there’d be no reason for me to accept your dollars for my services when I have the ability to print my own dollars as needed. That set up would be essentially the same as having no money at all.”

    But what if all could print the same dollars government collects as taxes?

  6. Then at least we would not need private banks.

  7. Good Thought!
    Go a little further and eliminate money completely.
    Now go and “google” JACQUE FRESCO and/or THE VENUS PROJECT.

  8. A nice thought experiment – JD started with money and ended with money – a needless journey of the imagination!

  9. Each of us could print our own dollars. The ultimate libertarian fantasy! Obviously, however, that wouldn’t work, because there’d be no reason for me to accept your dollars for my services when I have the ability to print my own dollars as needed. J.D. Alt

    No one should be allowed to print dollars except the US Treasury (cf. Matthew 22:16-22 “Render to Caesar”). They should be inexpensive fiat and the only means of extinguishing the population’s tax liabilities.

    But as for private monies, any number of them might exist so long as they gave people a reason to willingly accept them. Movie tickets, store coupons, futures contracts, and common stock are private money forms or at least potentially so.

    The allowance of genuine private monies is crucial if we are to disallow a government enforced private money monopoly. We should not have to work for or borrow someone else’s government money to pay our private debts. That’s government enforced private tyranny.

  10. MMT,

    I am a JD candidate at UMKC (in Prof. Carbone’s Property class). Is there a specific field of law, or even classes, that I should focus on to help create this thought experiment?

    Although law school gobbles up most of my time (and brain), I always find time to read this blog. As depressing as some of the news is, I am encouraged to know that there are people out there looking for answers outside of the binary lies we are feed.

  11. Of course the problem with this approach is the same problem we have with the FED (aka its member banks) issuing the currency — the issuing authority does what’s best for the issuing authority, not for the population at large. No matter how you slice it, the authority to issue money confers enormous power on whomever gets to issue it. And that kind of power tends to attract a decidedly un-socially-minded mentality.

  12. Money has several problems. It is a measure of value, a store of value, it can be hoarded, it can be accumulated without limit and it allows unearned income (the transfer and accumulation of labor credits without performing labor).

    Our old system over uses interest as a control mechanism and as a source of unearned income. Interest acts as a delayed tax on purchasing power, stalling the economy. With fiat it is not necessary. The euro is a good example of interest abuse.

    Money should be a measure of value only, a token of exchange that decays like all other assets. Accumulation is futile, with one exception. Money can be exchanged for inflation protected saving certificates that do not decay, up to a limit of $5 million. Wealthy people can spend, but not hoard or accumulate. With decay, there can be no deficit to confuse with a debt nor will it accumulate after government investment during recessions. With the role of wealth and money diminished, we may not have recessions caused by mal-investment or executive greed.

    The savings fund acts as an emergency fund and retirement supplement. You can own other assets but conversion would involve money that decays over time. Transfers in and out of savings would be limited. This system closely approximates our just in time cash flow of today while providing a savings cushion and a spending incentive. Money-getting would diminish with asset transfer taxes. Folks would need to labor for their wealth and business consolidation would make less sense.

  13. That’s a good narrative for spreading the word.

    (…) if we could just somehow get past those folks, the rest of us might be very happy with the theoretical monetary system we’ve just envisioned — “those folks” are not just pundits and politicians but greedy hoarders, too. Hence, we might also want to think about adding, e.g., a dynamic progressive tax on hoarding because that’s presumably not what we want money primarily to be (i.e. by making it easy to collect the first million but steadily more difficult afterwards until some democratically consented personal maximum, say, five or ten or whatever million, is reached after which that hoarding tax jumps to 100% making it impossible to amass more). This way, the first priority would be placed on money as a medium of exchange, a medium in broad circulation, only secondly followed by its ability to serve as some store of value, and thirdly, for keeping inflation risks at bay. What a wonderful world this could be. We just need to democratize money, remove all useless, perverse, fraudulent financial weapons of mass destruction and do away with those few selfishly wrongheaded tomfools and their SDI’s.

    Oh, and we could try to combine this model with Bill Mitchell’s Job Guarantee Program. Such a society – based on a truly democratized work and money sphere – would most certainly be saner, healthier and more sustainable for us and our environment than the one we all live in today.

    The only force against this utopian new society is the authoritarian, obstructive and destructive power that money buys today. But that power amounts to only 1 vs 99 out of every 100 people. So, what are we waiting for? Voting for a third party could perhaps be a ground-shaking starter… (for Democrats in the opposition are likely to be and act more democratic than when in power). We’re only “sadly saddled” with what we have when we blindly accept to remain the thrashed horse instead of realizing that We, The People, are the riders (provided this still is a democracy and not already a tyranny). So, make your voice be heard – vote third!

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