By J.D. Alt
(This is the working draft of a short, targeted eBOOK directed specifically at the millennials—the huge generation of energetic, creative, and cooperatively inclined young people who might, just maybe, rise up and demand a new understanding of the American economy. The eBOOK has three goals: (1) explain the basics of MMT to those who’ve never heard of it (2) unveil, at least partially, the misinformation network of the status-quo, and (3) suggest the scale of very real collective benefits a new understanding actually makes possible. Any suggestions about fine-tuning—or fundamentally altering, if necessary—the basic message of the essay are welcomed. (I’ve divided the draft into two parts to better fit the blogosphere.)
How is it the 1% exerts such complete and dominant control over our national agenda? And by what means can the 99% claim the collective power that, by democratic rights, should be firmly in their hands? The answers obviously have something to do with money—after all, the 1% are defined by various monetary measurements: the top 1% own 42% of the total financial wealth in the U.S. economy; the top 1% own 35% of all privately held stock, 64% of all financial securities, and 62% of all business equity. If all those percentages have a numbing affect, here’s another way to frame it: The top 400 families in America own more financial wealth than the bottom 150 MILLION families combined!
The 1% clearly control the money, and they use that money not only to make more money but to exert political power in a myriad of ways. But implicit in this perspective is a profound misunderstanding about money itself—and it is this key misunderstanding which oppresses the 99% far more than the income disparity itself: Not only is the misunderstanding relentlessly exploited by the 1% to maintain their advantage—more insidiously, it prevents the 99% from even seeing the paths of opportunity available to it.
The critical—and crippling—misunderstanding about money is embodied in a narrative that is echoed daily, hourly, with drumbeat regularity, in the national media and spin-chambers (which are controlled and financed, not suprisingly, by the 1%.) The narrative will sound very familiar—it goes like this:
The financial wealth of a nation is, at any given time, a finite resource privately and individually held by the citizens; any and all government spending must, therefore, be funded by the collection of taxes. An “out-of-control,” “big government” spends more Dollars than the citizens are willing (or able) to pay in taxes—and this lack of “fiscal responsibility” requires the government to borrow Dollars from the financial markets to make up the difference. This borrowing places the “out-of-control” government in direct competition for Dollar resources with the business-financial class of citizens. Since all citizens are ultimately dependent upon the business-financial class to create jobs and pay wages, this competition for Dollar resources by “big government” diminishes the overall prosperity of the citizens—a diminishing that is compounded by the burden of tax payments, and further compounded by the government’s debt which represents future tax burdens.
The narrative continues with the indignant observation that government gets “too big” and “out-of-control” because in a democracy citizens with meager financial resources are able to vote for government spending programs that provide services and benefits which they, themselves, cannot afford to buy. The 1% agenda, therefore, is specifically focused on limiting or eliminating government spending programs which benefit the poor. The 1% perspective is that the best that can be done for citizens with meager financial resources is to shrink the government and limit its spending, thus making more Dollars available to the business-financial class for job creation and wages. Providing financially struggling citizens with assistance, or welfare, or “free” services succeeds only in creating a culture of dependency. The very last thing the 1% agenda would ever abide is for the government to “print” money to pay for the costs of its “out-of-control” spending, since such a policy would destroy the value of the citizen’s Dollars (of which the 1% own the vast majority) and create the disastrous consequences of inflation.
Why the 99% struggles to respond.
To date, the 99% have no effective response to this drumbeat narrative for the simple reason that they have implicitly agreed with its most basic premise: In order to spend, the U.S. government has to either collect taxes or borrow Dollars from the private sector economy. This premise is taken to be such a logical, common-sense truth, it never occurs to the 99% to question its validity. Because they buy this premise, the 99% are left with only the defensive position of trying to justify higher taxes on the wealthy (to help the government mitigate the pain and social problems of poverty, for example)—or having to justify continued government borrowing (to help recover from the devastation of catastrophic super-storms, for example.) Is there need for a special social program targeting a collective good? “Pay as you go” is the only logic of the 1% basic premise. Thus, for example, President Obama’s “universal” pre-school program is proposed to be “funded” with a 94 cent tax increase on cigarettes and tobacco products. The money to provide our preschool children with early reading and learning skills, in other words, has to be taken from somewhere else—a zero sum game that requires someone to lose in order for others to gain.
