With the imminence of a two-year budget deal including targets for the next decade comes removal of the only substantive objection we have heard from any expert to re-introduction of debt-free United States Notes….that the ability to fund deficits without cost may tempt Congress to throw itself into reverse and spend our way into hyper-inflation. That unlikely scenario will be gone with the amount of spending to be done established by the budget. The only decision yet to be made concerning this budget is whether to fund the deficit with Federal Reserve Notes that will cost the government hundreds of billions of dollars to borrow or to fund it at least in part using historic debt free United States Notes issued directly by the Treasury. We can as much as turn the 2014 deficit into a surplus.
Is there really a choice as simple as that? Yes, if we properly design our “new” alternative. Consider: The original authorization for US Notes (Lincoln’s “greenbacks”) was for a limited dollar amount. But the widening Civil War required additional issuances at the same time that massive wartime shortages drove up prices as they would have no matter what form of currency was used. There was inflation, during the course of the war – as much as 80%. At the end of the war, however, prices and the value of the greenback stabilized. Labor and agrarian interests sought to expand the number of greenbacks in circulation to foster growth and, it was alleged, to make debts repayable with cheaper dollars. Banks and creditors fought for re-introduction of the gold standard as the means then in use to tighten the money supply. There went the debt-free greenbacks, due solely to the operation of a political contest. That is the only reason we don’t have them today. Today, neither gold nor silver backs either US Notes or Federal Reserve Notes and we have other ways to tighten or expand the money supply - a new game.
Congress could, once again, authorize an issuance of greenbacks (paper and electronic equivalents) limited by dollar amount. There might also be a limited authorization time, perhaps with a one-year sunset date. That would give Congress a chance to assess how things are going. Interim administrative assessments could be made by the Fed and the Treasury, as the US Notes need not be issued all at one time. The Fed and the Treasury coordinated effectively during the 80+ years that United States Notes and Federal Reserve Notes circulated side-by-side. Even if we fund the whole deficit by US Notes, that would only be about 5% of the conservative M2 money supply measure (see our October newsletter). The Fed would clearly remain in the driver’s seat. Should the US Notes eventually be withdrawn from circulation, that can happen exactly as it did before; you can still deposit US Notes at a bank, but you’ll only get Federal Reserve Notes if you withdraw cash. The rest is “swallowed by the machine.” Let’s be clear: a dollar is a dollar, by law “Legal tender for all debts, public and private.” Nothing “backs” Federal Reserve Notes any more than US Notes–in both cases it is only the “legal tender” declaration of the government, which allows either Federal Reserve Notes or US Notes to purchase Treasury bonds, gold or anything else according only to their dollar denomination. There is absolutely no technical or practical reason why United States Notes cannot be issued again, used interchangeably, just as in the past.
If we were in the middle of another Civil War, the buying power of Federal Reserve Notes would decline just as much as United States Notes. Neither form of currency is “weaker”. With the gold and silver standards now abolished, both have value sustained by precisely the same things: (1) the initial fiat power of government to declare them “Legal tender for all debts, public and private”; (2) limitation of the total number of dollars of both types in circulation; (3) the health of the US economy, in which a factor is the financial health of the US government (which the use of debt-free US Notes would promote). Unlike the Civil War period, we now have a Federal Reserve capable of tightening the money supply, of which the US Notes would be “a drop in a rainstorm”. The Fed would be able to effect monetary policy on its own, even without the cooperation of the Treasury concerning its pittance, but isn’t it reasonable that there would be cooperation again? Besides, we are not just at a sensitivity crisis point, not on the very verge of collapsing into hyper-inflation, but rather in a position to, without precise micro-management, expand employment and production (supply in balance with demand).
Are debt-free United States Notes more inflation-causing than an equal number of dollars in Federal Reserve Notes? Absolutely not. That question was specifically addressed by a Congressional Research Service paper.
Does it really cost the government less to issue debt-free United States Notes than to borrow Federal Reserve Notes, given that the Fed returns interest on Treasury bonds to the Treasury? You bet it does! We are surprised by how often that question comes up. The Congressional Research Service report cited above notes that only 10% of the federal debt is held by the Federal Reserve. The rest of the debt is funded by other borrowing, primarily selling Treasuries to domestic and foreign investors who will not return the interest, who may not always be as able or as motivated to purchase them as today, and who will require higher returns when interest rates rise from today’s all-time lows.
