That means it generated its first revenue by passing laws. It created, from thin air, as many dollars as it wished and gave those dollars whatever value it wanted.

The government arbitrarily valued the first dollar at 371.25 grains of pure silver (approximately 24.1 grams). Later, the government arbitrarily defined the dollar as equal to 24.75 grains of gold (about 1.6 grams).

1834 — Gold Revaluation: Congress arbitrarily redefined the gold dollar to: $1 = 23.2 grains of gold (~1.5 grams)

1933 — Roosevelt Devaluation, after the Great Depression began, FDR arbitrarily ended gold coin circulation and made private gold ownership illegal (with exceptions). Then, in 1934, via the Gold Reserve Act, the official gold price was arbitrarily redefined to $35 per ounce ($1 = 13.714 grains of gold; ~0.89 grams)

1971 — President Nixon Ends Convertibility. Nixon closed the gold window (foreign redemption suspended). The dollar was no longer exchangeable for gold or any other physical commodity. The dollar was purely numbers on balance sheets.

Due to the government’s ability to generate numbers and control its own balance sheets, it has created an unlimited capacity to produce dollars.

Therefore, the federal government cannot run out of dollars unwillingly; it can create them at its discretion.

Federal Reserve Chairman Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency. There is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The United States can pay any debt it has because we can always print the money to do that.”

Federal Reserve Chairman Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.  It’s not tax money… We simply use the computer to mark up the size of the account.

Here, Ben Bernanke expresses the basic truth of federal financing, a truth that is denied by most economists, politicians, and the media: FEDERAL TAXPAYERS DO NOT FUND FEDERAL SPENDING.

Too often, you read or hear how someone is “spending taxpayer dollars,” or “wasting taxpayer dollars.” Those statements can be true of monetarily non-sovereign state and local government taxpayer dollars, but they cannot be true of the Monetarily Sovereign federal government taxpayer dollars.

Your federal taxes do not fund anything. They are destroyed upon receipt. The purpose of federal taxes is not to fund spending but to:

1. Control the economy by taxing what the government wishes to discourage (i.e. “sin” taxes on cigarettes) and giving tax breaks to what the government wishes to encourage (i.e. tax breaks for charity giving, and solar electricity.).
2. Assure demand for the U.S. dollar by requiring taxes be paid in dollars.
3. Make the rich wealthier by giving them tax breaks not available to ordinary Americans (Example: Trump paying $0 taxes for 8 out of 10 years), thus widening the Gap between the rich and the rest.

Federal Reserve Chairman Jerome Powell: “As a central bank, we have the ability to create money digitally.”

The St. Louis Federal Reserve: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.”

Secretary of the Treasury Paul O’Neill: “I come to you as a managing trustee of Social Security. Today we have no assets in the trust fund. We have promises of the good faith and credit of the United States government that benefits will flow.”

Paul Krugman (Nobel Prize–winning economist): “The U.S. government is not like a household.

It literally prints money, and it can’t run out.”

Ask your doubting friends which authority they believe more than three Fed Chairmen, a Treasury Secretary, a Nobel-winning economist, and the St. Louis Fed.

Other Monetarily Sovereign nations include Japan, Canada, Australia and the United Kingdom. They too cannot unintentionally run short of their own sovereign currencies.

The U.S. state, county, and city governments, along with businesses and individuals, are financially non-sovereign. They are simply users of dollars, and can run out of them.

Eurozone countries, such as France, Germany, Portugal, and Italy, do not have monetary sovereignty over the euro. They use it without the ability to create it, which means they can run out of euros.

Monetarily non-sovereign entities can create dollars by lending. When anyone borrows from a bank, the bank does not go into a vault and find dollars. Instead, the bank types this into its ledger:

Customer checking account: +$100,000 Customer loan account: –$100,000

The borrower (customer)  now has a newly created $100,000 to spend.

The bank has an asset (the borrower’s promise to repay with interest) and a liability (the deposit into the checking account). No cash changes hands. No reserves are touched.