What the 99% must come to realize, however—even if it seems impossibly doubtful at first blush—is that because of the realities of the modern fiat currency we use today, the central premise of the 1% narrative is false. More important, revealing the truth behind this false premise can create an opportunity for the 99% to build a powerful counter-narrative with which to duel the 1% agenda. Anger and outrage are not enough. The next time an urban plaza is “occupied” there needs to be a cohesive argument about what the underlying problem actually is, and how to fix it. The purpose of this small essay is to suggest a platform upon which that counter-argument might be constructed. The platform is composed of five simple talking points which reveal—each from a slightly different perspective—the single, root cause of the 99 percent’s continuing frustration and oppression: The failure of sovereign government to fairly and effectively manage the national fiat currency (money) over which the sovereign government, in fact, has exclusive control.
The Talking Points
- Any sovereign nation which fails to provide its citizens with the full benefits available to them by virtue of the sovereign’s inherent ability to issue and manage its own fiat currency should be strongly challenged by its citizenry.
- Any economist who makes the claim, either explicit or implicit, that a nation which issues and manages a sovereign fiat currency must either borrow or collect taxes in order to have currency to spend, should have his or her diploma revoked.
- Any political leader in a sovereign nation which issues and manages its own fiat currency who claims the national government doesn’t have the “money” to pay for goods or services which are, in fact, available within the national borders—and which would greatly benefit the citizens—should be tarred and feathered and drummed out of office as an ignorant charlatan.
- Any banker or financial leader who suggests that a sovereign nation which issues and manages its own fiat currency is dependent upon the bond market to “finance” its sovereign spending should be investigated and prosecuted for the financial frauds they are more than likely in the act of perpetrating.
- Any journalist who makes his or her living counseling the public about economic matters, who fails to take the time to understand and explain to his or her audience how sovereign fiat currencies actually function, should be summarily stripped of their journalistic credentials and pushed out the door of the newsroom.
These talking points can be supported with a simple set of facts and logic easily grasped by any person with or without an interest in economics. Let’s begin with the pivotal terms contained in each of the five points: “sovereign nation” and “fiat currency.” Simply acknowledging the basic meaning of these terms (and their relationship to each other) will lay the foundation for virtually everything that needs to be understood for the 99% to take control of their destiny.
What is a sovereign nation? It is a group of people within a claimed territorial boundary (recognized by other sovereign nations) who are joined together by a social contract stipulating that each individual citizen agrees to abide by the rules exclusively established and enforced by the group. For our purposes, we don’t need to get any more complicated than that: I am a citizen of the sovereign nation USA, and I agree to abide by the rules established and enforced by, and within the borders of, the USA.
What is a fiat currency? It is the result of one of the rules established and enforced by the sovereign nation: The U.S. government establishes that it will, on a regular basis, collect taxes from its citizens. It further declares that the only thing it will accept as payment for taxes due is the sovereign currency which the government, itself, will print or issue electronically—(in America, this is the U.S. Dollar). The sovereign government of USA creates these Dollars by “fiat” (it “declares” them into existence) and it is the only entity which can issue U.S. Dollars. Everyone else—families, corporations, banks, state and local governments—are users of the fiat Dollars the sovereign government issues. Anyone else who tries to issue a U.S. Dollar is a counterfeiter and subject to imprisonment.
This is how Money is created!
The two simple statements above explain how, in fact, money is created in modern societies. We, as citizens, don’t accept U.S. Dollars in exchange for our labor, or for the goods we produce, because those dollars have any intrinsic value—or because they can be converted, on demand, into something else that has intrinsic value (gold, for example.) U.S. fiat currency—the U.S. Dollar issued by the sovereign government—is nothing more, and nothing other, than a promise by the sovereign government (by virtue of its declarations) to accept that Dollar as payment for Federal taxes owed. We citizens, in turn, accept fiat Dollars as payment for the goods or services we provide because we know two things:
- We are going to need some of those Dollars to pay our taxes with, and
- Other citizens will, in turn, accept fiat Dollars from us—as payment for the goods and services we need from them—for exactly the same reason.
The “value” of the fiat currency, then, lies directly in the original declaration by the sovereign government that taxes MUST be paid using the fiat currency issued by the government. As we shall see, the implications of this fundamental truth are enormous for the aspirations of the 99%. But first, it is necessary to counter a volley of objections from those who believe that “fiat” money is not “real” money, and whose chorus of alarms continuously reinforces the 1% narrative.
What about Gold and Silver?
