Posted on December 2, 2014 by Devin Smith | 4 Comments
J. D. Alt
Money causes labor to do useful things, and goods and services to be exchanged between people, thereby enabling people in general—both individually and collectively—to obtain what they need. In order for this process to occur in an optimal way—that is, in order for the maximum number of people to obtain what they need, individually and collectively, it seems clear that two basic conditions must be met: (1) there needs to be enough money to pay people to create all the goods and services they need, and (2) this adequate supply of money needs to be in the hands of people who are actually able and motivated to spend it for that purpose.
By “enough money” I mean this: Is there enough money to pay people to build all the things and provide all the services they need both individually and collectively—without there being too MUCH money (which could cause prices to escalate)? If there isn’t enough money, it is likely there will be things we need but which we cannot have—not for the lack of available and willing labor to provide those things, but for lack of money with which to pay that labor. In this case that labor not only remains wastefully unemployed, but we, collectively and individually, go without something which we otherwise could have, and might possibly—even desperately—need. (It is also possible, of course, that we cannot have the things we need because the required natural resources—energy, materials, chemicals and minerals etc.—are not available. This, however, is not a “money problem” but a resource problem.)
Assuming there is enough money to employ people to create all the goods and services they need, the second question is whether or not that adequate money supply is in the hands of people who are in a position and motivated to actually spend it to achieve that purpose? It could well be, instead, that the money is held by people who cannot imagine something useful to do with it—in which case it sits idle while people who are willing to work for it remain unemployed, and the things we need, individually and collectively, remain un-provided. Or it could be that some portion of what is otherwise an adequate supply of money is held by people with no interest in spending it to cause useful things to be done, but instead are interested in making bets with the goal of acquiring more money with which to make even bigger bets. Where this is the case, much of the money that appears to be available to pay people to do useful things is actually not available at all, and the people who would be willing to work for that money must remain unemployed, and the useful things we need un-provided.
Assuming our over-arching goal as a society is to employ every person who is willing to do something useful and, by doing so, also provide ourselves individually and collectively with the goods and services we need, what prevents us from doing so? If there is, indeed, enough money, and this adequate money is in the hands of people actually motivated to spend it to employ people to do the useful things we need, then nothing prevents us from achieving our goals (except where required natural resources are unavailable.) It must be, then, that our economic “problems” arise when (a) there isn’t enough money, and/or (b) the money that exists is in the hands of people who either cannot imagine how to usefully spend it, or who wish to spend it for the purpose of making bets rather than employing people to do useful things.
The issues we must confront, then, are (1) how do we make sure there is enough money, and (2) how do we make sure this adequate money supply is in the hands of people who are able and motivated to actually spend it to create the goods and services we need?
Taking up the first issue, it’s important to note at the outset that to “create more money”—assuming we’ve determined there isn’t enough of it—it is not necessary to “take” money from those who already have it. This is the crucial understanding upon which everything else depends. A nation’s money supply is different from a family’s money supply—or the money supply of a business, or even of a local government within that nation. A family, business or local government’s money supply can only be increased at the expense of someone else—the family earns wages which are an expense for the family employer, the business earns profits which are an expense for the customers who buy its goods, the local government collects taxes which are an expense for local citizens and businesses who pay them. National—or sovereign—governments, however, are uniquely different because they (and only they) can legally create the national currency (or “money”) that everyone else—the families, the businesses, the local governments—must use. There is no other place the money could possibly come from. It does not grow on trees, as we famously know. Nor is it found in the ground; though many things found in the ground can be exchanged for great sums of money, those things found in the ground are not the same as money itself: Money can only be created by a sovereign—or legally enforceable—declaration that “money” has been brought, by the sovereign power, into existence (“issued”.)
Now it is possible that a national government could issue new money and its citizens would refuse to provide goods and services in exchange for that money. In this case, the government’s money would have no value as “money”, and even though the government thought it had issued “money,” it will have issued something else that is essentially useless. For a sovereign government to actually issue “money” it must ensure that its citizens will, in fact, be willing to provide goods and services in exchange for it. How can this certainty be created? There are, basically, only three ways:
First, the government could promise to convert the new money it issues, on demand, into a certain amount of something that has a known tangible value. For example, it could promise to convert a unit of its issued money into a certain quantity of beefsteak, or a certain weight of gold. This method of creating money—that is, of creating the certainty that citizens will accept it in exchange for their labor and goods—has the problem that the sovereign government needs access to a good supply of whatever it has promised to convert its money into: As soon as it runs out, and is unable to make the promised conversion, the citizens will stop being willing to provide their labor in exchange for it—i.e. it will no longer be functional “money”.
A second method of creating the necessary certainty would be for the government to promise to convert its newly created money, on demand, into another kind of money which is already widely accepted as “money” by the citizens of another nation. This is especially effective if that other nation produces a lot of useful goods and services which can be purchased with its particular kind of money. This promise to convert newly created money “A” into existing (and widely accepted) money “B” means citizens can provide their labor in exchange for money “A” and then buy many of the goods and services they need with money “B”. This method, however, has a similar problem to the first: to make it work, the national government needs to have access to a large quantity of the other nation’s money in order to fulfill its promise to make the conversion. As soon as it runs short of that other money, its citizens will stop being willing to exchange their labor for the new money the government creates, and that new money will rapidly become worthless.
The third (and, by far, most effective) method of creating the certainty that a national government’s newly issued money will be accepted by its citizens in exchange for their labor and goods, are national taxes—payable ONLY with the new money—levied and enforced by the money-issuing government. This arrangement means the citizens will be willing to work for the new money because they need it, at a minimum, to pay their tax obligations to the sovereign state. What is crucially important to see and understand about this third method is what the national tax collections are actually used for: They are NOT imposed for the purpose of collecting funds which the national government can then spend—they are, instead, instituted to create a demand, on the part of the citizens, for the money the national government has already created: Now it wants to spend that new money, and it wants to make sure that its citizens will be willing to accept it in exchange for providing their labor and goods. Having created this certainty, the national government can then spend its new money to pay its citizens to create all kinds of useful goods and services— making up for the vast quantity of “old” money that has been sidelined by the hoarding of the unimaginative idlers and gamblers—or which has been “drained” out of the hands of active spenders by the collection of the national taxes.
This last method (which the modern world is just now beginning to fully understand) has the virtue of NOT requiring the national government to have access to a large stash of something else to convert its new money into—a “something” which it might otherwise run out of. Indeed, the method provides it with an endless supply of its new money, so long as it is able to successfully impose and enforce its national tax on its citizens. Where a national society is able to successfully impose and enforce this condition upon itself, it establishes the ability to create enough money, as necessary, to enable every citizen who is willing to be employed in the doing of something useful.
Having established the ability to create enough money, however, it is also necessary for the national government to ensure that the adequate money supply is in the hands of people who are actually able and motivated to spend it to pay other people to provide useful goods and services. This issue, in fact, is the real conundrum every national society faces and must struggle, politically, to achieve as best it can. What is crucial to see, however, is that this political struggle cannot be rationally carried out until it is openly acknowledged and understood that the national society can, in fact, (and without undue effort) create ENOUGH money for its purposes—whatever they may be agreed upon to be.