The super-committee of Congress is the latest group to confess
abject defeat by the Treasury budget deficit. Who can be surprised
by this total failure? During the past generation Congress has made
as many as fifteen legislative attempts to control government
spending — aimed ultimately at a balanced budget. The most notable
efforts were those sponsored by the all-time budget hawk, Senator
Phil Gramm of Texas. But every administrative and legislative
effort by the authorities, no matter how well-intentioned, has
collapsed. Why is this so?
Nobel economist Milton Friedman believed the solution to
the budget deficit problem was to deny Congress tax revenues. So he
advised Congressmen and Presidents to oppose all tax increases —
thereby denying bloated government the funds with which to increase
spending. But Friedman’s advice has failed, too. We know this
because marginal tax rates have been reduced from as high as 70% in
1964 to 15-20-39% in 2011 — depending on the type of income. But
congressional spending has nevertheless increased every year —
such that, today, only 60% of the Federal budget is financed by
taxes, the remainder by Treasury debt. Total direct Federal debt is
now about equal to total U.S. output.
The intractable budget deficit and the inexorable rise of
government spending has a simpler explanation. Congress and the
Treasury are in possession of several open-ended charge accounts —
“permanent credit card financing” — with no limits. With its
charge cards the Treasury can borrow new credit (money) from the
banking system — much of what it needs every year to finance the
ever-rising budget deficit.
A look at the current Federal Reserve Balance Sheet shows
that the Fed has created about $1.7 trillion of new credit
(money) with which to purchase Treasury debt. Foreign central banks
have created about $2.7 trillion of new credit to purchase U.S.
Treasury bonds. This global, electronic, money-printing exercise
has financed almost 30% of the total direct debt of the U.S.
Treasury. In 2002, Ben Bernanke, now Chairman of the Fed, did not
mince words to describe this process:
[U]nder a fiat (that is, paper) money system, a government (in
practice, the central bank in cooperation with other agencies)
should always be able to generate increased nominal spending and
inflation, even when the short-term nominal interest rate is at
zero…. [T]he U.S. government has a technology, called a printing
press (or, today, its electronic equivalent), that allows it to
produce as many U.S. dollars as it wishes at essentially no
cost.
He might have added that these “no cost” dollars, printed
by the Fed, are the enablers of the perennial U.S. budget
deficit.
But the Fed is not the only credit card used by the
Treasury to finance the budget deficit. Because the dollar is the
world’s reserve currency, foreign central banks also finance U.S.
budget deficits (as the custody account of the Fed balance sheet
shows). Domestic and foreign commercial banks, too, supply vast
amounts of new credit to the U.S. Treasury because domestic,
foreign, and international bank regulators, such as the Basel
authorities, define U.S. sovereign bonds as high quality assets for
which bank reserves are not necessary. Therefore financial
institutions can qualify their overleveraged balance sheets by
loading up on Treasury Securities. Indeed, only 10-20% of the total
direct debt of the U.S. Treasury is now owned by the non-bank,
non-government private market. In a word, given the reserve
currency role of the dollar, the Federal Reserve and foreign
central banks have been given every institutional incentive to
finance the U.S. budget deficit. Beginning with World War I, every
monetary discipline has been removed by domestic and international
authorities, such that runaway government spending everywhere
relies on the ultimate credit card — newly created money in the
banking system.
The simplest solution to the government spending problem
in Congress is “to tear up” its credit cards. The way to do this is
not with ad hoc and unavailing administrative patchworks, all of
which are nullified by world banking system credit made available
to the U.S. Treasury. Instead, the effective democratic solution is
authorized by the U.S. Constitution — in Article I, Sections 8 and
10: — whereby the control of the supply of dollars is entrusted to
the hands of the people — where it stayed for most of American
history, especially from 1792 to 1914. This was America’s longest
period of rapid, non-inflationary, economic growth — almost 4%
annually, with the budget under control except wartime.
Congress need only mobilize its unique, Article I,
constitutional power “to coin money and regulate the value
thereof.” From 1792 to 1971 Congress defined by law the gold value
of the currency such that paper dollars and bank demand deposits
were convertible to their gold equivalent — by the people
(1792-1914) and/or by governments (1933-1971). Congress should
exercise this constitutional power to restore dollar-gold
convertibility, because of the proven budgetary and economic growth
benefits of a dollar as good as gold.
First, the discipline of
convertibility would automatically set the limit on Treasury access
to its Federal Reserve credit card. If the Federal Reserve created
more money than participants in the market wanted to hold, people
would get rid of the inflationary excess by promptly exchanging
paper and credit money for the gold equivalent. But under the true
gold standard, the Fed and the commercial banks would be required
by law to maintain dollar-gold convertibility at the statutory
gold-dollar parity — or suffer insolvency. In order to maintain
dollar convertibility to gold, the Fed and the commercial banks
must reduce the quantity of money and credit, including credit to
the Treasury — thus controlling government spending increases and
inflation.
Second, the empirical evidence of
American economic history also shows that convertibility to gold
stabilizes the value of the dollar. The same evidence shows that a
stable dollar also stabilizes the general price level over the long
run. For example, under the gold standard, the price level in 1914
was at almost exactly the same level as it was in 1879 and in 1834.
There was no long term inflation, even over an 80 year period! But
from 1971 — Nixon’s termination of dollar-gold convertibility —
until 2011, the purchasing power of the dollar (adjusted by the
CPI) has fallen 85% in a 40 year period.
Third, gold convertibility of the
dollar leads to a vast outpouring of savings from inflation hedges
such as commodities, farmland, art, antiques — almost anything
perceived to be a better store of value than depreciating paper
currencies. Stable money also creates incentives to save from
income. Combined with the global release of trillions of hoarded,
inert, unproductive inflation hedges, convertibility triggers new
savings which would pour into the productive investment market. The
new investment would give rise to a general economic expansion —
through new business, new products, new plant and equipment,
creating thereby a renewed demand for labor to work the expanding
production facilities.
The restoration of a dollar worth its weight in gold
provides not only a missing and necessary brake on government
spending, but a stable dollar supplies the missing steering wheel
by which to guide the immense, hoarded savings into long-term
productive investment. Dollar convertibility to gold is the simple,
institutional financial reform which terminates the fear of rapid
inflation — thus transforming unproductive, store-of-value hedges
into real investment capital with which to inaugurate a new
American era of rapid economic and employment growth.
