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Chapter I: The Dollar
For billions of years in the history of the universe and for thousands of years in the history of the human species, there was no United States and there were no US dollars.
Native Americans first arrived on this continent about 15,000 years ago, but still there was no United States and no US dollars.
By the year 1770, mostly European immigrants had established 13 colonies, and in 1776, delegates from these colonies met in a Continental Congress to create the United States of America.
The nation they created is not a physical entity; it is a legal entity, created from thin air.
Yes, the USA has those spacious skies, amber waves of grain, purple mountain majesties, and fruited plains, but that is not what was created in 1776. Being only a legal entity, and not a physical entity, the “USA” created in 1776, cannot be seen, tasted, smelled, touched or heard.
The sovereign United States of America, like all nations, was created from thin air — by an arbitrary collection of laws — written by men.
Like all nations, the newly created US needed some form of money, so the founders decided to create their own sovereign currency rather than using some other nation’s money (unlike the cities, counties, states and euro nations, which do not use their own sovereign currency). The founders decided to pass laws that made the USA Monetarily Sovereign.
Why $241,552,780? It was just the total of eleven different printings. The Congress had the power to create, from thin air, more Continental dollars or fewer, as it chose, merely by interpreting existing laws and by passing new laws. The Congress was sovereign over its currency.
Because there is no limit to what laws can dictate, there was no limit to the number of Continental dollars the Congress could create.
Congress appointed Robert Morris to be Superintendent of Finance of the United States in 1782. Morris advocated the creation of the first financial institution chartered by the United States, The Bank of North America.
Like the United States itself, the Bank of North America was created from thin air, by the passage of arbitrary laws. It was a legal, not a physical, creation.
On August 8, 1785, the Continental Congress of the United States authorized the issuance of a new currency, the US dollar. The Coinage Act of 1792 established the dollar as the basic unit of account for the United States.
Thus, the US dollar exists, not in any physical form, but only as an accounting term.
The US itself, the Bank of North America, and the US dollar, are not physical entities. They are legal entities, created from thin air by arbitrary laws. While the amount and form of a physical entity are limited by many physical factors — production, supplies, shipping, etc. — a legal entity is limited only by laws.
Like the US, the US dollar cannot be seen, tasted, smelled, touched or heard.
The dollar bill in your wallet is not a dollar. That piece of paper is just the title — evidence of ownership — to a dollar. Just as a car title is not a car and a house title is not a house, a dollar bill is only evidence you own a dollar.
Tear that paper in half, and you do not own two half dollars. Change the appearance — the size, color or words — of that piece of paper and it may continue to represent the same dollar, so long as the laws say so. A dollar bill, a check for one dollar, a wire transfer of a dollar, a savings account passbook showing a balance of one dollar, all are legal representations of that same US dollar.
Not only did arbitrary laws create the dollar, but arbitrary laws created the value of the dollar.
Not understood by the public is the fact that every form of money is a form of debt. And the value of any debt is based on its collateral, so every form of debt/money is backed by collateral.
The collateral for today’s dollar is the full faith and credit of the US government.
“Full faith and credit” may sound nebulous to some, but it actually involves certain, specific and valuable guarantees, among which are:
A. –The government will accept only U.S. currency in payment of debts to the government
B. –It unfailingly will pay all it’s dollar debts with U.S. dollars and will not default
C. –It will force all your domestic creditors to accept U.S. dollars, if you offer them, to satisfy your debt.
D. –It will not require domestic creditors to accept any other money
E. –It will take action to protect the value of the dollar.
F. –It will maintain a market for U.S. currency
G. –It will continue to use U.S. currency and will not change to another currency.
H. –All forms of U.S. currency will be reciprocal, that is five $1 bills always will equal one $5 bill.
The full faith and credit of the fledgling US was insufficient to give the early dollar enough value, so additionally the dollar was collateralized by gold and silver:
In the early 19th century, gold rose in relation to silver, resulting in the removal from commerce of nearly all gold coins, and their subsequent melting. Therefore, in the Coinage Act of 1834, the 15:1 ratio of silver to gold was changed to a 16:1 ratio by reducing the weight of the nation’s gold coinage.
This created a new U.S. dollar that was backed by 1.50 g (23.22 grains) of gold. However, the previous dollar had been represented by 1.60 g (24.75 grains) of gold. The result of this revaluation, which was the first devaluation of the U.S. dollar, was that the value in gold of the dollar was reduced by 6%.