Over 90% of U.S. dollars in existence are bank deposits, created by private commercial banks.

The U.S. federal government established arbitrary rules regarding the exchange of gold and silver for dollars, which are entirely within its control.

The dollar was never “backed” by gold; it was exchangeable for gold, a system always determined and controlled by the federal government.

The term “fiat” currency is a misnomer. “Fiat” originates from the Latin word meaning “let it be done.” In legal and administrative contexts, it refers to an authoritative order or decree established by a government or authority.

All money fits that definition, including dollars that the government decrees are exchangeable for gold or silver. Thus, all money is fiat.

The U.S. dollar has always been the debt of the federal government. Debt requires collateral. The collateral for federal debt is “full faith and credit.” This 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 its 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 and vice versa.

If you wish to issue your own money, there is no law against it. However, its acceptance would rely on its users’ belief in your full faith and credit.

For example, you could issue “My Greenbacks” and offer to pay your bills with them. If all your creditors agreed to accept “My Greenbacks” as payment, you instantly would become Monetarily Sovereign and have the infinite ability to pay all your bills.

You would not need to borrow or use any other form of income. You never would run short of money. Debt would not be a burden.

The belief that the federal government borrows is based on a semantic misunderstanding. The government issues Treasury Securities called “T-bills, T-notes, and T-bonds.” These are receipts for deposits into accounts owned by depositors.

The confusion arises from the terms “bills,” “notes,” and “bonds,” which, in the context of the federal government, refer to dollars, whereas in the private sector, they describe debt.

The term “national debt” often evokes the image of a household accumulating credit card debt. However, this comparison is misleading. In reality, what we call the national debt isn’t debt in the traditional sense; it is merely another form of U.S. dollars.

A U.S. dollar is not a physical commodity; rather, it is an entry in the financial records of the federal government. The dollar may be represented by a paper bill, a bank statement, or a Treasury security, and it signifies a legal obligation of the U.S. government.

The only difference is the form and terms of the obligation.

A T-bill is an interest-bearing IOU from the U.S. Treasury that matures at a fixed date. A dollar bill is a non-interest-bearing, zero-maturity IOU from the Federal Reserve. They both are financial obligations of the U.S. government.

A government that can create T-bills can just as easily generate dollar bills.

Yet, the media, and even the government, incorrectly describe T-bills as “debt” and dollar bills as “money.”

Donald Trump boasted that his tariffs would reduce federal debt.” That is identical to saying his tariffs would reduce dollars. And that is precisely what is happening. Tariffs remove dollars from the economy.

Dollars in the economy are being reduced, which is recessionary.

When the public pays the tariffs, dollars in the economy flow to the federal government, where they are destroyed. The federal government does not have a vault where it keeps dollars. It creates new dollars, ad hoc, every time it pays a creditor.

Treasury securities are simply time-bound dollars that pay interest. They are not borrowed dollars; they merely are dollars.

When you invest in a T-bill, one type of government-backed money (a deposit of dollars) is exchanged for another type (a T-bill). This is no different in principle from moving funds from a checking account to a savings certificate.

The term “debt” is applied to Treasury securities by accounting convention. We count the sum of outstanding T-bills, notes, and bonds as “the national debt.” We do not refer to dollar bills, reserve balances, or bank deposits as “national debt.”

Rather than providing the federal government with spending funds, the purposes of T-securities are to:

1. 1. Provide the private sector with a safe, interest-bearing place to store unused dollars — safer than any private bank.
   2. Provide a mechanism for managing bank reserves and setting interest rates
   3. Provide the federal government with a semantic rationale for claiming that benefits for middle- and lower-income people are “unaffordable” and “unsustainable,” while continuing to give tax breaks to the rich — i.e., widening the income/wealth/power Gap between the rich and the rest, thus making the rich richer.

Paying off Treasury securities involves debiting T-security accounts and crediting bank accounts. The government does not need to “earn” dollars before doing this. It merely changes the form of its liability from T-bills to dollar bills, the reverse of what it did when issuing the T-bill in the first place.