Why haven’t we wisened up to the use of debt-free United States Notes before? We have. The politics surrounding the greenbacks after the Civil War reflected a struggle between massively powerful interests – 19th century labor and agrarian interests versus banks and wealthy creditors - with the later coming out on top. However, the debate has raged on in every decade since, as described in past issues including the November, 2013 Policy Winners. Is there still a struggle going on, sometimes behind-the-scenes, with the banks and the very rich pitted against working class interests? Indeed there is. But….
We need not think in terms of a winner-take-all sweepstakes. Let’s put it in perspective: We have licensed the banks to create money “out of nothing” via the fractional reserve system that allows them to lend 10 times or so what they actually have. This is the way most of our money is created. What gives the money that they lend value? It is nothing that the banks do. It is nothing more or less than the fiat power of government stipulating that the money is “Legal tender for all debts, public and private.” This license we have given the banks is very generous indeed. (We would throw counterfeiters in jail).
After the redistribution of wealth from the great middle to the “uber rich” we have seen during recent decades…by now a phenomenon well-known to the public at large…and after the Great Recession, is the public in the mood to be just a bit less generous toward the banks and the money masters? Is it too much to ask that the public be given, say, five percent of the benefit the banks are given…that the government license to itself, in accordance with the mainstream of historical orthodoxy, the old sovereign right to create money - even if just a tiny part, not all (as per the Chicago Plan) of our money?
Why should we go hundreds of billions of dollars further into debt this coming year, rather than be willing to fight a little over the bitty scrap we need? The irony is, if we use United States Notes wisely to strengthen the governments’ financial position and the health of the economy, everyone will gain at least some benefit…including the banks and the very rich. If there’s one thing we should have learned from the Great Recession, when both the banks and the public had their scary moments, it is this: Ultimately, we’re all in the same boat together and the ability to bail it out is our underlying security.
A moment of opportunity? Our slow recovery, our present super-consciousness of debt, our recent history of failures of “the system” and now the establishment by Congress of the spending we will do can come together as a unique moment of willingness to try something new–particularly in the cautious manner here proposed. We can escape the dismal “science” (?) of dire fiscal prophesying by showing a new willingness to explore and work out new solutions, now that Congress has initiated a fresh start. The stars may not so align and such a moment of opportunity may not re-appear for a very long time.
Is there really a choice as simple as that? Yes, if we properly design our “new” alternative. Consider: The original authorization for US Notes (Lincoln’s “greenbacks”) was for a limited dollar amount. But the widening Civil War required additional issuances at the same time that massive wartime shortages drove up prices as they would have no matter what form of currency was used. There was inflation, during the course of the war – as much as 80%. At the end of the war, however, prices and the value of the greenback stabilized. Labor and agrarian interests sought to expand the number of greenbacks in circulation to foster growth and, it was alleged, to make debts repayable with cheaper dollars. Banks and creditors fought for re-introduction of the gold standard as the means then in use to tighten the money supply. There went the debt-free greenbacks, due solely to the operation of a political contest. That is the only reason we don’t have them today. Today, neither gold nor silver backs either US Notes or Federal Reserve Notes and we have other ways to tighten or expand the money supply - a new game.
Congress could, once again, authorize an issuance of greenbacks (paper and electronic equivalents) limited by dollar amount. There might also be a limited authorization time, perhaps with a one-year sunset date. That would give Congress a chance to assess how things are going. Interim administrative assessments could be made by the Fed and the Treasury, as the US Notes need not be issued all at one time. The Fed and the Treasury coordinated effectively during the 80+ years that United States Notes and Federal Reserve Notes circulated side-by-side. Even if we fund the whole deficit by US Notes, that would only be about 5% of the conservative M2 money supply measure (see our October newsletter). The Fed would clearly remain in the driver’s seat. Should the US Notes eventually be withdrawn from circulation, that can happen exactly as it did before; you can still deposit US Notes at a bank, but you’ll only get Federal Reserve Notes if you withdraw cash. The rest is “swallowed by the machine.” Let’s be clear: a dollar is a dollar, by law “Legal tender for all debts, public and private.” Nothing “backs” Federal Reserve Notes any more than US Notes–in both cases it is only the “legal tender” declaration of the government, which allows either Federal Reserve Notes or US Notes to purchase Treasury bonds, gold or anything else according only to their dollar denomination. There is absolutely no technical or practical reason why United States Notes cannot be issued again, used interchangeably, just as in the past.