Most of our cultural instincts about money are based on an underlying and implicit “story” about precious metals. The only “real” money in this story is gold and silver, or the “old” U.S. Dollars that used to be convertible, on demand, to some specific amount of gold or silver. In this tale, the gold and silver coins that used to circulate as money derived their value, of course, from the amount of gold or silver each coin contained. In order for them to be used efficiently as a medium of exchange (with everyone being able to quickly ascertain a coin’s value) some authority had to “strike” or “mint” the coins (emboss them with a figure) to certify the amount of metal each contained. This service was typically provided by the sovereign government—the King or Emperor, or Queen, back in those ancient days—and the figure embossed on the coin was, more often than not, the visage of that sovereign leader. The Monarchy then acquired its own supply of the gold and silver coins by taxing the citizens.
The story continues along these lines: Citizens who, by one means or another, amassed large amounts of these gold and silver coins, needed some place to safely store them. Banks were created for this purpose, and “bank notes” were paper receipts issued by the banks for the gold coins held in deposit. Soon the paper bank notes themselves were used as money, with people accepting them in exchange for goods and services because of the actual gold backing them up in the bank’s vault.
Gold to Modern Fiat Money—a transition of fuzzy logic
In the modern world today there is no national currency that is backed by either gold or silver. All sovereign monies are fiat currencies—the U.S. Dollar, the Japanese Yen, the Russian Ruble, the Chinese Yuan, the British Pound, etc.. Gold coins, which are still minted for commemorative purposes, are simply decorative chunks of precious metal—not unlike jewelry—which are purchased with fiat money (in the same way that precious jewelry is purchased.) The U.S. Dollar has had no real or implied connection to gold for over forty years. Richard Nixon took the U.S. (and consequently the rest of the world) off the gold standard in 1971. The reason was quite simple: it had become painfully apparent that there was not enough gold in the world to “back up” all the sovereign currency that was being created to cover the dramatic expansion of goods and services in the global economy. When Charles de Gaul, the French president, demanded that the U.S. convert all the French-held U.S. Dollars into gold, it was clear the game was up. Nixon acted, ushering in the modern era of pure fiat currencies.
Nevertheless, the implicit story about gold and silver “money” stubbornly persists, leading to the fuzzy reasoning that U.S. Dollars (and other fiat currencies) continue to “operate” according to the logic of gold and silver coins: (1) Dollars are “struck” by the government (which officially establishes their value); (2) they are owned by citizens and (3) kept in banks which loan them out to people and businesses. The sovereign government itself—when it needs Dollars to pay for its national programs and expenses—must get those Dollars either by collecting taxes or borrowing from the citizens.
The fuzzy logic of this persistent story is reinforced by historic anomaly: the U.S. Congress continues to maintain today laws that were implemented in the early 1900’s specifically to prevent the government, at that time, from issuing more Dollars than it could back up with gold. The Federal Reserve Act of 1913 established that for every Dollar the sovereign spends over and above what it collects in taxes, it is required by law to make up the difference by selling Treasury bonds to the citizens—in other words, it has to “borrow” existing Dollars already issued (rather than issuing new Dollars) if it needs to spend more than it collects in taxes.
It is the structure of this antiquated law which enshrines the Dollars and Gold story in our contemporary psyche by forcing the sovereign government to do something it otherwise, by logic, should no longer be doing in today’s world of fiat currency: measure what it can “afford” to spend in terms of what it can collect in taxes—and going into “debt” to make up the difference. It is by this law that the false choice is established which pits the citizens against their own government—a false confrontation heralded in every newspaper article about sovereign spending with the phrases “at the taxpayer’s expense,” or “spending taxpayer’s Dollars,” or “on the backs of taxpayers.” And the only thing we, the citizens, resent more than paying those taxes in the first place is the idea that the sovereign government is guaranteeing that we’ll have to pay even higher taxes in the future because of all the Dollars it is “borrowing”.
This story that the sovereign government is competing with the citizens for a finite amount of money that exists in the national economy—appropriating vast sums through taxation, borrowing vast sums which the citizens, themselves, will have to repay at some point in the future, depriving the business-financial class of Dollars it could otherwise be using to create jobs and pay wages—is the chanting mantra of the 1%. And for good reason—because it avoids the most basic question there is about the true nature of modern fiat currency: If only the sovereign government can issue fiat Dollars, then how do those Dollars get into the hands of the citizens?
It is the answer to this question that can potentially empower and liberate the 99%.