An Explanation of the Federal Reserve Money system and what it means for the potential accomplishments of American Democracy
By J.D. ALT
The big surprise of our tour of the Federal Reserve system (please see PARTS 1 & 2) is that the FED (America’s central bank)—as it is presently authorized to operate—can create “money,” as necessary, to support not only the undertakings of private enterprise, but the undertakings of public enterprise as well. Please recall that public enterprise produces needed goods and services which private enterprise cannot produce at a profit or, to make its profit, must set prices higher than what most citizens can afford to pay. To accomplish what private enterprise cannot, therefore, the U.S. Treasury, as directed by Congress, pays U.S. citizens and businesses directly to produce the goods and services of public enterprise.
The fact that the Federal Reserve system is able to create the “money” required for this spending is a surprise because we, the American voters, have always been led to believe that public enterprise is “financed” by a different method: namely, some combination of taxing private profits/income and borrowing from the investment capital of private enterprise. What we discovered, instead, is that, yes, taxes do fund some portion of the Treasury’s spending—but the remainder of the funding is derived from operations that have nothing to do with “borrowing” in any meaningful sense of the term.
What we clearly observed and documented on our tour is that the Reserves (fiat dollars) which the U.S. Treasury uses to meet the federal government’s spending requirements come, in fact, from three sources: (1) federal tax collections; (2) the voluntary exchange of privately held Reserves for future Reserves issued by the Treasury (i.e. “treasury bonds”); and (3) the exchange of future Reserves issued by the Treasury (i.e. “treasury bonds” again) for new Reserves issued by the FED. This third source is a multi-step process because the FED is not allowed to trade directly with the Treasury—but the net result of the operation we observed on our tour is exactly the same as if it did.
The federal government, we discovered, doesn’t ever “borrow” anything—and what we are persuaded to think of as a “national debt” is, in fact, merely a bookkeeping tally of some portion of the undertakings of public enterprise. It is not something that has to be “repaid” to anybody in the future; it is not something that future tax collections will have to reimburse. Nor is there a limit on the number of Reserves that can be created to pay for public enterprise: what is limited is not the availability of fiat money (the “Reserves” of the Federal Reserve system), but the real resources—skilled labor, technology, energy, materiel—which the Reserves are used to employ. If the need for some public enterprise exists, and the real resources are available to meet the challenge, the Reserves can be issued, as necessary, to employ those resources.
The implications of this “surprise discovery” are game-changing. As I write, for example, Elizabeth Warren has just released her long-awaited formula to pay for Medicare-for-all—a $50 trillion +/- federal spending commitment. Playing the old game, Elizabeth’s formula pulls out all the stops on raising taxes on the super-wealthy and large corporations—and pieces together a multitude of spending adjustments and projected cost savings to miraculously come up with the “money” necessary to pay American medical providers to provide medical care to Americans. (Elizabeth has, of necessity, carefully manipulated all these pieces within the old-game formula so it doesn’t appear the government has to “borrow” dollars—a proposition which American voters have been trained to view as political suicide.)
Mission accomplished! Except, having now stretched the old-game formula as far as it apparently can go to accomplish goal no. 1 of public enterprise (universal healthcare) we are left to wonder about the other major, money-intensive, public enterprise challenges we presently face as a collective society:
(2) student debt—$1.6 trillion plus $47 billion per year for free tuition at state colleges; (3) early child-hood care and development—$70 billion per year; (4) affordable housing—$350 billion for 7 million units (5) climate change—$90 trillion for the “Green New Deal.” And let’s now add another one to the list: (6) large-scale middle-class job displacement via the pending AIbot revolution—$148 billion per year (as a conservative estimate) for a job guarantee.
That’s a total of about $110 trillion over the next decade—after we’ve paid for universal health care—for the undertakings of public enterprise that are genuinely, if not existentially, needed by the citizens of modern American society. How is the old-game formula going to work with a number like that? And what’s going on, anyway? Have we suddenly, in the twenty-first century, become exceedingly and unreasonably profligate in our needs?
Why we need a new game formula
You can’t help but consider how fortuitous the “surprise discovery” we made in our Federal Reserve tour really is. As it happens, modern society seems to have evolved to a point where the old-game formula is, mathematically, simply incapable (as exemplified in the calculations above) of addressing the major challenges modern society confronts. Specifically, there seems to be a dramatic increase in the kinds of goods and services modern society needs, but which the profit model of private enterprise cannot provide—or cannot provide at a price that a large percentage of society’s membership can afford to pay.