If we were in the middle of another Civil War, the buying power of Federal Reserve Notes would decline just as much as United States Notes. Neither form of currency is “weaker”. With the gold and silver standards now abolished, both have value sustained by precisely the same things: (1) the initial fiat power of government to declare them “Legal tender for all debts, public and private”; (2) limitation of the total number of dollars of both types in circulation; (3) the health of the US economy, in which a factor is the financial health of the US government (which the use of debt-free US Notes would promote). Unlike the Civil War period, we now have a Federal Reserve capable of tightening the money supply, of which the US Notes would be “a drop in a rainstorm”. The Fed would be able to effect monetary policy on its own, even without the cooperation of the Treasury concerning its pittance, but isn’t it reasonable that there would be cooperation again? Besides, we are not just at a sensitivity crisis point, not on the very verge of collapsing into hyper-inflation, but rather in a position to, without precise micro-management, expand employment and production (supply in balance with demand).
Are debt-free United States Notes more inflation-causing than an equal number of dollars in Federal Reserve Notes? Absolutely not. That question was specifically addressed by a Congressional Research Service paper.
Does it really cost the government less to issue debt-free United States Notes than to borrow Federal Reserve Notes, given that the Fed returns interest on Treasury bonds to the Treasury? You bet it does! We are surprised by how often that question comes up. The Congressional Research Service report cited above notes that only 10% of the federal debt is held by the Federal Reserve. The rest of the debt is funded by other borrowing, primarily selling Treasuries to domestic and foreign investors who will not return the interest, who may not always be as able or as motivated to purchase them as today, and who will require higher returns when interest rates rise from today’s all-time lows.
Why haven’t we wisened up to the use of debt-free United States Notes before? We have. The politics surrounding the greenbacks after the Civil War reflected a struggle between massively powerful interests – 19th century labor and agrarian interests versus banks and wealthy creditors - with the later coming out on top. However, the debate has raged on in every decade since, as described in past issues including the November, 2013 Policy Winners. Is there still a struggle going on, sometimes behind-the-scenes, with the banks and the very rich pitted against working class interests? Indeed there is. But….
We need not think in terms of a winner-take-all sweepstakes. Let’s put it in perspective: We have licensed the banks to create money “out of nothing” via the fractional reserve system that allows them to lend 10 times or so what they actually have. This is the way most of our money is created. What gives the money that they lend value? It is nothing that the banks do. It is nothing more or less than the fiat power of government stipulating that the money is “Legal tender for all debts, public and private.” This license we have given the banks is very generous indeed. (We would throw counterfeiters in jail).
After the redistribution of wealth from the great middle to the “uber rich” we have seen during recent decades…by now a phenomenon well-known to the public at large…and after the Great Recession, is the public in the mood to be just a bit less generous toward the banks and the money masters? Is it too much to ask that the public be given, say, five percent of the benefit the banks are given…that the government license to itself, in accordance with the mainstream of historical orthodoxy, the old sovereign right to create money - even if just a tiny part, not all (as per the Chicago Plan) of our money?
Why should we go hundreds of billions of dollars further into debt this coming year, rather than be willing to fight a little over the bitty scrap we need? The irony is, if we use United States Notes wisely to strengthen the governments’ financial position and the health of the economy, everyone will gain at least some benefit…including the banks and the very rich. If there’s one thing we should have learned from the Great Recession, when both the banks and the public had their scary moments, it is this: Ultimately, we’re all in the same boat together and the ability to bail it out is our underlying security.
A moment of opportunity? Our slow recovery, our present super-consciousness of debt, our recent history of failures of “the system” and now the establishment by Congress of the spending we will do can come together as a unique moment of willingness to try something new–particularly in the cautious manner here proposed. We can escape the dismal “science” (?) of dire fiscal prophesying by showing a new willingness to explore and work out new solutions, now that Congress has initiated a fresh start. The stars may not so align and such a moment of opportunity may not re-appear for a very long time.
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