U.S. depressions come on the heels of federal surpluses.

1804-1812: U. S. Federal Debt reduced 48%. Depression began in 1807.

1817-1821: U. S. Federal Debt reduced 29%. Depression began in 1819.

1823-1836: U. S. Federal Debt reduced 99%. Depression began in 1837.

1852-1857: U. S. Federal Debt reduced 59%. Depression began in 1857.

1867-1873: U. S. Federal Debt reduced 27%. Depression began in 1873.

1880-1893: U. S. Federal Debt reduced 57%. Depression began in 1893.

1920-1930: U. S. Federal Debt reduced 36%. Depression began in 1929.

1997-2001: U. S. Federal Debt reduced 15%. The recession began in 2001.

The reason: Gross Domestic Product, the most common measure of the economy is the total of: Federal Spending + Non-federal Spending + Net Exports.

Decreases in Federal Spending also decrease Non-federal  Spending, and these decreases decrease GDP.

In short, the so-called federal “debt” is a record of how many more dollars the federal government has added to the economy by spending than it has removed by taxing.

Adding dollars to the economy grows the economy. Thus the so-called “debt” demonstrates economic growth. The larger the debt, the greater the growth. Lack of debt growth = recession.

If your governor or mayor boasted that he/she was going to increase sales taxes so that the government could take in more money, would you consider that good news?

That is no different from the President boasting that he increased tariffs so that the government could take in more money.

Actually, the Presidential boast is worse because states and cities need and spend tax revenue, the federal government doesn’t.

When Donald Trump and his associates claim that the government will receive trillions in tax revenue, they essentially are stating that they will extract trillions from the U.S. economy solely to make the wealthy even richer.

How do increased tariffs benefit the rich? To become wealthier, the rich must widen the income/wealth/Gap below them and narrow the Gap above them.

Those of us who are not rich pay a greater percentage of our incomes on products subject to duties than do the rich. The duties widen the income/wealth/power Gap between the rich and the rest, and it is the Gap that makes them rich.

If there were no Gap, no one would be rich. We all would be the same, and the wider the Gap, the richer they are. Tariffs widen the Gap.

President Donald Trump said he is considering distributing rebates to U.S. taxpayers because of billions of dollars from tariffs flowing in from foreign imports.

This either is based on his ignorance of federal financing or, more likely, his intentional misrepresentation of how federal finance works.

State and local governments, businesses, and individuals like you and me are all monetarily non-sovereign, meaning we rely on income and borrowed funds. In contrast, our federal government, which is Monetarily Sovereign, does not depend on income or borrowing. Instead, it creates new dollars as needed whenever it pays a creditor.

Your federal tax dollars are destroyed the instant they are received by the Treasury. The process is:

1. You pay your taxes by taking dollars from your checking account. These dollars are taken from the M2 money supply measure. 2. When your dollars reach the Treasury, they cease to be part of any money supply measure. There is no measure of the Treasury’s money supply because the Treasury has access to an infinite amount of dollars.

As a result, your federal tax dollars are effectively removed from circulation, while new dollars are created and sent to creditors.

Once these new dollars reach the banks of the creditors, they are added to the M2 money supply. This is how the federal government generates dollars—by settling its obligations.

In summary, Trump cannot distribute tariff dollars. They disappear immediately. He can, at will, send as many dollars as he wishes to anyone he wishes because the government has infinite dollars available to spend. He could have sent the “rebates” the day he came into office, or today. Waiting for tariff dollars is a meaningless gesture.

Tariff collections do not add to the federal government’s ability to spend. That ability remains infinite, whether or not tariffs are collected.

By contrast, state/local tax dollars are not destroyed. They go into banks where they continue to be part of the M2 money supply. State/local governments do spend the tax dollars and other income they receive.

The traditional view suggests that inflation occurs due to “too much money chasing too few goods.” However, this outdated explanation misses the more immediate cause of inflation: supply shortages, especially in essential goods like oil, food, and housing.

