The Difference Between You and The Federal Government is Authority and Access

I’ve discussed many times now that the US dollar is just a number with a “$” symbol in front of the number. It is not a commodity. It is not finite; it is infinite, because numbers are infinite. Anyone who tells you that the US dollar is finite, or that the US government does not emit US dollars, doesn’t know what they’re talking about. At all times, when the US government spends, it is spending US dollars into existence via keystrokes, by entering an account and typing a number. That number becomes US dollars. At no point in time does the US government need your numbers before it can type them into someone else’s account. The notion is patently absurd. To illustrate the absurdity, let’s use you as an example.

I want you to think back to your days in grade school. When taking a basic math test, did you ever lean over to a classmate and whisper, “Hey, I just added 3 + 5 which is 8, but I only have the number 4 left to use. Can I borrow the number 4 from you, so I can write the number 8?” Of course you didn’t. The very idea is ridiculous. You simply wrote the number 8. Typing the number 8 at a keyboard is no different. If you wish to conjure the number 8 into existence, you simply press the “8” key.

Anyone can type the number 8 and place a “$” symbol in front of it to reflect $8. You probably do it every day. However, the difference between when you type $8 and when the federal government does it, lies in authority and access.

Authority

The US government is the currency-issuing authority. It derives that authority from the US Constitution, Article 1, Section 8, which states clearly that only the US government can issue US dollars and it can punish anyone who attempts to issue US dollars; a crime which we call “counterfeiting”. It is also given the authority to levy taxes. The tax is especially important, because it creates a demand for US dollars.

Prior to the US government coming to power, there was a market that used British pounds and other monetary instruments. When the US government came to power, the situation changed. Upon ratification of the Constitution, the US government first issued a tax that would be payable in US dollars. However, no US dollars existed, so the question was, how can anyone be expected to pay this tax? The answer was that the market must offer to sell its goods and services to the US government and in response, the US government would then pay for those goods and services with its own currency that it created: The US dollar. The US government chose the price it would pay in US dollars and the market, agreeing upon that price, sold its goods and services to the US government. At that point, the pound-based market was overthrown, replaced by a market that used US dollars and a US economy operating on US dollars was born. Because the market agreed to sell goods and services to the US government in exchange for the US government’s currency at a price deemed acceptable by the US government, the market subjected itself to the currency-issuing and regulatory authority of the US government. The US government brought the US market into existence; it is the sovereign to which the private sector is subject. Your political feelings concerning the federal government do not apply here. Those feelings have absolutely no bearing on the federal government’s authority to issue US dollars, nor upon its authority to regulate the market which it created.

Access

Because the US government, unlike you, has supreme authority when it comes to issuing the US dollar, it also has access to the nation’s banking system. You might have access as far as opening an account somewhere, but the US government has the authority to access the entire banking system allowing it to intentionally manipulate the numbers in any bank account. Having total access to the nation’s banking system, which it has the authority to maintain, the US government can spend US dollars into existence and tax US dollars out of existence.

That is why you cannot go into the Federal Reserve’s system, find your bank’s reserve account, then locate your account and type the number 1,000,000 and give yourself $1 million dollars. You do not have that kind of authority nor access. If you were able to somehow manage it, you’d be arrested and sent to prison for counterfeiting. Commercial banks have limited authority as well. Whilst commercial banks are tied to the Federal Reserve system by maintaining reserve accounts, they also, like you, have no authority to issue US dollars. They can and do, however, issue their own IOU, or “money”. In order to do that, the bank must denominate its IOU in the government’s unit of account (US dollar). In doing so, that IOU can then act as “money” in the private sector, because it is acceptable to extinguish tax liabilities to the federal government. How is that?

Since commercial banks are tied to the central bank (Federal Reserve) and they maintain reserve accounts containing actual US dollars issued by the US government, those US dollars within the reserve accounts guarantee that any bank’s IOU can clear at par. In other words, the US dollars in reserve accounts at the Federal Reserve guarantee that one Chase buck lent to you or one Bank of America buck lent to you is always equal and convertible to one US dollar. No matter what bank lends you their IOU to buy a car, couch or house, that IOU will be acceptable in exchange for those goods, because the IOUs can be readily exchanged for an equal amount of US dollars and the US dollar is the only acceptable currency in which you can pay your federal taxes.

You can only increase or decrease numbers in your bank account by depositing or withdrawing, but your bank can manipulate the numbers in your bank account through lending or other activities. However, Chase cannot willfully go into an account at Bank of America and manipulate the numbers up or down and vice versa. If Chase wanted a customer at Bank of America to have $500, Chase must make a deposit in that person’s account, transferring $500 from Chase’s reserve account to Bank of America’s reserve account which would then result in an increase in the numbers in that person’s account by 500. Only the US government can access any bank account system-wide and willfully manipulate numbers up and down, effectively creating US dollars out of thin air or destroying US dollars out of existence, because it is the currency-issuing authority. It issues the US dollars that you, Chase and Bank of America use. That being said, a quick word about defunct US monetary systems.

Both the gold standard and the Bretton-Woods system are defunct, leaving the US dollar free-floating, non-convertible fiat. Its exchange rate with other currencies today is market-determined, thus there is no exchange parity to defend that restricts fiscal space. During the former Bretton-Woods system, were the US government to use fiscal policy (expand deficits) to reduce unemployment levels, it would affect the exchange parity. So, expanding deficits to reduce unemployment within the Bretton-Woods system would result in monetary policy going into action to buy up US dollars in order to defend the exchange parity, thus reducing the supply of US dollars, increasing unemployment in the US and causing an economic downturn. Because Bretton-Woods is gone, such a situation no longer exists.

Further, the US government will not agree to convert your US dollars into gold, silver or Duracell batteries. It will only give you $10 for every $10 you give it. If you went to the US Treasury and gave them a $10 bill, Treasury would give you two fives, one five and five ones, or any combination equal to $10. Nothing else. There are no gold reserves attached to the US dollar today that need defending.

In short, today the US dollar is just a number with a “$” symbol in front of the number and the supply of those US dollars available to the US government is always equal to infinity. That does not imply, however, that the US government should spend to infinity. Real resources, unlike the US dollar, are not infinite; they are finite.

If the deficit continuously exceeds the real ability of the US economy to produce goods and services, accelerating inflation will result. Deficits though, regardless of how large, are not necessarily inflationary. If the US government issued $200 trillion and those US dollars sat in an account unspent, then there would be no problem. It is only when those $200 trillion US dollars are spent on goods and services that a potential problem then arises. But, on the other hand, we must understand that if the deficit is too low, then unemployment will result. How do we know if the deficit is too low? Check the unemployment rate. If unemployment exists, then the deficit is too low to support full employment.

US dollars are not finite. Real resources are finite. When you use what is infinite to purchase that which is finite, that spending carries the risk of inflation, whether that spending is public or private.

It is time that the public understands and accepts the reality of the federal government’s authority and access with regard to its monopoly product – The US dollar.