Saturday, April 24, 2010


In a 1787 letter to Thomas Jefferson, John Adams made a comment which has become a reoccurring theme in 2010. He said:

"All the perplexities, confusion and distress in America arise not from defects in their Constitution or Confederation, nor from want of honor or virtue, so much as downright ignorance of the nature of coin, credit, and circulation."

Because my life has been spent in the law and in education, I confess that downright ignorance about money has always been one of my peculiar charms.

But in these days of multi-zeroed dollar amounts being bandied about, worried about, shouted about, and wondered about, a modicum of patriotism suggests that we Google up some information about the infamous ‘root of all evil.’

Here are a few things I have learned:

Article I, Section 8 of the United States Constitution gives Congress the power to “coin money and regulate the value thereof.” The Constitution says nothing about printing money, nor does it limit the amount of money the Congress may coin.

During the Civil War, Congress passed the Legal Tender Act which authorized paper money to finance the Union war effort. In 1870, the Supreme Court held the Legal Tender Act unconstitutional by a vote of 4 to 3. Congress promptly increased the court to nine members, President Grant appointed two pro-paper justices and the new court reversed the decision.

Thus did greenbacks become legal tender for all debts public and private. That’s what it says on the Federal Reserve notes in your wallet.

The Federal Reserve system is the fourth incarnation of a bank of the United States. Established in 1913, it is the bank with which all the other banks bank. Its principal depositor is the United States Treasury.

The United States operates under a system of fiat money. “Fiat” is a Latin word that means “let it be.” Our money has no intrinsic value. It’s only value grows out of the fact that the law makes Federal Reserve notes legal tender.

So why do we worry about trillion dollar deficits and gazillion dollar national debts? Why do we fret that our children and our children’s children will be burdened with the obligation of repaying the public debt? Why doesn’t the Federal Government just print all the money it needs to balance the budget and pay off the national debt?

The answer to that question can be found in Article I Section 8 of the U.S. Constitution. Congress is authorized to borrow money on the credit of the United States, but it is required to regulate the value of money.

The credit of the United States means the expectation that the government will repay the true value of what it borrows.

If you loan me a hundred dollars, you don’t expect me to pay you back in poker chips.

Neither do the Chinese.

Congress has the obligation to regulate the value of money. That means “make it regular.” Make it real. Make it dependable. Make it useful and reliable as a medium of exchange for the people who buy and sell, work and hire, save and spend.

The farmers and the working folks who cheered William Jennings Bryan’s “Cross of Gold” speech and who demanded free silver as the monetary standard, like debtors everywhere, wanted to pay back what they owed in the cheapest currency possible.

Not much has changed.

We are a nation of debtors. A whole generation of Americans is burdened with student loans. Pre approved credit cards are mailed to the unemployed.

Congress has its hands on the spigot. We need to remind ourselves that paying debts with cheap dollars is not much of a boon if it means that a quart of milk will cost five dollars.

Inflation is the most insipid and retrogressive form of taxation. Always.

1 comment:

  1. Eventually, this fact will lead to an increase in individual income tax rates on the wealthy - since no one else can be taxed without slowing down the economy.

    This leads to an examination of who actually owes the national debt. It is often expressed in per capita terms, however this is incorrect. The reason the national debt can grow to the extent it has is because it is backed by the power to tax incomes. (It can also use tarrifs, however the Chinese would balk if we tried that - and a general tarrif or a tarrif on China would slow the economy). The debt any one person owes is therefore linked to the tax which will eventually be used to pay the debt back - the income tax. The amount is fairly straight forward - total debt held by public and private funds dividied by the amount of income tax collections. On an individual basis, this ratio can be applied to the Total Tax line on the 1040 form, less credits which decrease it. The last time I checked, the ratio was 9 dollars in debt for each dollar taxed. If, when all is said and done, withholding plus tax owed (or less refund) is $10,000 - the debt owed is $90,000. Of course, most folks don't pay that much. Indeed 40% of folks don't pay anything at all. They also don't owe any of the national debt unless the tax laws are changed and they end up paying something. Of course, reducing their credits would slow the economy - so it would be counter-productive. Our family total tax bill this year was roughly $6,000. This means we owe $54,000 for the federal government (on top of unpaid taxes and my student loans - as well as our Virginia Housing Development Authority mortgage - indeed, liability for the debt is the least of our financial worries).

    Bill Gates owes much more, because he pays more in taxes. Of course, raising his taxes also would increase his personal liability, but if it reduced the debt he might break even or gain from the transaction. In the end, it will be his kids, who althought they won't inherit the whole thing, will still likely get a pretty penny, who will gain from increasing income taxes now.

    When the rich and the upper middle class realize that it is their kids, not the populace as a whole, who is responsible for the increasing national debt, I believe they will actually advocate tax increases in order to not pass them on.