Inflation always results from an imbalance between demand and supply. But we must ask: what causes that imbalance? Federal spending increases the money supply, which in turn can increase demand for goods and services.

However, demand typically builds gradually and through indirect channels, like increased employment, public contracts, or income supports.

In contrast, supply shocks tend to happen abruptly. Wars, pandemics, droughts, embargoes, and logistical breakdowns can slash the availability of key goods almost overnight.

When essential commodities like oil or wheat are suddenly scarce, prices rise across the board, not because of excessive money, but because of insufficient supply.

Historical Examples of Supply-Driven Inflation

Real-world inflation episodes across the globe support the supply-side view:

1950–1951 Korean War: At the outbreak of the Korean War, prices surged due to panic buying, military buildup, and supply bottlenecks in key materials like steel, rubber, and oil.

1970s U.S. Oil Shocks: The Organization of the Petroleum Exporting Countries (OPEC) imposed oil embargoes in 1973 and 1979, causing significant price increases. Inflation rose, not due to excessive federal spending, but because of the sudden drop in oil supply.

1973–1974 Global Food Crisis: In addition to the 1973 oil shock, the early ’70s saw a global spike in grain prices, partly due to poor harvests, rising meat consumption, and large U.S. grain sales to the Soviet Union.

2005 Hurricane Katrina: Katrina damaged Gulf Coast oil production and refining capacity, leading to a temporary spike in gasoline prices.

2020–2022 COVID-19 Pandemic: Lockdowns disrupted global supply chains, while shipping bottlenecks and factory shutdowns diminished the availability of goods. This was followed by inflation, despite subdued household demand early in the pandemic.

Post-War Europe (1940s–50s): After WWII, devastated infrastructure and displaced populations created widespread scarcity of goods, particularly food and housing, leading to inflation across the continent. Currency reform helped, but the recovery of supply was the key.

Zimbabwe (2000s): Though frequently cited as an example of money printing leading to hyperinflation, the primary cause was the devastation of agricultural output due to land confiscations. This resulted in food shortages and a decline in export revenue, ultimately leading to the collapse of the currency.

Weimar Germany (1920s): Reparations payments and loss of industrial territory after WWI, combined with political unrest and a halt in domestic production, created shortages. Hyperinflation followed only after real output had drastically fallen.

These examples show that supply breakdowns, whether from war, sanctions, pandemics, or policy, are central to inflation crises.

Time Asymmetry: The Hidden Factor

A crucial but underappreciated aspect is time. Demand tends to rise slowly, giving markets and the government time to adjust. But supply can fall sharply and without warning.

The economy does not self-correct at the same pace in both directions, and government reaction can have difficulty keeping up with the shortages.

Federal deficit spending rarely causes direct demand spikes for food or oil. Most government spending enters the economy as a general stimulus, bolstering incomes, investment, and production.

If inflation arises during such periods, it generally coincides with supply constraints, not with runaway consumer demand.

The Mistake of Fighting the Wrong Cause

When policymakers target inflation by suppressing demand, through higher interest rates or spending cuts, they may worsen economic pain without resolving the shortage.

Interest rate hikes do not produce more wheat, oil, or housing. They may instead trigger unemployment or recession. Reductions in federal spending are recessionary.

Understanding that most inflation is driven by supply indicates different solutions: strengthening supply chains, investing in domestic production, stabilizing essential imports, and maintaining strategic reserves. All these measures require increased federal spending rather than a reduction.

Conclusion

Inflation is rarely, if ever, a sign of excessive money supply; rather, it indicates a shortage of goods.

We should stop blaming federal deficits for what are clearly supply-side problems. Better policy begins with better diagnosis, and in today’s world, that means putting shortages at the center of our efforts to prevent and cure inflation.

Rodger Malcolm Mitchell

Monetary Sovereignty

Twitter: @rodgermitchell

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MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell;

https://www.academia.edu/

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A Government’s Sole Purpose is to Improve and Protect The People’s Lives.

MONETARY SOVEREIGNTY