More recently, (in the Bretton Woods Agreement negotiated after World War II) the dollar was arbitrarily collateralized by 0.888671 grams of gold (plus the full faith and credit of the US government).
Then, on August 15, 1971, the laws were changed yet again, and the value of the debt known as “the US dollar,” no longer was partly collateralized by gold, but only by the US government’s faith and credit.
In summary: We repeatedly have used the phrase, “from thin air,” to emphasize the non-physical status of the US dollar. Being non-physical, and existing only because of non-physical laws, the US dollar is under the total control of the US government.
The existence of the US, and the existence of the dollar, and the total of outstanding dollars, and the value of each individual US dollar was and is controlled by our laws, which the federal government arbitrarily can change at any time, without limit.
So long as the federal government does not run short of laws, it cannot unintentionally run short of US dollars, nor have its dollar forced into an unintentional loss of value (aka “inflation”).
Next, Chapter II will discuss why America’s absolute sovereignty over the US dollar (Monetary Sovereignty) is important to you.
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Ten Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Federally funded Medicare — parts A, B & D plus long term nursing care — for everyone (Click here)
3. Provide an Economic Bonus to every man, woman and child in America, and/or every state a per capita Economic Bonus. (Click here) Or institute a reverse income tax.
4. Free education (including post-grad) for everyone. Click here
5. Salary for attending school (Click here)
6. Eliminate corporate taxes (Click here)
7. Increase the standard income tax deduction annually Click here
8. Tax the very rich (.1%) more, with higher, progressive tax rates on all forms of income. (Click here)
9. Federal ownership of all banks (Click here and here)
10. Increase federal spending on the myriad initiatives that benefit America’s 99% (Click here)
The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.
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10 Steps to Economic Misery: (Click here:)
1. Maintain or increase the FICA tax..
2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.
3. Cut federal employment in the military, post office, other federal agencies.
4. Broaden the income tax base so more lower income people will pay.
5. Cut financial assistance to the states.
6. Spread the myth federal taxes pay for federal spending.
7. Allow banks to trade for their own accounts; save them when their investments go sour.
8. Never prosecute any banker for criminal activity.
9. Nominate arch conservatives to the Supreme Court.
10. Reduce the federal deficit and debt
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.
1. A growing economy requires a growing supply of dollars (GDP=Federal Spending + Non-federal Spending + Net Exports)
2. All deficit spending grows the supply of dollars
3. The limit to federal deficit spending is an inflation that cannot be cured with interest rate control.
4. The limit to non-federal deficit spending is the ability to borrow.
THE RECESSION CLOCK
Recessions begin an average of 2 years after the blue line first dips below zero. There was a dip below zero in 2015. Recessions are cured by a rising red line.
Vertical gray bars mark recessions.
As the federal deficit growth lines drop, we approach recession, which will be cured only when the growth lines rise. Increasing federal deficit growth (aka “stimulus”) is necessary for long-term economic growth.
Mitchell’s laws:
•Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
•Any monetarily NON-sovereign government — be it city, county, state or nation — that runs an ongoing trade deficit, eventually will run out of money.
•The more federal budgets are cut and taxes increased, the weaker an economy becomes..
•Liberals think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.
•The single most important problem in economics is the Gap between rich and the rest..
•Austerity is the government’s method for widening the Gap between rich and poor.
•Until the 99% understand the need for federal deficits, the upper 1% will rule.
•Everything in economics devolves to motive, and the motive is the Gap between the rich and the rest..
MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
So, the change in the purchasing power of the dollar over a period of years – say, since 1971 – is due to a change in the “faith and credit” of the US? Or has the government failed in its promise:
E. –It will take action to protect the value of the dollar
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The value of a debt is “based on,” but not “determined by” the full faith and credit of the collateral.
For instance, the value of a debt can be market-based. Debt/money is an investment product. You can buy dollars or such dollar-based products as CDs, bonds, notes, etc.
Depending on the perceived value of competing investment products, a debt can rise or fall in value.
Over time, investing in dollars has not been as remunerative as investing in real estate, stocks and other commodities.
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Someone on this blog explained that our purchasing power has in fact increased but i don’t remember the details. Something about the time it took to produce the goods and services and the wages paid. It made sense 🙂
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Golfer brings up a topic that perplexes me. Why has the purchasing power of a dollar declined over the years? That is, why does a car that cost $2,000 in 1940 cost $22,000 today?
Honestly I do not know, but I suspect that this occurs because too much money in the U.S. economy consists of bank loans (with interest), and not enough as U.S. government spending.
