By J.D. ALT
NOTE: This essay was originally posted at Real Progressives
Before it disappears forever from our experience—which the rapid adoption of smart-phone commerce suggests might happen within the next decade—we should examine, take stock of, and fully understand what this piece of paper is that we call a U.S. dollar. Or maybe a five-dollar bill, which is what I happen to have pulled from my wallet in preparation for writing this essay. It doesn’t matter which bill we choose: they all have the same basic informational clues indelibly printed onto their durably woven, cotton-linen fabric. The point is this: if, and when, we can no longer pull this particular piece of “paper” out of our pocket and actually examine it, we’ll have lost our chance to understand what a U.S. dollar actually is—which is something we very much need to understand if we hope to eventually create a successful, progressive, democratic economy. So, while it is still conveniently in our pockets, let’s take it out and consider what we’re really looking at—and what that means for our modern society going forward.
My five-dollar bill has, as its focal point, a very skilled portrait of Abraham Lincoln. This has a central (if subliminal) meaning: he is a famous U.S. president who represents the idea of our collective democracy: i.e. we elect a government and give that elected government the power to “govern” us (until we determine to elect a new government to “govern” us in a new way). But whoever we elect, the whole idea of the election is that we are willingly granting those personas the power to “govern” us, which chiefly means two things: they can create laws which we can be coerced to follow, and they can impose fines, fees, and taxes which we can be coerced to pay. As I say, this is subliminal, but it’s important.
Next to Lincoln’s left ear is a watermark national symbol (a bald-eagle) overprinted with the bold inscription “The United States of America.” Taken together, these pretty much summarize the fact that this piece of paper is an official message to us from our democratically elected sovereign governors. What, exactly is the message? First, we might ask: is a message even necessary? Why couldn’t we simply have a piece of paper with an elaborately graphic and impossible to counterfeit “five” printed on it? (People who contend that money is merely a “unit of account” for economic transactions might prefer such a piece of paper!) But such a piece of paper wouldn’t work because it would not say what needs to be said for the piece of paper to actually become “money.” It would just be a piece of paper with a “five” on it—whereas my five-dollar bill, by the additional pronouncements it deems necessary to make, is something different.
What are those additional pronouncements? First, the paper is signed by not just one, but two officials of the U.S. sovereign government: The Treasurer of the United States and the U.S. Secretary of the Treasury. Again, why the need for these signatures? Why not just a piece of paper with a “five” on it? The answer is because the paper is, in fact, a contract signed by the Secretary of the Treasury and “notarized,” if you will, by the U.S. Treasurer.
What does the contract stipulate? Like most contracts, it’s a promise made by the signatory to do something. The reason for the written and signed contract is to protect against breach-of-contract in the event the signatory does not fulfill the promise. The promise is specifically described in the contract, and if it is not fulfilled, the owner of the contract—the person to whom the promise was made—has legal recourse in the courts of law to coerce the promisor either to follow through with the promise, or otherwise compensate the owner. These kinds of written contracts are, therefore, generally called “promissory notes.” And we have evidence that our five-dollar bill is, in fact, a “promissory note” by the title it is given across its top: it calls itself a “Federal Reserve Note.” It is a promise by the U.S. sovereign government (represented by its central bank, the Federal Reserve) to do something—vouchsafed by the signatures of the U.S. Treasurer and the Treasury Secretary, officials appointed by the democratically elected governing body. This is why the term “fiat” is often applied: my five-dollar Federal Reserve Note is an official “declaration” of a promise.
What, then, is it promising to do? That is specifically spelled out to the left of Mr. Lincoln’s visage, under the official seal of the United States Federal Reserve System. The promise made is as follows: “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE.” In other words, my five-dollar promissory note may be “tendered” as payment for a debt. Now if I owe you a debt you value at five-dollars, you may choose not to accept my five-dollar bill as payment, because you have not made the promise. It is not your signature on my five-dollar bill. You may require me to pay you in cat’s-eye marbles. That is your right (though you’d likely accept the fiver). The U.S. sovereign government, however, legally does not have that option because it has signed the five-dollar promissory note. It has made the promise to accept the five-dollar bill as payment for a debt you owe to the U.S. government. (Unstated, but crucially implicit in the agreement, is the fact that the only thing the government will accept as payment is, in fact, the Promissory Note we are talking about.)
