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.