Not long ago I read William Greider’s Secrets of the Temple: How the Federal Reserve Runs the Country (1989). I had read it in the early 1990s, but really didn’t fully understand the story’s implications at that time. Hard to say why I missed some really solid connections to the power of money, the power of the Federal Reserve, and the half-truths and outright lies that many of us have lived with for generations. We’ve all heard it from politicians and talking heads on the TV. “Well, how are we going to pay for that?” “You’ll have to raise taxes.” After a second thought, here’s my take on it.
The big lie: “The purpose of taxes is to raise funds for government spending.” Because we live in a “sovereign country” with a fiat money system our government does all its spending through the creation of new money. Taxes are not spent, but rather, are used to remove – more like “erase” using key stokes – some of the money that has already been spent.
The other big lie: “We need to balance the federal budget and pay off the national debt.” How many times have you heard that one? As the sole issuer of the nation’s money, sovereign governments aren’t constrained like states, businesses or households at all. However, most people believe sovereign governments have to tax in order to spend. I suppose this is partly because state, county and city governments or those nations which have given up their sovereignty by using another currency do need to balance their budget each year. Governments that can’t create fiat money are forced to operate like a household or business, spending only as much as their tax receipts plus any approved borrowing. But this just isn’t the case for the national government.
From these basic, big lies, come a litany of connected lies that most people fall for, hook, line and sinker. Here are few of my favorite, common perennial myths:
- Social Security and Medicare are unfunded liabilities that we cannot afford. Or more commonly, Social Security and Medicare are going broke.
- America borrows from China to fund our national debt. Or, the government must borrow to fund spending that exceeds tax revenues.
- Persistent government deficits lead to high inflation and we’re leaving a huge debt burden to our children.
- Government “borrowing” bleeds money away from the private sector.
What happens when the sole issuer of the nation’s money does “balance their budget?” What this means is that the government would tax (retire) all the money it issued into the economy each year – take every dollar issued out of circulation.
This would be the height of irresponsibility.
I realize that acting responsibly isn’t high on the agenda these days, but let’s pretend for a minute that someone in Washington, D.C. really does care. A responsible government tries to stabilize the economy to achieve and maintain full employment. The purpose and intent of issuing money should be used for public purposes – for the national public good, for the health and well-being of its people, for the environment, and for a sustainable economy.
The power vested in the government to issue money is not about taking it away from businesses or working families. Issuing government money comes first. That money is spent into the economy. A “deficit” is new money that has been spent into the economy and has not yet been taxed back out to compensate for our natural inclination to save some of our hard-earned money.
Part of our confusion also comes from the fact that for a long period of history national currency systems had fixed exchange rates and promises to convert their currency to gold on demand. Until 1971 the U.S. dollar was convertible to gold. That’s long been over, but we can’t seem to get over it. We act like our national money is still constrained by amount of gold stored in Fort Knox. Now we are free to issue our own currency for our national interests and for our people.
Sovereign dollars are the government’s IOU which we can return to the government in payment for our taxes. When taxes are paid, the IOU is taken off the books. If the government needs to spend, it creates new money. Taxes serve no funding purpose for sovereign governments.
It is true for all sovereign nations that issue currency and have a floating exchange rate, that government spending must precede taxation, not the other way around. We need to obtain government-issued currency first before we can return it to the government in payment for any taxes owed. There’s no need to raise taxes every time we want to fund a new government program or project. There is no need to cut one government program in order to “free up” money for another one, or a new one. Congress’s “pay-go” constraint on spending is actually creating unnecessary unemployment and recessionary pressure on the economy.
Do not misunderstand, taxes are important. Through paying taxes money is universally accepted throughout the nation. We all need that money to pay our taxes. Taxes create adequate demand for the government-issued money. Without taxation no one would accept the government “fiat” money in payment for anything.
Taxes also help to regulate the economy so it can create full employment and as a tool to keep inflation at bay. Taxation can be increased (removing money from the economy) when too much government money has been added relative to the productive capacity of the economy. Taxation can be reduced when there’s not enough money in the economy to buy all the productive output of the nation or when the private sector increases savings (which means weaker buying of goods and services), which creates unemployment.
Taxation can also be used to direct resources for the good of the people or for the environment that are otherwise being poorly distributed by the “natural forces” of so-called capitalism.
One moment in Greider’s book stood out to me. It’s pre-election1984, The Reagan miracle is rolling along, when the Fed reverses course, begins “tightening,” effectively killing Pres. Reagan’s “boom” after just 18 months.
“The civic mythology of representative democracy was also exquisitely mocked by these events. In the middle of a presidential election season the President was impotent. It was not his decision and he could not stop the Federal Reserve from making it. The elected representatives in Congress were not even consulted. Neither branch could object in candid terms without accentuating its own weakness. The American public could hardly protest either, for the public did not know that the unelected government in Washington had decided to end the boom.” (p. 620)
It’s time to end the incessant nonsense and bickering in Washington about “taxpayer funded” programs and a “balanced budget.” Become well informed on how money works. Then tell your congressman that taxes don’t fund anything. If we force government to take back (tax) all the money it creates (spends) we will be killing any hope of saving, and we’re decreasing economic productivity, which creates unnecessary unemployment. If your congressman know this already, and still feel the need to collectively punish the people they represent because of some ideological belief, well, we do indeed need a new system that prevents this kind of dead wood from being reelected.
Have a happy national tax day, everyone.