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posted on 03 February 2018

THE SHIFT: Understanding And Using America's Fiat Money

by J.D. Alt, New Economic Perspectives

Before it disappears forever from our experience - which the rapid adoption of smart-phone commerce suggests might happen within the next decade - we should examine, take stock of, and fully understand what this piece of paper is that we call a U.S. dollar. Or maybe a five-dollar bill, which is what I happen to have pulled from my wallet in preparation for writing this essay.

five.dollar.bill


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It doesn’t matter which bill we choose: they all have the same basic informational clues indelibly printed onto their durably woven, cotton-linen fabric. The point is this: if, and when, we can no longer pull this particular piece of “paper" out of our pocket and actually examine it, we’ll have lost our chance to understand what a U.S. dollar actually is - which is something we very much need to understand if we hope to eventually create a successful, progressive, democratic economy. So, while it is still conveniently in our pockets, let’s take it out and consider what we’re really looking at - and what that means for our modern society going forward.

My five-dollar bill has, as its focal point, a very skilled portrait of Abraham Lincoln. This has a central (if subliminal) meaning: he is a famous U.S. president who represents the idea of our collective democracy: i.e. we elect a government and give that elected government the power to “govern" us (until we determine to elect a new government to “govern" us in a new way). But whoever we elect, the whole idea of the election is that we are willingly granting those personas the power to “govern" us, which chiefly means two things: they can create laws which we can be coerced to follow, and they can impose fines, fees, and taxes which we can be coerced to pay. As I say, this is subliminal, but it’s important.

Next to Lincoln’s left ear is a watermark national symbol (a bald-eagle) overprinted with the bold inscription “The United States of America." Taken together, these pretty much summarize the fact that this piece of paper is an official message to us from our democratically elected sovereign governors. What, exactly is the message? First, we might ask: is a message even necessary? Why couldn’t we simply have a piece of paper with an elaborately graphic and impossible to counterfeit “five" printed on it? (People who contend that money is merely a “unit of account" for economic transactions might prefer such a piece of paper!) But such a piece of paper wouldn’t work because it would not say what needs to be said for the piece of paper to actually become “money." It would just be a piece of paper with a “five" on it - whereas my five-dollar bill, by the additional pronouncements it deems necessary to make, is something different.

What are those additional pronouncements? First, the paper is signed by not just one, but two officials of the U.S. sovereign government: The Treasurer of the United States and the U.S. Secretary of the Treasury. Again, why the need for these signatures? Why not just a piece of paper with a “five" on it? The answer is because the paper is, in fact, a contractsigned by the Secretary of the Treasury and “notarized," if you will, by the U.S. Treasurer.


our five-dollar bill is, in fact, a “promissory note"


What does the contract stipulate? Like most contracts, it’s a promise made by the signatory to do something. The reason for the written and signed contract is to protect against breach-of-contract in the event the signatory does not fulfill the promise. The promise is specifically described in the contract, and if it is not fulfilled, the owner of the contract - the person to whom the promise was made - has legal recourse in the courts of law to coerce the promisor either to follow through with the promise, or otherwise compensate the owner. These kinds of written contracts are, therefore, generally called “promissory notes." And we have evidence that our five-dollar bill is, in fact, a “promissory note" by the title it is given across its top: it calls itself a “Federal Reserve Note." It is a promise by the U.S. sovereign government (represented by its central bank, the Federal Reserve) to do something - vouchsafed by the signatures of the U.S. Treasurer and the Treasury Secretary, officials appointed by the democratically elected governing body. This is why the term “fiat" is often applied: my five-dollar Federal Reserve Note is an official “declaration" of a promise.

What, then, is it promising to do? That is specifically spelled out to the left of Mr. Lincoln’s visage, under the official seal of the United States Federal Reserve System. The promise made is as follows: “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE." In other words, my five-dollar promissory note may be “tendered" as payment for a debt. Now if I owe you a debt you value at five-dollars, you may choose not to accept my five-dollar bill as payment, because you have not made the promise. It is not your signature on my five-dollar bill. You may require me to pay you in cat’s-eye marbles. That is your right (though you’d likely accept the fiver).


“THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE."


The U.S. sovereign government, however, legally does not have that option because it has signed the five-dollar promissory note. It has made the promise to accept the five-dollar bill as payment for a debt you owe to the U.S. government. (Unstated, but crucially implicit in the agreement, is the fact that the only thing the government will accept as payment is, in fact, the Promissory Note we are talking about.)

