The Truth about Money Can Allow Us to Spend More Federal Dollars to Help People Post-Pandemic – Without More Taxes
by Vandana Whitney
In 1971, President Nixon took the U.S. off the gold standard. Fifty years later, the members of Congress seem convinced we’re still on the gold standard and they are not alone in that mistaken belief. While going off the gold standard made radical changes to our monetary system, the national conversation about how money works barely changed at all.
Under the gold standard, the federal government was very restricted as to how much currency it could issue because dollars had to be backed up by a certain amount of gold. If the public or other trading countries started demanding gold for the dollars they held, then the gold reserves would drop, and the government could issue even less currency to spend into the economy. There was a finite number of dollars that could be issued and be in circulation at any given time depending on gold reserves.
Since going off the gold standard in 1971, we have what is called a non-convertible fiat monetary system, meaning you can’t trade U.S. dollars (USD) into the government for anything other than new dollars. Eliminating the need for the government to defend its gold reserves also means that there is no financial constraint on how much money the government can issue. Congress remains steadfastly, if somewhat erratically, unaware of the change.
The Constitution gives Congress the power to authorize spending, so Congress determines how much money is created and issued in a fiscal year; that is the power of the public purse. But as we have all witnessed once again this year, while Congress has no trouble whatsoever in authorizing and creating the money for the bloated military budget, the members insist that there is only a finite number of dollars available for domestic spending. The public is frustrated with Congress and suspects that something is terribly amiss with this budgeting process, but like Congress, the public has been educated to believe that we’re still on the gold standard.
Economists in the field of Modern Monetary Theory, or MMT, are working diligently to educate both Congress and the public to an entirely different understanding of our money system. Over twenty years ago, this group of economists began an analysis of the Federal Reserve’s accounting system, and the Federal Reserve’s interaction with the Treasury. Their research contradicts the standard narrative about our money.
Professor Stephanie Kelton became the public face of the MMT economists because she is exceptionally good at explaining complex economic issues to people who have no background in economics. Kelton’s book, The Deficit Myth, was published in 2020 and immediately became a New York Times best seller. Kelton also knows how to talk to members of Congress. She served as chief economist on the U.S. Senate Budget Committee for the Democratic staff in 2015 and as a senior economic adviser to Bernie Sanders in 2016.
The first myth, or mistaken belief, that Kelton addresses in her book is that the federal government should budget like a household. It is irrefutably true that the federal government is the monopoly issuer of our currency, the USD. The government is the currency issuer while everyone else is a currency user. That is a very important distinction that is obviously true but is hardly acknowledged. State and local governments have to tax or borrow before they can spend. Households and businesses must earn or find the money before they can spend. The federal government does not have to find the money before it spends because it creates our money. The government must spend dollars into the economy before the rest of us can get dollars, so it plays by an entirely different set of rules than businesses or households.
When Congress authorizes new spending, the Federal Reserve, acting as the Treasury Department’s bank, creates new digital dollars on its computers. Digital dollars are known as bank reserves, and since we live in a digital age, most of our money is just numbers on a spreadsheet that exist on computer hard drives in electronic bank accounts.
The hardest myth to overcome is the mistaken belief that taxpayers fund the government. The taxpayer money mantra came about in the 1980’s during Ronald Reagan’s administration in this country and Margaret Thatcher’s administration in the U.K. It was deceptive by design and because it was repeated so effectively, we now have most people believing that the public funds the federal government. That was never true; it is exactly the reverse.
As a point of logic, a government that issues its own currency must spend before it taxes, or else there would be no currency to collect. In accounting terms, when the government spends, it’s crediting or adding to bank accounts. When we pay taxes, the government is debiting or subtracting from bank accounts. At the federal level, our tax dollars are just deleted; they don’t fund anything.
Even though the federal government is self-financing, taxes are essential to the monetary system. If the government continued spending dollars into existence but never drained any dollars back out, it would have a definite inflationary effect. So taxing dollars out of the economy removes those dollars from circulation and helps to control inflation. This is an important point because MMT economists maintain that while the government is not financially constrained, there is a real restraint to spending: available human resources, natural resources, and inflation. Additional reasons for federal taxation are 1) that it creates a demand for dollars as the government will not accept any other form of payment, 2) it can be used to alter the distribution of income, and 3) it can modify spending behavior through tax incentives.
Another glaring misunderstanding of our money system is the idea that we have a national debt that must be paid back. The annual deficit is just government spending in a fiscal year minus taxes taken back out of circulation (we normally spend more than we tax) and by law the federal government must issue Treasury securities (bonds) to equal the difference. We are told that the government is “borrowing” money when it issues bonds which is very misleading terminology. The government has no need to borrow in a currency that it alone issues.
Our so-called national debt is nothing more than Treasury bond money held in what are called securities accounts at the Federal Reserve. They are functionally identical to savings accounts at commercial banks. At maturity, the bond money is moved out of savings into Federal Reserve accounts (checking accounts) with added earned-interest dollars. Those Treasury bond dollars are never used or needed as a source of government revenue, and the earned-interest dollars are not a problem as the U.S. can always create the dollars in its own currency to cover all debts or obligations. The U.S. has no debts in a foreign currency.
Under our current system, if the federal government doesn’t run deficits, then the public doesn’t have Treasury bonds. Treasury bonds are only issued in response to deficits. So, while members of Congress unite in their fear and loathing of a federal deficit, everyone loves Treasury bonds. If you’re an investor, U. S. bonds are safe, they’re liquid, they’re free of default risk. Bonds help you diversify your portfolio, and they pay interest. It’s a false narrative dilemma that is completely illogical but persists because of our collective ignorance about our fiat monetary system. Stephanie Kelton is working to change that.
Based on her own interactions with lawmakers in Congress, Kelton estimates that roughly one-third of Congress is now MMT conversant. By that she means that they could articulate—in very general terms—that the federal government is the issuer of the currency, that its budget is not constrained like that of a household or private business, and that inflation, not solvency, is a real constraint on spending.
Right now, all new bills in Congress must pass a review by the Congressional Budget Office to check for whether the bill will increase the deficit. (Non-spending bills obviously don’t need a CBO review.) MMT economists say this is totally wrong thinking and that we have government agencies that could instead calculate the inflationary pressures associated with any new bill. Government agencies do have tools to help control inflation.
If the public clearly understood how our money system functions, members of Congress would, in fact, be put in a far more uncomfortable position. Such knowledge would not help the corporate interests that push to privatize all public services. As we know, corporate PAC money funds a high percentage of congressional campaigns. It is much easier to declare that the government can’t afford to fund public services than to hold more relevant debates as to whether such spending would be inflationary.
Rep. John Yarmuth, current House Budget Committee Chair, is one of the few members of Congress who publicly uses MMT talking points. Yarmuth said recently in an interview that MMT’s influence in Congress is greater than its visibility. “There aren’t many people who are willing to be out front about it because it doesn’t resonate with what the average person thinks,” he said. Educating the average person is key to changing a political system that is clearly not working for the American public.