So what kind of debt might you owe to the U.S. government? There are lots of fees and fines that are imposed as a consequence of being “governed,” but chiefly the debt you will constantly and repetitively owe to the sovereign government is taxes. Basically, then, the promise my five-dollar Federal Reserve (Promissory) Note makes is that the U.S. government will accept it as a tax payment. That’s it. That’s the contract. That’s the declared “promise.”
There used to be another kind of paper “dollar” that called itself a “gold certificate.” This piece of paper made an entirely different promise: it promised to accept the certificate in exchange for a specified amount of gold bullion. If you can get your hands on a U.S. government “gold certificate” no doubt the government will still honor that contract. But the Federal Reserve “fiat” Notes we use today—that we have, in fact, been using exclusively for over the past half century—do not make such a promise, do they? You can search all over your five-dollar bill and you’ll not find any hint or mention of gold or silver.
The importance of this is not simply that the U.S. government no longer must keep enough gold in its vaults to back up its money supply. The importance lies in a profound conceptual shift about what money is—and how a modern, democratic society can use that new understanding to address public needs and pursue collective goals.
First, let’s consider the “shift.” STEP ONE: The government doesn’t print “money”—it prints Promissory Notes (promises it makes by fiat). We, the citizens, transform the Promissory Notes into “money” when we accept them as payments for goods and services we provide to the sovereign government. Why are we willing to do that? Because we perpetually have a debt we owe to the sovereign government which we can only pay with the government’s Promissory Notes—so we need to earn them to be able to cancel that debt. When we accept these same Promissory Notes as payments for goods and services amongst ourselves, we reinforce this transformation of the Notes into what we think of—and use—as “money.”
STEP TWO: The sovereign government must issue and spend its Promissory Notes before it can accept them back as tax payments. This issuing and spending is crucial for the whole system to function. It obviously doesn’t work well for the government to levy taxes on its citizens and then refuse to issue and spend the Promissory Notes they will need to pay those taxes.
STEP THREE: The sovereign government cannot collect back more Promissory Notes (as tax payments) than it has issued and spent. How could it? Where would the citizens get the additional Promissory Notes? (Banks cannot print Promissory Notes signed by the U.S. Treasury Secretary and the U.S. Treasurer.) Furthermore, if the government collected back (as tax payments) exactly all the Promissory Notes it has issued and spent, the citizens would end up totally bereft of the “money” they had been using to buy goods and services amongst themselves. For the system to work, then, the government must collect back (as tax payments) substantially fewer of the Promissory Notes than it has issued.
STEP FOUR: The shift is now complete. We must simply look back at where we were to understand where we’ve gotten to. We can see what an odd perspective it was that we started out with: We imagined the U.S. government had to collect taxes before it had “money” to spend. Even stranger, we imagined that if the government spent more than it collected in taxes, it was somehow creating a debt that had to be “repaid” in the future. We can also see that today our congressional leaders—our democratically elected “governors”—still cling to, and operate upon, these two assumptions which we can now see are based on a very old, and no longer applicable, understanding of “money.”
Thus, if we are striving to unfold a successful, progressive, democratic economy, our mission is now clearly defined: First, we must facilitate this SHIFT in the thinking of every voting American—but especially in the thinking of our new progressive candidates for political office. Second, (and this will greatly assist in facilitating the first) we must begin to imagine and outline new, concrete, progressive agendas for the issuing and spending of our sovereign Promissory Notes.
To give a concrete example of the kind of “direct sovereign spending” I’m suggesting, here is what I believe should be the among the first of the progressive spending proposals: Establish, staff, and operate “free” pre-school-day-care education centers in every local American community or neighborhood.
And this is where the SHIFT becomes so important. President Obama proposed a Universal Pre-school Day Care program in his 2013 State of the Union Address. He then effectively killed it—pre-SHIFT—by explaining that his program would “cost” tax-payers ten billion dollars a year. But now, post-SHIFT, we don’t have to explain things that way anymore. Now, we explain it like this: Our democratically elected sovereign government is going to issue and spend its Federal Reserve Promissory Notes to pay American citizens to establish, staff, and operate the pre-school education centers American families—and American preschoolers—desperately need. It doesn’t “cost” anybody anything. The American citizens are going to get paid for building and operating something they need to have—provided, of course, they’re willing to be paid with the government’s Promissory Notes.