So what kind of debt might you owe to the U.S. government? There are lots of fees and fines that are imposed as a consequence of being “governed," but chiefly the debt you will constantly and repetitively owe to the sovereign government is taxes. Basically, then, the promise my five-dollar Federal Reserve (Promissory) Note makes is that the U.S. government will accept it as a tax payment. That’s it. That’s the contract. That’s the declared “promise."

There used to be another kind of paper “dollar" that called itself a “gold certificate". This piece of paper made an entirely different promise: it promised to accept the certificate in exchange for a specified amount of gold bullion. If you can get your hands on a U.S. government “gold certificate" no doubt the government will still honor that contract. But the Federal Reserve “fiat" Notes we use today - that we have, in fact, been using exclusively for over the past half century - do not make such a promise, do they? You can search all over your five-dollar bill and you’ll not find any hint or mention of gold or silver.


There used to be another kind of paper “dollar" that called itself a “gold certificate".


The importance of this is not simply that the U.S. government no longer must keep enough gold in its vaults to back up its money supply. The importance lies in a profound conceptual shift about what money is - and how a modern, democratic society can use that new understanding to address public needs and pursue collective goals.

First, let’s consider the “shift." STEP ONE: The government doesn’t print “money" - it prints Promissory Notes (promises it makes by fiat). We, the citizens, transform the Promissory Notes into “money" when we accept them as payments for goods and services we provide to the sovereign government. Why are we willing to do that? Because we perpetually have a debt we owe to the sovereign government which we can only pay with the government’s Promissory Notes - so we need to earn them to be able to cancel that debt. When we accept these same Promissory Notes as payments for goods and services amongst ourselves, we reinforce this transformation of the Notes into what we think of - and use - as “money."


The government doesn’t print “money" - it prints Promissory Notes (promises it makes by fiat).


STEP TWO: The sovereign government must issue and spend its Promissory Notes before it can accept them back as tax payments. This issuing and spending is crucial for the whole system to function. It obviously doesn’t work well for the government to levy taxes on its citizens and then refuse to issue and spend the Promissory Notes they will need to pay those taxes.

STEP THREE: The sovereign government cannot collect back more Promissory Notes (as tax payments) than it has issued and spent. How could it? Where would the citizens get the additional Promissory Notes? (Banks cannot print Promissory Notes signed by the U.S. Treasury Secretary and the U.S. Treasurer.) Furthermore, if the government collected back (as tax payments) exactly all the Promissory Notes it has issued and spent, the citizens would end up totally bereft of the “money" they had been using to buy goods and services amongst themselves. For the system to work, then, the government must collect back (as tax payments) substantially fewer of the Promissory Notes than it has issued.


The sovereign government must issue and spend its Promissory Notes before it can accept them back as tax payments.


STEP FOUR: The shift is now complete. We must simply look back at where we were to understand where we’ve gotten to. We can see what an odd perspective it was that we started out with: We imagined the U.S. government had to collect taxes before it had “money" to spend. Even stranger, we imagined that if the government spent more than it collected in taxes, it was somehow creating a debt that had to be “repaid" in the future. We can also see that today our congressional leaders - our democratically elected “governors" - still cling to, and operate upon, these two assumptions which we can now see are based on a very old, and no longer applicable, understanding of “money."


The sovereign government cannot collect back more Promissory Notes (as tax payments) than it has issued and spent.


Thus, if we are striving to unfold a successful, progressive, democratic economy, our mission is now clearly defined: First, we must facilitate this SHIFT in the thinking of every voting American - but especially in the thinking of our new progressive candidates for political office. Second, (and this will greatly assist in facilitating the first) we must begin to imagine and outline new, concrete, progressive agendas for the issuing and spending of our sovereign Promissory Notes.

To give a concrete example of the kind of “direct sovereign spending" I’m suggesting, here is what I believe should be the among the first of the progressive spending proposals: Establish, staff, and operate “free" pre-school-day-care education centers in every local American community or neighborhood.

And this is where the SHIFT becomes so important. President Obama proposed a Universal Pre-school Day Care program in his 2013 State of the Union Address. He then effectively killed it - pre-SHIFT - by explaining that his program would “cost" tax-payers ten billion dollars a year.

But now, post-SHIFT, we don’t have to explain things that way anymore. Now, we explain it like this: Our democratically elected sovereign government is going to issue and spend its Federal Reserve Promissory Notes to pay American citizens to establish, staff, and operate the pre-school education centers American families - and American preschoolers - desperately need. It doesn’t “cost" anybody anything. The American citizens are going to get paid for building and operating something they need to have - provided, of course, they’re willing to be paid with the government’s Promissory Notes.


This essay was originally posted at Real Progressives.


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