For example, bank lending inflates land prices, and thereby inflates interest payments to the banks. The more banks lend, the higher real estate prices rise, which in turns encourages banks to lend still more, which further inflates interest payments to the banks.
I could be dead wrong about this, but it seems to me that bank loans, plus interest, are the reason why more dollars are needed to buy the same item over time.
If there had never been bank loans in the USA, and all dollars consisted of government spending, would the purchasing power of a dollar have declined over time? I don’t know. This topic vexes me. Any help from Rodger or his readers would be greatly appreciated.
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Average wages have increased more than eleven-fold since 1940. Therefore, today’s $22k vehicle is cheaper. Current vehicles are much safer and have many more conveniences, which means added VALUE.
Good points about bank loans and interest-that makes total sense.
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Elizabeth,
Today’s cars are more expensive because they are so much better-quality.
You are looking at only one side of the equation by comparing just money to money. Factor in car to car. Today’s $20,000 cars are vastly more safe. They have features such as automatic transmission, air-conditioning, cruise control, AM-FM, CD stereo, better gas mileage, better tires, etc. As recently as the seventies, cars were engineered to last 3 years / 50,000 miles before requiring major repairs (by design to promote more frequent sales). Although more expensive, cars are more than10 times superior in so many ways than any car from the 1940s.
Dollar for dollar your standard of living has gone up over the past 70 years, with cars, and just about everything else in your life. In many respects, purchasing power of the dollar has actually gone up.
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I am especially fond of what I call Rodger’s “B2B” posts (back-to-basics) like the one above. In discussing various topics, it behooves us to occasionally stop and ask, “EXACTLY HOW is the shin bone connected to the ankle bone?”
(I’m thinking of that old spiritual song “Dem Bones” by black songwriter James Weldon Johnson.)
Two comments…
[1] “Not understood by the public is the fact that every form of money is a form of debt.” ~ RMM
Yes and also a form of credit. If you have a dollar bill, then you have a credit for one dollar’s worth of “full faith and credit.”
If you have a credit, then someone must be in debt to you. Who is that someone? Everyone who thinks that your dollar is worth a dollar.
For every debt there is a credit.
For every credit there is a debt.
For every bank debit there is a credit.
For every bank credit there is a debit.
One entity’s credit is another entity’s debt or debit.
This is why we need a Federal Reserve. When the U.S. government creates money out of thin air, a bank (acting on instructions from the government) credits the account of whoever receives the money, and debits the (limitless) U.S. government account at the Fed.
All money is both a debt and a credit, but not all debts and credits consist of monetary loans. If I find a dollar in the street, then I have a credit for one dollar. Everyone who thinks the dollar is worth a dollar is in debt to me for a dollar. But the dollar-debt is not a loan-debt. I do not have to pay the dollar back to anyone, nor pay interest on the dollar.
Social Security benefits are not loans from the government to me, or to a bank. However Social Security benefits become loans from me to my bank the instant that my bank credits the SS benefits to my account (acting on instructions from the U.S. government).
People become confused because they falsely think of money as something solid and physical.
People also become confused because they fail to ask…
Exactly what is a credit?
Exactly what is a debt?
Exactly what are bank credits and bank debits?
Exactly what and who is a creditor?
Exactly what and who is a debtor / debitor?
These questions have clear and definite answers.
[2] Most MMT people falsely claim that “taxes drive money.” I presume they mean that taxes are what maintain the legitimacy of a currency and a monetary system. Some MMT people even claim that taxes are ultimately what maintain the social demand for money.
We know that these MMT claims are false (even silly), since some countries have sovereign currencies and Monetary Sovereignty without having any income tax or corporate tax. I wish that MMT people would grow out of this nonsense.
So what maintains the legitimacy of a currency and a monetary system? Social habit and custom, buttressed by government laws and guarantees. (See items A through H in Rodger’s post above.)
A U.S. currency note is a printed guarantee by the U.S. government that the note shall be legal tender (i.e. it is a government-backed medium of exchange) for all debts (and credits) public or private.
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“some countries have sovereign currencies and Monetary Sovereignty without having any income tax or corporate tax.”
Lots of countries have Value Added Tax, presumably in lieu of these others? What are the countries that have a sovereign currency and no taxes, fees, or other obligations to the government that are payable only in the government’s money (that is what MMT says, btw, not just “taxes”)?
And in those countries, if they exist, why do people there accept scraps of worthless paper in exchange for their labor?
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As for accepting “worthless scraps of paper:
It’s similar to the reason people accept titles to cars, titles to houses, stock certificates, bond certificates, passbooks, travelers’ checks, bank checks and every other contract of ownership.
