The Green New Deal, free college, free universal health care, universal basic income, the elimination of student debt, bailouts for unfunded government worker pensions and other ideas animating the new socialist wing of the Democrat Party leave most Americans scratching their heads: Where could they possibly get the money for that?
Trillions upon trillions of dollars in proposed new spending, without any apparent regard to financing. Many people ask: Are these candidates and their young supporters deluded?
The answer may surprise you: No, at least not in the way you are probably thinking. Recent government financial maneuvers provide an empirical and intellectual basis for the energized socialists of the 2020 Democrat party. The new left even has a name for their theory: Modern Monetary Theory.
The Democrats’ MMT may not be completely delusional, but it is rooted in disdain for the public, and it is profoundly dangerous to the viability of the dollar and our national prosperity. MMT works only to the extent that the government is able to take advantage of billions of people who don’t understand what the U.S. dollar is today.
Most people around the world don’t give any thought to this key fact about the dollar: It’s nothing. It’s literally not a thing. It’s an idea — and like other creations of human imagination, the supply, existence and value of the dollar is only a function of what people think.
This was not always so. As an anthropological matter, money arose organically out of human interaction. Ancient humans who started to trade things with each other would sometimes trade for shiny rocks too — metals that people liked to have and, because people liked them, the rocks or metals were valuable to hold for trade.
Money was a commodity standardized by government, not created by it. It’s easier to trade anything according to accepted standards, so humans developed objective measures such as the size, weight and quality of everything that humans sought to trade, including the shiny rocks/metals. And so, thousands of years ago, man started to develop coins, the size and standards for which were established by a commonly recognized authority. Stamping these new units of the shiny metal with the name or image of the fearsome warrior/leader served multiple purposes, including conveying a guaranty of the measure, a threat to those that might tamper with it and advertising the strength and wealth of the leader.
For thousands of years, money was a thing, the desirability of which was independent of the leader whose image or name was stamped upon it. The stuff from which money was minted came from the ground or from other people; it was scarce, and the leader’s governing organization had to get the stuff from somewhere or someone else.
A few hundred years ago, there was another innovation with respect to money. Some people offered to hold gold or silver coins for others in order to keep the coins secure and lessen the burden of carrying them and issued claim checks for the coins being held. Paper money was born.
But people only accepted paper money if and to the extent they were confident that the “real” money existed and they trusted the holder of the “real” money to keep it safe.
Then, in the 1930s, the U.S. and other governments started issuing paper money that purported to be the money itself, not a claim check. The bearer could no longer approach the issuer of the paper money and trade it for gold and silver — although the issuer of the paper money pledged that indeed it really did have tons of gold and silver to “back up” the paper.
Confidence and faith of the people in the issuer thus became a more important component of money’s value to people. The full faith and credit of some issuers (such as the United States) was good, while that of others (such as Germany’s Weimar Republic) was not so good.
Then, in the 1970s, the U.S. and paper money issuers announced that the value and amount of minted or printed currency would not be linked to the gold and silver held by the issuer. Money issuers assured money users that they still held tons of gold and silver, but also governed large economies rich in properties, some of which the issuers could take through taxation to “back up” the money.
With this innovation, money’s value would depend on the relative supply and demand for each currency, which in turn depends on people’s faith and confidence in the different issuers and the vitality of the economy associated with that currency. The value of these new “fiat currencies” fell relative to the original “real” money, but our Federal Reserve Bank proved in the 1980s that it would take painful actions to regulate the supply of money and keep the value of the dollar from plummeting.
Fiat currencies work, until they don’t (see: Venezuela). The United States dollar has been universally desired and valued since the 1980s because people have faith in the United States, its economic prospects, its safety from military conquest, and the prudent management of its money supply.
Due to the electronic data revolution, bookkeeping for money went from tangible ledgers and paper form to an array of invisible electrons at about the same time the dollar disconnected from “real” money. In this electronic form, money was infinitely easier to trade — and easier to create.
Over time, less and less money existed in the tangible form of rocks or coins or paper and more and more existed only as invisible electrons in a computer, to the point where today some issuers of money are now actually seeking to do away with tangible money altogether in a preference for intangible electronic forms.
Billions of people the world over will trade what they have for the U.S. dollar. They will hide dollars in the tangible form of $100 bills, but want it in electronic form too, if that’s permitted by their government. Despite being largely invisible, the dollar is real because people believe in it.
Why does this matter? The U.S. dollar is now purely a creature of the federal government. The United States can create more dollars without getting anything else from anywhere or anyone else. And because almost no U.S. dollars exist in tangible form, any amount can be created nearly invisibly.
This is a power greater than that of Caesar or Louis the Sun King — each of whom had to have more gold or silver to mint and issue more money. There is at any time a finite amount of gold and silver — and to get more, one had to mine it, trade for it or steal it. Many dreamed of being able to convert other plentiful metals like lead into gold, but this alchemy was beyond human reach.
Until now — because not only is government the sole supplier of its currency, it can create an endless supply invisibly at the touch of a button. With this power, in the midst of the financial crisis of 2008, the U.S. government started to explore new frontiers of money management by launching “Quantitative Easing.”
Quantitative Easing is government-speak for “push a button to create electronic dollars and buy stuff.” Offsetting the trillions of dollars in debt issued by the Obama administration Treasury Department with the trillions acquired by the Obama Fed, the government acquired trillions of dollars of goods and services for literally nothing but electrons. Money from nothing enables the government to buy stuff for free.
As a member of the Fed at the time said to me: “Yes! It’s the miracle of modern central banking!”
Quantitative Easing drove up demand for financial assets, but didn’t destroy the dollar, in part because of other actions taken by the Fed — but also because very few people understood what Quantitative Easing meant. QE’s success spawned this Democrat Modern Monetary Theory: The government can create tens of trillions more than it created in Quantitative Easing and pay for all the needs and wants of every American. For “free.”
MMT is catnip for socialists — and it reflects a remarkable disdain for ordinary people the world over. Is it conceivable that folks wouldn’t systematically notice that the U.S. is acquiring $50 trillion, $60 trillion, or more in services and goods for … nothing? Consider what happens to the value of the dollar itself, and of all that is valued in the dollar, upon the growing realization that the government is playing its counterparts as fools.
Consider what happens to our nation once the dollar is treated by its creator as nothing -- the supply of which is infinite. Trust in the U.S. government’s prudence is the ultimate coin of our realm, trust that it will value its own currency as if it were “real” money. This trust is what the 2020 Democrats wish to exploit with their grand plans: just make the money to make the world we imagine. Voila!
But can the government make money from nothing, give it to people for nothing and still expect people to trust and rely on the money for their savings and transactions?
Trust is intangible and mutable; trust derives from assessment of the behavior and character of the other. Trust takes ages to develop but can be lost in an instant. The dollar is intangible; its sole source of value is trust in the U.S.; and therefore its value depends on, and changes with, how the government manages itself and the money it creates.
Ask yourself: Can you trust any of the 2020 Democrats with a button that instantly and invisibly creates infinite amounts of money? While Quantitative Easing worked for a variety of reasons in the wake of the 2008 crisis, it would be foolish to bet our dollar and our prosperity that money from nothing empowers Democrats to achieve socialism for free.
Richard Porter is a lawyer in Chicago and Illinois’ national committeeman to the RNC.