I’d appreciate with your permission recycling this essay duly credited into an edited version that will fit in a tri-folded 8 1/2 X 11 format You can find me on facebook.
Tadit Anderson, I’m off facebook at the moment. Sorry. Send me a message at twitter (@ALT_JD), and I’ll tell how we can communicate. Interested in any proposal to put forward the agenda!
There’s an angle that the essay doesn’t develop, resulting from the phrase “ALL DEBTS PUBLIC AND PRIVATE”. That phrase means that you can get the help of the court system in enforcing your contracts and doing your business, if you do your transactions using dollars. So in STEP THREE, people had had at least one good reason to use dollars to buy goods and services amongst themselves, beyond just making their government happy. It’s not complete tyranny.
I’d also add that dollars are a measurement (of obligation), not a commodity, like a lump of gold. Mark Blyth says we’ve discovered that we can have either a democracy or gold-backed currency; not both.
Any commodity-based money bakes austerity, debt deflation and/or the prospect of running out, into the economy. One never hears of protests at the Bureau of Weights and Measures worrying about them running out of inches. Yet protests about running out of dollars are a commonplace.
It’s also worth remembering that the dollar financial assets retained by the population are commonly called “National ‘Debt'”…. This is like your checking account. That’s your asset, but to the bank, it’s a liability. Dollars are just checks made out to “cash” in fixed amounts. The Federal Reserve carries currency, and some other things like bonds, on its books as a liability.
When a bank makes a loan, it creates a new deposit to the name of the borrower. It doesn’t need anything else. However, that doesn’t mean that the bank has a blank check. The bank has to attract other deposits or borrow money to avoid depleting its reserves, in the same amount of the loan. The only way to avoid this is in a monopoly.
The same way, although the government can make new notes without effort, later it will need to raise money through taxes to “sterilize” it. If not, just as other banks cause the depletion of reserves in the lending bank, other countries will cause the depletion of goods in the country (perceived as inflation). The only way to avoid this is to isolate the country or to be a monopoly (which USA has been at least until now with the dollar. The moment China and other countries stop piling up dollars and bonds it will cause an inflationary boom).
Besides all that, there is a reason people flee from communist countries. They’re an economic disaster. Spending new money without raising taxes and transforming the economy into a state planned economy (more) will lead to economic disaster in the short term (and the end of liberties in the medium term, as with all communist countries).
Thinking that one (the government) can spend without cost is very naive. Thinking (in 2018) that a planned economy is better than an unregulated economy or even feasible is nonsense.
I always enjoy your posts. I fault only one state ment you made – the next to last – “It doesn’ ‘cost’ anybody anything”. This is misleading, because the government, representing the public good, does decide to ‘spend’ money on this, or any other project it chooses to undertake.
Your many efforts to change the ‘memes’ about MMT are helpful and provocative. Thanks.
Justin Synnestvedt, retired philosophy prof
Great post JD thanks for writing and sharing your expertise.
An interesting take on the reason and purpose for a money supply JD, but why do you ignore the fact that the majority of every nation’s money supply is created by the private banking sector as interest bearing debt?
You make a statement that if the Government does not honour their promise the can be taken to court and the plaintiff compensated. But, compensated with what? Replacement promissory notes, or some gold, perhaps silver, or maybe a truckload of vegetables? But, let’s forget the printed notes for the moment and look at coins. I guarantee there is no such “promise” attached to any coins that are minted. As every printed note can be converted to solid physical metal coins, who is to say that the “promise” on the note isn’t simply a promise that the note can be converted to coins any time the “owner” of the note wishes?
As for your analogy about day-care, why can’t that analogy be converted to housing. Should the Government simply create the money supply so that everyone can have a decent house to live in? And then there is the food and water they need to survive, what about that? Those things would seem far more important for survival compared to day-care for some kids.