People are not actually accepting paper, but rather they are accepting the legal ownership for which the paper stands. The dollar itself (not the paper) has value because:
–Everyone says it has
–People trust the full faith and credit of the federal government
–The federal government not only accepts dollars for taxes and all other debts, and uses dollars to pay its bills.
–There is no viable alternative.
Very few payments are made by way of “scraps of paper.” The vast majority are made electronically. (“Worthless” electrons?)
Remember, dollars have no physical existence, not even scraps of paper. Dollars only are as real as the laws that created them.
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Andorra uses the Euro. They are not monetarily sovereign.
Just as a curiosity, how does the government fund itself? Who gives them Euro to spend?
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MMT says the scraps of paper, or bits in the computer, have value because the government requires you to submit them in payment of your tax obligation.
Titles to houses, etc., are evidence of ownership of real assets or debts of banks or other entities. Dollars are evidence of nothing, if not tax credits – debts of government.
“Because everyone accepts them” is a circular argument. Why does everyone accept them?
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Are you saying that if you didn’t pay taxes you wouldn’t accept dollars? What is your reasoning?
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No, if a broad enough portion of the population needs them to pay taxes, then those people both accept and demand them in payment for their services, so their customers accept and demand them, etc. Even those who owe no taxes will accept and demand dollars, because they need them to buy things from taxpayers. NOT because “everyone accepts them”.
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Why does everyone accept them? For me the answer to this question goes all the way back to the days of having to barter for goods and services. It was a hassle without an established currency. So people began using animal skins as currency but trust me its not fun having to load a 100 animal skins into your wagon and not realistic for a long term solution to speed up trade. The logical next step would be for everyone to agree on a currency that is able to be widely distributed, like paper.
For me understanding a good portion of how and why money is what it is all goes back to putting myself into the shoes of the people who didn’t have a currency and the headaches that would create.
Real value lies in goods and services, Currency is just a means to quickly and efficiently trade that value.
IMO this is the natural progression of business, if you truly have to barter for trade then you will eventually develop some sort of currency to make this trading easier. Everyone will accept this currency because it in turn makes their life easier.
To me all of this is really simple if you start from the beginning. It is just made complicated in the minds of the people because they have lost touch with the facts.
I am probably the least intelligent person on this blog 🙂 so please correct me if I am wrong. Thanks!
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“What are the countries that have a sovereign currency and no taxes, fees, or other obligations to the government that are payable only in the government’s money (that is what MMT says, btw, not just ‘taxes’)?” ~ Golfer.
Many thanks for your question.
Randy Wray says taxes are the ONLY things that make people accept a fiat currency.
Here are Wray’s words verbatim:
“Why would anyone accept government’s fiat currency? Because the government’s currency is the main (and usually the only) thing accepted by government in payment of taxes. To avoid the penalties imposed for non-payment of taxes (that could include prison), the taxpayer needs to get hold of the government’s currency.”
Really? Suppose you had no tax liabilities at all. Suppose you had no job or income, and you lived in your Mom’s basement, and she paid all your expenses. Wouldn’t you still want dollars?
Suppose that all government laws and agencies that address money were in full operation, but all taxes, tariffs and so on were reduced to zero. Wouldn’t people still want dollars?
However, let us grant that the MMT claim is true. What I want to know is, why obsess on taxes in the first place? Instead, why not keep things simple?
QUESTION: What makes people accept fiat currency?
ANSWER: Three factors:
1. Government laws and regulations at all levels.
2. People’s need to have a measure of wealth (i.e. an accounting), plus a medium of exchange.
3. Habit, custom, and convention.
These three factors are mutually reinforcing.
The central government says, “Our currency is the dollar,” and backs up this edict with laws, plus the means to enforce those laws. When everyone gets accustomed to using dollars, we have a currency, whether or not there are taxes.
Therefore when you ask people, “Why do you accept dollars?” they say, “So I can buy things and pay my living expenses.” People do not say, “So I can pay taxes.”
Some countries have no income taxes. Andorra, Bahamas, Bahrain, Bermuda, Brunei Darussalam, Cayman Islands, Kuwait, Monaco, Oman, Qatar, United Arab Emirates come to mind.
Golfer asks if those countries have other taxes that “drive money” such as VAT taxes.
I say what’s the point? To shore up the myth that, “Taxes are the only things that drive money”?
It’s just not true, and no amount of MMT chanting will make it true.