To effectively function, then, modern society requires a new approach to public enterprise—and a new understanding of how U.S. citizens and businesses will be paid to undertake and implement it. What our tour of the Federal Reserve system has shown us is this goal can be (and currently is being) accomplished within the existing operations of the Federal Reserve system. If only we could clearly see it.
I should emphasize, now, that the intention here is not to denigrate or call for the curtailment of the private enterprise system. As I proposed in PARTS 1 & 2 of this essay, private enterprise and public enterprise are partners in the larger American Enterprise. As things have evolved, however—and continue to evolve with every more rapidity—the new structures of modern society are requiring larger and larger inputs from the public enterprise side of the equation.
To glimpse how this is so, let’s briefly look, one by one, at the previously listed money-intensive challenges we’re currently facing. The first four can be considered with just a few casual observations:
1. Universal Health Care
Before World War 1, health-care goods and services involved a relatively limited and straightforward set of technologies and skills. Doctors did simple surgeries, set bones, applied poultices, prescribed homeopathic tinctures, administrated morphine and, for the most part, watched, comforted and advised both patients and families. A doctor’s bill, almost by definition, was limited to a certain magnitude simply by the limitations of what a doctor could undertake to do, or what medications could be prescribed.
In today’s modern society, of course, things couldn’t be more different. There’s hardly a human medical condition that cannot be ameliorated or totally cured by the application of advanced technologies and pharmacology. These are administered in highly technical hospital complexes attended by specialized teams of highly trained physicians and aides. Illnesses or conditions that a few generations ago were simply accepted as one’s lot in life, or end-life, can now be routinely treated—and cured. And the “doctor’s bill” can now be virtually as unlimited as the amazing outcomes provided.
The problem, of course, is that only a fraction of American citizens has the income and/or wealth to buy these outcomes. To be profitable—or even to be provided at cost (out of empathetic generosity)—the modern medical services of private enterprise must be priced beyond the means of most members of modern society. The ethical choice of modern society is stark: either a large percentage of citizens must go without available medical services—or public enterprise must step in and make up the difference.
2. Student debt
It should not be a surprise that modern American society has generated a student debt crisis. Two or three generations ago most young people, embarking on a career in life, didn’t need a college education. Most employment involved manual skills. Employment that required technical thinking or management skills could be obtained by apprenticing or learning on the job. College was reserved either for learning highly complex/professional skills—e.g. medicine, law, mathematics and science—or as a badge of upper-class identity in the fine arts.
In modern society, the availability (and social status) of manual employment has dramatically declined. Production and management skills, in virtually every employment field and endeavor, have become highly technical and specialized—requiring expensive, post-high school degrees and training before a career can be embarked upon. In itself, this could be viewed as a positive evolution except, of course, for one big problem: Most career-aspiring youth do not have the financial resources to buy the required higher education and, as a result, are forced into substantial debt to do so. The perversity of being pushed into debt in order to begin earning a living is one of the most extraordinary structures modern American society has yet produced—and it weighs heavily on many crucial aspects of our collective well-being, including family formation and consumer markets.
The only remedy to this evolved structure of modern society is for higher education—and specialized technical training—to be undertaken as a public enterprise. (What could possibly be, by the way, a more logical investment by collective society in itself?)
3. Early childhood care and development
Three generations ago, the challenge of early childhood care and development—outside the realm and context of the parental family—did not exist. Pre-school children grew up in, and were nurtured by, an extended family context which covered the bases of their needs and early acclimation to the norms of becoming a socially productive individual. Families paid nothing for these services—other than the hours “donated” as parent, grandparent, aunt, uncle, or neighbor.
Transition, now, to modern American society: Extended family structures have been spatially fractured and displaced. Grandparents, aunts, uncles and cousins are, typically not around to donate childcare hours to a young family. Neighbors are typically only casual acquaintances, at best—and hardly open to stepping in for a few hours of care. The difficulty is exacerbated by the fact that, in most modern families, both parents are obliged to be employed to earn wages adequate to meet basic living expenses. Or, most problematic of all, many families have only a single parent—usually working more than one job to make up for the lack of a second income. The modern pre-school child, as a result, is virtually “abandoned.”
