Over the last two weeks, I’ve seen some “interesting” commentary on Facebook concerning why we use the US Dollar. Some mistakenly feel that it has a lot to do with the US Dollar being a reserve currency; more than a few believe that it’s just a mere agreement to use the US Dollar, and that the population has the power to change its mind at any time.
We do not use the US Dollar out of patriotism. The IMF doesn’t dictate US currency acceptance. The fact that the IMF includes the US Dollar in its basket of reserve currencies has nothing to do, whatsoever, with why the US populace uses US Dollars. But this “power to the people” notion of blind faith currency acceptance – we can change our mind at any time – is particularly errant, and it is that notion that I wish to address.
No, we cannot decide one day to use Pokemon cards as currency. The citizenry does not have the power to dictate terms here. Currency doesn’t work that way. Sure, Minsky said that anyone can create money, but the problem is getting it accepted. For you, it is a problem; for the US Government, it’s not a problem. Why?
The US Government has the power to tax the entire US population as per US Constitution, Article 1, Section 8, that’s why. Along with the tax, there are also serious consequences for not paying the tax. So, firstly, we understand that we must pay any and all taxes, fees and fines that the US Government imposes upon us.
Now, forget the idea that taxation is a means of revenue. The US Government does not require revenue in a fiat system, thus, it does not tax to fund its spending. There are several reasons why the US Government taxes, but let us concentrate our discussion on, what we will soon understand, is the highest purpose of federal taxation.
With what do we pay our federal taxes? Gold? How about goats? ChapStick? Box tops from used cereal boxes? Wheat? Cigarette ashes? Oil, both crude and canola? None of these things, nor any good you can think of. You do not get to decide what is acceptable as payment for federal taxes. Only the sole supplier of US Dollars – the currency monopolist – has such authority.
The sole supplier of US Dollars is the monopolist, and that sole supplier is the US Government. As the monopolist, it has the authority to issue US Dollars at will, to set the price of goods and services in terms of US Dollars, to punish anyone who attempts to counterfeit US Dollars, to regulate the market, and to declare what it will accept as payment for federal taxes. The US Government will only accept one thing as payment for taxes and that is its own currency – The US Dollar.
What this reality means for those of you who possesses a lot of Pokemon cards, is that your hopes of becoming the new 1% are dashed. You, as a citizen, certainly cannot impose a tax on the entire nation payable only in Pokemon cards, and you cannot pay your federal taxes with Pokemon cards either. Thus, there is no possibility of those cards ever becoming a widely-accepted currency. Besides, it wouldn’t be you that would become the new 1%; it would be the maker of Pokemon cards.
The US Government purposely demands its own currency in payment of taxes, because that is what causes you to need to obtain US Dollars and, thus, it is what causes the demand for US Dollars. The tax is the thing which drives the currency. The tax is the reason why we need to get ahold of the US Dollar, and it is because of the US Government’s unquestionable power to enforce those tax collections that the population uses the US Dollar and so, the population cannot simply decide one day to drop the dollar in favor of Pokemon cards. Now then, a quick work on the term “The US Government” to get your thinking correctly aligned with reality.
When I say “US government” I’m not talking about politicians; I’m talking about the public institution that is the US federal government. In a monetary economy, there is an issuer of the “money” that everyone else uses to buy food, clothes, pay workers, invest, sell things, speculate, gamble – what have you. Everyone in the United States (you, me, Walmart, Amazon, Wall Street, Chase, Bank of America, Joe Poor and the Koch brothers) is dependent on the US government creating US Dollars and then spending them into the economy. Regardless of what politicians do, the US Government is a neutral entity. It cannot act unless politicians make it act. So, the US Government can be made to look after the needs of Wall Street and the 1%, or it can be made to look after the needs of the entire population. It can become authoritarian; it can become a protector for its citizens; it can become weak. It is up to those elected officials to make the US Government work for or against its own people. What I am asking you to do is separate in your mind politicians from the public institution called the US Government and realize that it is the people whom you vote for that cause you to either love or hate your own federal government. When it comes to issuing US Dollars, your feelings concerning the role of the federal government are not subject to opinion – your feelings do not matter.
The reality is that the US Government is the sole supplier of US Dollars for the US economy and the rest of the world. It funds the market; it funds your household; it funds the US economy, and it funds China’s desire to purchase US Treasury bonds. Finally, to address further questions before they arise, let’s revisit a short section from my introductory series on US currency.
The Origins of the US Dollar
The US Dollar is a manufactured product. An iPad is a product manufactured exclusively by Apple. No other entity besides Apple manufactures iPads. It is Apple’s monopoly product, we could say. Similarly, the US Dollar is a product manufactured exclusively by the US government. It is the US government’s monopoly product. The same applies to the British Pound and the Australian Dollar. The Pound is a product manufactured exclusively by the UK government. The Australian Dollar is a product manufactured exclusively by the Australian government, though most Australian politicians act as though they aren’t aware of it, judging from the fact that they’ve spent years stripping Australian Dollars from their domestic economy, apparently, in pursuit of creating mass unemployment. In an alternate universe, such a pursuit might be beneficial, but in this one, it is wholly unacceptable.
The US Dollar is a Unit of Account
In the world of mathematics, there are several different ways we can measure things. We can measure distance using various units such as inches, meters, feet, miles, kilometers, light years. The same is true for weight: ounces, grams, pounds. Each unit of measurement can be made equivalent to another through conversion. For example, inches are one type of unit of measurement and so are feet. 12 inches is equal to 1 foot. So, we have a choice and can be satisfied to say 24 inches, or 2 feet.