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Nobody says that taxes are “the only thing” that can drive money. Read Wray on this point. He is adamant that taxes are a SUFFICIENT condition to drive money, not a NECESSARY condition,
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That is your interpretation. I didn’t know that was Randy’s interpretation.
Many things are SUFFICIENT to drive money. Widespread usage, government laws, full faith and credit to name a few.
Taxes are one of those things. Everyone agrees on that.
The disagreement is whether taxes are NECESSARY to drive money.
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A quote from Randy Wray:
“From inception why would anyone except BiffyBob and BillySue accept a “fiat” currency if there were no better reason to accept it other than the dupe-a-dope expectation that someone else is dumb enough to take it? OMG if that works, I’ve got a stack of my business cards I’m willing to exchange for your Beemer.”
http://neweconomicperspectives.org/2014/05/need-taxes-mmt-perspective.html
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And more Wray:
“Now, to be sure, taxes are not the only obligation that will drive the currency. As we’ve pointed out countless times, the farther you go back in history the more you will find that other kinds of obligations drove the currency—tithes, tribute, fees, and fines.”
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@ Golfer: I see. So Wray contradicts himself, thereby weakening the MMT myth further still.
Wray says that taxes are not the only thing that “drive money,” and yet taxes are the only thing.
“Why would anyone accept government’s fiat currency? Because the government’s currency is the main (and usually the only) thing accepted by government in payment of taxes.”
That’s it. Wray offers no qualifiers, or indication that other things drive money. Moreover his inclusion of the word “usually” shows that his assertion is dubious and incomplete.
Here it is, fourth paragraph down….
http://neweconomicperspectives.org/2011/07/mmp-blog-8-taxes-drive-money.html
The “taxes drive money” slogan is a hollow chant. It is one of MMT people’s fanatical fixations, akin to the “jobs guarantee” mumbo jumbo.
Like the emperor’s new clothes, it sounds reasonable as long as you don’t actually look at it.
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Still waiting for an example of a monetary sovereign with no taxes. Not a Euro country. Not a Caribbean island or oil sheikdom that uses $US.
You can create your own money. Write “IOU one Golferdollar” on a piece of paper. Now try to spend it. Without someone who can put you in jail or fine you for not surrendering golferdollars, that paper is worthless. Minsky says “Anyone can issue money. The trick is to get it accepted.”
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Now you’re narrowing your criteria. But why? What is your point?
Yes, you can create your own money. In fact, you have done it many times: You create money every time:
–You take out a mortgage
–You take out a car loan
–You use a credit card
–You write a check
Money = debt, so every time you create debt, you create money. People accept golferjohn money because they rely on golferjohn’s full faith and credit, the same reason they accept US dollars.
Look up Full faith and credit It, not taxes, is the reason people accept dollars.
Think of all the people who accept your checks. Why do they accept them? Do you charge these people taxes?
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The money I create is not accepted by anyone, except at a discount. My check is not my debt, it is a debt of my bank. That is why it is accepted.
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THIS WEEK IN CRAZY
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Still waiting for an example of a monetary sovereign with no taxes.
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As usual, I have no idea what your point is. Are you trying to say that taxes are or are not necessary to give value to money?
Your example from Randy seems to indicate that even he feels taxes are not necessary.
I thank you for that, for it is exactly what I have been saying.
Also, you said, “The money I create is not accepted by anyone, except at a discount.”
Fascinating. So if you go to the grocery store, they make you write a check for more than the dollar amount of your purchase?
And I loved this one: “My check is not my debt, it is a debt of my bank. That is why it is accepted.”
This means that if your check bounces, the bank, not you, is liable. I never knew that. Also, I wonder why people bother to get certified checks or bank checks, if the bank already is liable for personal checks. ‘Tis a mystery.
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You, I and Randy agree. Taxes are sufficient, not necessary. Any obligation to the sovereign, payable only in his currency, is sufficient, unless it affects only a small portion of the population. A license fee for left-handed plumbers probably wouldn’t work, if that were the only obligation imposed on any citizen.
I’m not aware of a monetary sovereign that doesn’t impose a tax, or duties, or fees – some obligation payable only in its currency. Are you?
Yes, a check could be fraudulent, just like a dollar bill or a wire transfer or a certified check can be fraudulent. But giving a check, personal, certified, or otherwise, assures the seller that he can convert it to dollars at par. Only bank money, not my IOU, is convertible at par.
If I use a credit card, I agree to pay the bank more money than the bank agrees to pay the seller. If I default on that debt, the bank still pays the seller. My IOU is accepted only at a discount.
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