Tuesday, August 16, 2011

Money is Debt: A Drama in One Act

In an attempt to understand the national debt better, I thought it might be worth stepping back a bit and ask, what is money? To illustrate, we might try a bit of drama.
My former friend Fred, a really big guy, bought a thing from me for $10.  
In payment he gave a $10 IOU. I was perplexed
Dan: Fred, how about some real money?
Fred: Dan, ole buddy, you know I’m good for it.
Dan: Well, OK. (Reluctantly)
Days later I go to Fred.
Dan: Fred, ole buddy, I came to collect my money.
Fred: Right now the best I can do is give you 10 $1 IOUs.
Dan: What? How about some real money? (Somewhat pissed)
Fred: That’s it.
Days later Fred comes to me.
Fred: Dan, give me back 5 of those $1 IOUs, or I’ll beat the crap out of you.
Dan: What the hell for?
Fred: It’s a friendship tax. 
Dan: 50% is a lot
Fred: Yep. (Raises clenched fist)
Dan: Well OK, I’ll give back 5 of your IOUs, to satisfy my tax liability.
We wouldn’t accept this kind of behavior very long in our private lives, but that is just what our government does. It purchases goods and services from us and pays us with IOUs (Federal Reserve Notes). Then it turns around and taxes some of those IOUs back. What’s left we get to save. 
This drama, OK bad skit, reminds us that the government creates money first and then takes back in taxes money it has already spent. The issuer of currency must always spend before it can either tax or borrow dollars. In either case, it is getting back dollars it has already spent.
Money has been debt for centuries, if not millennia. Any lord, king, or government that can enforce taxes can have money that will circulate based on credit and debt. Money is a claim on the taxing authority and moves around as people go about their trading. 
During the 19th century in the African British colonies, the Brits offered coins of the realm to the natives for them to work in the fields. The natives had no use for British coins and wouldn’t work for them. So, the Brits levied a hut tax payable only in British coin. Soon the workers were willing to work for the Brits and those who didn’t work directly for the Brits sold their goods and services to the workers in order to obtain the now precious coins. That’s all it takes. 
It’s so astoundingly simple, it boggles the mind.

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