Private enterprise, of course, provides child-care services which “solve” this problem of modern society. Except the price for these services—even if it simply covers operating costs and expenses—must be set far beyond the ability of most families to pay. Result: either modern society must suffer the uncalculated (to date) consequences of a generation of poorly nurtured and acclimated children—or public enterprise, in defense of itself, must produce high quality child-care, as needed, for every American family.
4. Affordable Housing
Before the two World Wars, most Americans lived and worked in rural communities that revolved around agriculture and subsistence economies. Housing for the most part was a simple structure, providing shelter from the elements and an organizational matrix for the tools, implements, and subsistence activities of family life. A dwelling was something that could be put together with hard-nosed, hands-on-and-neighbor-assisted labor—and there was plenty of land-space to be owned or rented in the rural communities for that purpose.
In the non-subsistence, consumer-structure of modern society, most citizens (in order to have access to employment and education) must live in high-density megalopolises where a dwelling space is, of necessity, created by an entirely different process—a process that unfolds within a highly regulated and technical context. And while private enterprise, with great relish, rapidly produces dwellings in these complicated urban contexts, its necessary profit and overhead demands that prices for the dwellings be set far higher than what a growing number of families can afford to pay.
If every American family is to have access to an affordable dwelling, then, public enterprise must play a major role in the construction and/or ownership operations of strategic segments of the housing industry.
The big disconnect
In each of the cases just described, the structure of modern society has evolved to create a human need for goods and services—or a technical level of goods and services—which previously did not exist. And while private enterprise has the real resources to produce those goods and services, it either cannot do so within a profit-making structure, or it must set prices at a level beyond what a significant membership of society can afford to pay. Another way of visualizing this imbalanced structure is to say that private enterprise, in producing the goods and services that modern society uniquely needs, is no longer able to provide adequately compensated employment for a large segment of that society’s members—thus enabling them to be consumers of the goods and services. This endemic under-employment, relative to the goods and services that an average citizen needs to buy to live an existence of relative health and well-being, has become, in fact, the primary structural disconnect of modern society itself. And it is this disconnect (among other things) which is necessitating the dramatic growth in public enterprise.
Of all the structural changes modern society is imposing on its citizens, however, the most challenging are the next two items our list. By comparison, the four we’ve just briefly considered—devastating as they may be to the well-being of families and collective society—are mere aggravations. The ultimate magnitude of the necessity for public enterprise—and of the Federal Reserve system’s ability to create the fiat money necessary to marshal efforts to undertake that enterprise—becomes apparent when we consider, now, the challenges of (a) climate change and (b) massive job displacement by AIbots. Let’s consider these in reverse order because, as we’ll see, the former may well be the savior of the latter.
5. Massive job-displacement by the AIbot revolution
When my brother went to college (this is less than one generation ago!) he used a slide-rule to make calculations in his engineering courses. He even gave me (I was still in high-school) a slide-rule (in a beautiful leather case) for Christmas—and showed me the rudiments of its use. Before I got to college myself, the slide-rule was useless—replaced by the hand-held electronic calculator. (The oddest thing, for me, was abandoning the leather case, which had suggested the protection of something magically precious that was now rendered meaningless.)
In modern society today, the calculations of technology do not even require human input. Measurements of all kinds are taken by robotic machines, organized as data by other robotic machines, then sorted, evaluated, and applied to a task (“stay in the middle of the road!”) by artificial intelligence communicating with another robotic machine. The relentless (and “logical”) effort by private enterprise to eliminate from any given task or goal the overhead expense, inconvenience, and inefficiency of human labor has brought us to the brink of a situation that’s difficult to rationally comprehend: a society in which human participation in the production of needed things—even the creative contribution of human thought and ingenuity—have a rapidly diminishing role to play in the efforts of private enterprise. Which points directly, of course, to an approaching, overwhelming problem of massive unemployment.
There are those who say that, as with the industrial and digital revolutions, “work” will simply transition, and people will re-train themselves to do new things. The march of “progress,” they say, inevitably must replace old work and employment paradigms with new roles. And this might indeed prove to be the case with the AIbot revolution as well—except this time, at least from the perspective of profit-making private enterprise, the last of the contributing human organs is being replaced: the BRAIN. How do you recover from that? What role remains for the human being to earn his daily bread produced by the AIBot?
Perhaps I just misspoke. There is one human organ left which private enterprise’s profit motive cannot (I don’t think) replace. I’ll save that thought for PART 4 of this essay which will consider the challenge of climate change, and how, ironically, it might be what saves us—with a lot of help from the operations of the Federal Reserve system—from ourselves.