In fractions, students learn that the denominator is the unit of measurement that tells us how many equal parts an item is divided into. If we change the denominator, then the way in which we are measuring an item changes. For example, 2/4 means two parts of a total of four. Changing the unit of measurement to eighths, 4/8, now means four parts of a total of eight. So, in the fractions 1/4, 1/8, 1/16, 4, 8 and 16 are the units of measurement. Similarly, a US Dollar is a unit of measurement called “the unit of account”.
Like inches, meters and fractions, we can break down the US Dollar into two parts, which, when put together, answers the questions “What are we talking about?”, and “How many are we talking about?” The first component of a US Dollar is the familiar “$” symbol. You could say that this is the bottom line, or denominator, in the US. In the United States, the “$” symbol represents what we call the “Unit of Account”, which the US government alone commands and issues. The US Dollar is how we “measure” goods and services in the US economy. If we are talking about the UK, we do not “measure” goods and services with US Dollars. In the UK, the Pound is the unit of account, so we measure in Pounds. The unit of account distinguishes one nation’s currency from another’s and so, the unit of account tells us what we are talking about:
Here, we are talking about Pounds.
Here, we are talking about Dollars.
Here, we are talking about Kilometers.
Here, we are talking about Meters
And here, we are talking about Japanese Yen.
So, if we were talking about distance, (m) would tell us that we’re talking about meters and (ft) would be feet. And if we are talking about currency, (£) would tell us that we’re talking about the UK and (¥) would tell us that we are talking about Japan.
A number added to the unit of measurement tells us “how many” of the unit that we are talking about:
How many meters? One thousand meters.
How many dollars? Ten dollars.
In mathematics, students learn that numbers are infinite. You simply cannot run out of numbers. So, for a carpenter or an engineer, that’s a good thing. When a builder starts to construct a house and discovers that his tape measure only goes to 50 meters, he does not say, “Damn. I guess that I cannot build this house, because I’ve run out of meters.”? Meters go on forever:
It’s the object (wood, brick, sheet metal, land) that the builder is measuring that is finite. So, the builder can indeed run out of private property to build a house upon and material to build that house, but he cannot run out of meters to measure with.
In the real world, nobody owns or issues meters, but in the real world, national governments do own and issue units of account. So, only the US government issues the “$ US” and then, only the US government is allowed to add a number to its own unit of account, thereby creating US Dollars. Explaining the dollar this way helps people who think that US Dollars are commodities to think clearly. The US Dollar is actually no different than any unit of measurement. The number after the “$” symbol simply tells us “how many” dollars.
Modern Monetary Economy
People produce goods and services. There are different ways that people can obtain these goods and services. For instance, people could engage in barter, trading apples for trousers, sheep for corn or gold dust for a day’s work. Another method for people to produce and consume goods and services is through the use of monetary instruments.
Fundamentally, for something to be a monetary instrument, it requires an issuer of the instrument. Secondly, a monetary instrument requires that the issuer give it a face value. Third, a monetary instrument requires the issuer to promise to accept it back as payment. This is why gold itself is not a monetary instrument. Gold is a commodity and has no issuer. Gold coins, on the other hand, do have an issuer. Various governments throughout history have stamped coins that contain gold. However, the gold in the coin is not the monetary instrument: the coin and the face value of that coin is. So, today, world economies do not operate on the barter system; they operate on a monetary system. In a monetary economy, anyone could issue a monetary instrument that could cause the production and the consumption of goods and services to operate based on that particular monetary instrument. In order to achieve such a feat for an entire economy, the question becomes, how does the issuer cause its monetary instrument to become widely accepted? The most powerful method available to accomplish supreme acceptance of a monetary instrument is through taxation.
National governments are the supreme authority over their respective nations. Because they are such, they have the ability to lay a tax and then enforce those tax collections. First, the national government will declare a unit of account (US Dollars, British Pounds, Australian Dollars) then afterwards, in order to ensure the supremacy of its very own monetary instrument, the national government will lay a tax that is payable only in that monetary instrument. Because the national government is the supreme authority, when it lays a tax, it also imposes serious consequences for not paying it. The tax, and the consequences for not paying that tax, forces the citizenry to need to obtain the national government’s monetary instrument. But, if the currency is not yet in circulation, how can the citizenry obtain the currency and pay the tax, avoiding the penalties for not paying the tax?
The simple solution to the problem is for the citizenry to agree to offer goods and services for sale to the national government in exchange for the government’s new currency that it intends to issue. Because the citizenry does not know how much their goods and services are worth priced in the national government’s new currency, at this point, the citizenry simply cannot offer the goods for sale at a certain price. They could say to the government, “How about $50 for a bushel of apples”, but what does that really mean? How do apple producers know that a bushel is indeed worth $50? They simply cannot know until the price is set by the currency issuer. So, the people can only offer to sell their goods and services to the government and wait to find out what the government is willing to pay.
The government will now tell the citizenry how much it is willing to pay for the goods and services in its own currency and then it buys those goods and services. The citizenry will accept whatever price the government is willing to pay, because, as we’ve discussed, the people do not know what the price for the goods and services would be in the new currency, but also, and most importantly, because the citizenry has absolutely no choice but to accept that price. It must accept the price that the government sets in order to obtain the currency which is necessary to pay the tax. The national government manufactures some of its own currency and then exchanges it for the goods. Once the government does this, the national government becomes the price setter for the market. Now the citizenry has the national government’s currency; it can pay the tax and keep whatever is left over after taxes to use buying and selling goods and services that are priced in the national government’s currency. The reason why the domestic private sector will simply use the national government’s currency to produce, buy and sell all goods and services – in other words, to do business – is because of the national government’s tax enforcement. As long as the government can enforce its tax collections, the citizenry will demand the government’s currency. Because of this reality, the national government which issues the currency controls the market and the national economy.
You can forget about the Pokemon cards.