Money Pop Quiz -- Drill Down
The question was:
1) T/F The federal government spends borrowed money.
The answer is
1) Ans: False. Money is created by government spending.
One friend played by email and wrote
1) While I see it as borrowed, it is actually some sort of bond purchase arrangement.... Federal Reserve Notes ???
With respect for this person’s forbearance, here’s an edited-up version of a reply I sent.
Federal Reserve Notes are created from thin air as the government’s debt for purchased goods or services rendered to the government. The dollar is simply an IOU. It is not borrowed money and it is not funded from tax collections.
The true government debt is the money in circulation and in savings -- Federal Reserve Notes are the cash in your pocket or in your checking account. Treasury bonds are misleadingly called “national debt” - in fact they are the private sector savings where you can swap excess dollars in your checking account for a savings account.
Anybody can create an IOU that is a money object, without having to borrow or get anything else first. The problem is getting other people to accept it as money.
Acceptability can be gained by a credible promise to convert the IOU into something valuable, on demand. Millenia ago warehouse receipts circulated as money -- IOUs payable to the bearer of the receipt, issued by the temple or the warehouse when a farmer deposited a bushel of wheat. The receipt was accepted as money by anybody, because it could be converted into something of known value -- a bushel of wheat, on demand. Later the US government issued silver or gold certificates as payment, convertible on demand into gold from Fort Knox. Those certificates circulated as money because anybody could exchange them for gold.
Convertability of an IOU, as in a gold certificate, means that before anything useful can occur in the economy that is paid for by the IOU, something must be dug up out of the earth first, and deposited in Fort Knox. Convertible money benefits hoarders and miners, and only secondarily does it benefit the nation and the broader economy. In part this is what Bryant meant by “crucifying man upon a cross of gold” - he meant gold was a stupid object to elevate in importance above the wealth created in the economy itself; but the economy would just have to wait until new gold appeared before new dollars could be issued to help keep the economy running.
Gold convertibility is loved by people who hate government. You don’t care if the government is weak, you only care that it has gold in Fort Knox, to make your gold certificate acceptable as money.
A second way to ensure people will accept a debt IOU as money is for government to accept it in payment of tax. The government promises conversion of its own money object into a tax credit. Everyone will accept this IOU as money because somebody will have to get it to pay tax. Ability to enforce tax collection is a sign of healthy government.
Money is a creation of the national government. Its first use is to promote the public purpose when government spends it. Thereafter it is re-spent and it circulates in the economy to keep economic transactions moving.
A sovereign government does not have to “borrow” its own IOUs, or borrow foreign currencies, or get gold, or even collect tax to issue a new IOU. It may simply issue payments in these IOUs as authorized for specific expense. The IOUs can be created without limit to support the authorized public purpose.
The tax system ensures the IOUs in circulation remain valuable as money.
The deficit is the amount of new IOUs left in the economy after tax is collected that year. A balanced budget vacuums up all the dollars that were issued by government spending in a year. "Responsible" federal balanced budget is only responsible if the economy needs less money in circulation. The need for less money is a very rare situation, it implies a shrinking collapsing economy. A balanced budget would cause an economic collapse as savers rushed to hoard dollars, taking them out of circulation. This is "crucifying man on a cross of a balanced budget."
1) T/F The federal government spends borrowed money.
The answer is
1) Ans: False. Money is created by government spending.
One friend played by email and wrote
1) While I see it as borrowed, it is actually some sort of bond purchase arrangement.... Federal Reserve Notes ???
With respect for this person’s forbearance, here’s an edited-up version of a reply I sent.
Federal Reserve Notes are created from thin air as the government’s debt for purchased goods or services rendered to the government. The dollar is simply an IOU. It is not borrowed money and it is not funded from tax collections.
The true government debt is the money in circulation and in savings -- Federal Reserve Notes are the cash in your pocket or in your checking account. Treasury bonds are misleadingly called “national debt” - in fact they are the private sector savings where you can swap excess dollars in your checking account for a savings account.
Anybody can create an IOU that is a money object, without having to borrow or get anything else first. The problem is getting other people to accept it as money.
Acceptability can be gained by a credible promise to convert the IOU into something valuable, on demand. Millenia ago warehouse receipts circulated as money -- IOUs payable to the bearer of the receipt, issued by the temple or the warehouse when a farmer deposited a bushel of wheat. The receipt was accepted as money by anybody, because it could be converted into something of known value -- a bushel of wheat, on demand. Later the US government issued silver or gold certificates as payment, convertible on demand into gold from Fort Knox. Those certificates circulated as money because anybody could exchange them for gold.
Convertability of an IOU, as in a gold certificate, means that before anything useful can occur in the economy that is paid for by the IOU, something must be dug up out of the earth first, and deposited in Fort Knox. Convertible money benefits hoarders and miners, and only secondarily does it benefit the nation and the broader economy. In part this is what Bryant meant by “crucifying man upon a cross of gold” - he meant gold was a stupid object to elevate in importance above the wealth created in the economy itself; but the economy would just have to wait until new gold appeared before new dollars could be issued to help keep the economy running.
Gold convertibility is loved by people who hate government. You don’t care if the government is weak, you only care that it has gold in Fort Knox, to make your gold certificate acceptable as money.
A second way to ensure people will accept a debt IOU as money is for government to accept it in payment of tax. The government promises conversion of its own money object into a tax credit. Everyone will accept this IOU as money because somebody will have to get it to pay tax. Ability to enforce tax collection is a sign of healthy government.
Money is a creation of the national government. Its first use is to promote the public purpose when government spends it. Thereafter it is re-spent and it circulates in the economy to keep economic transactions moving.
A sovereign government does not have to “borrow” its own IOUs, or borrow foreign currencies, or get gold, or even collect tax to issue a new IOU. It may simply issue payments in these IOUs as authorized for specific expense. The IOUs can be created without limit to support the authorized public purpose.
The tax system ensures the IOUs in circulation remain valuable as money.
The deficit is the amount of new IOUs left in the economy after tax is collected that year. A balanced budget vacuums up all the dollars that were issued by government spending in a year. "Responsible" federal balanced budget is only responsible if the economy needs less money in circulation. The need for less money is a very rare situation, it implies a shrinking collapsing economy. A balanced budget would cause an economic collapse as savers rushed to hoard dollars, taking them out of circulation. This is "crucifying man on a cross of a balanced budget."