It is simply not true that the Government is the only source of a money supply that is essential for day to day trading. If a nation were dependent on the Government buying goods and services in order to distribute the money supply into the society, imagine the corruption and favouritism that would occur by people seeking to get on the Government’s buying list. But, you need to think one step back. How can goods and services be created unless the Government provides the money to build the factories and machinery needed to create those goods and services?
It is true that the Government is, or should be, the only authority to declare what shall be recognised as legal tender for any nation. That really has nothing to do with taxes and fees – those things are simply an application for the use of the money, not the purpose for creating money in the first place.
What we have is a relatively good distribution system of a nation’s money supply through the private retail banking system. When that banking system operates prudently and honestly, it supplies loans for viable projects on the basis of a calculated risk that the borrower will be able to repay the loan within an agreed timeframe. The problem that occurs with this system is that the banks only supply the borrower with the initial principle loan. They do not supply the extra money to cover the interest payment. As we all know, the normal type of interest on a house loan over 25 years will amount to approximately 200% of the principle amount.
Where is this extra money going to come from? Under the current system, that extra money has to come from the continual increase in the money supply. In today’s vernacular, that means the ongoing creation of more and more interest bearing loans and the creation of a perpetual debt cycle.
An option to change this system lies in the Government using their rightful authority in doing what they should be going – creating the whole of the nation’s money supply. If the Government were to make use of the real function of the private retail banking industry – that of distributing the money supply via proper due diligent loans, the Government could sell access to “money” to the private banks. By so doing, the Government could easily earn enough money to pay for all the functioning of the Government without the need to tax anyone or anything.
The only stipulation when using the banking industry would be to exclude the investment banking sector, which is primarily based on gambling and profit making rather than genuine productive investment for the benefit of the society.
That sector would have to rely on whatever money they can obtain from investors on the basis of buyer beware and not having the Government as their backup lender of last resort.
Just a thought.
A couple commenters seem to not understand all aspects of a fiat monetary system. Banks and other lenders operate in a parallel system that creates ‘low power’ money, or basically an agreement between parties that says, “I will give you ‘this’ (a government promissory note that I earn) if you give these other parties a government promissory note so that I het this ‘thing’ every party agrees is worth ‘this many government promissory notes’.”
We all need to eventually pay the government in government promissory notes (or their equivalent, and at least most of us), so the system works.
So, until the entire potential productivity of the economy is utilized, inflation cannot occur, and unemployment, will not rise. Only by trying to apply coomodity based monetary rules to a fiat monetary system do we get such large boom and bust swings. What many commodity based monetary adherents don’t seem to understand is that the only limit on the money supply is how much can be utilized, efficiently; aka the velocity of money in the economy.
Pertaining to the above article, paying for staffing, and expenditures of day care puts money into the pockets of people who will spend it, and create more commerce, which will create more jobs, etc., etc., etc.
Taxes, fees, and open market operations should only be used to regulate the M1 money supply, and interest rates. Government should be the ELR (Employet of Last Resort), and control/own any monopoly industries (e.g. power grid but not power generation, water pipes but not water plants, cable/fiber to the home but not program providers, etc.).
There is more, but you get the jist.
Nothing in the Constitution says ‘how’ congress must control spending. Why not have a Committee of Economists specializing in monetary theory determine how much Congress can spend each fiscal year without ‘breaking’ the economy?
Do an ELR ( Employer of Last Resort), and control the supply of high power money (definitely not a Friedman monetary control policy!!!), and the economy could be more stable . . . not perfect or without cycles, just more fair, and stable.
Didn’t the 74 years from 1917 to 1991 prove that governments really aren’t very good at unilaterally deciding how to spend national resources while ignoring the harsh realities of the free market?
“The American citizens are going to get paid for building and operating something they need to have—provided, of course, they’re willing to be paid with the government’s Promissory Notes.”
You mean provided, of course, they’re willing to be paid the amount of Promissory Notes that the government will pay for these services.
If the government makes too many promissory notes, people may expect huge amounts of them as payment for their services. When all those promissory notes that have been made by the government come out from under the mattresses of the oligarchs who have not been spending them, then there may be a real problem. The government may find it politically impossible to take enough of those promissory notes out of circulation fast enough to keep up the value of the ones remaining in circulation.
Thanks, JD, your post would make a great educational piece—maybe add a few of your illustrations?