The Gold Standard Is the Wrong Model for Thanksgiving

The Gold Standard Is the Wrong Model for Thanksgiving

This Thanksgiving all the talk in post-election America is about the fiscal cliff, the debt and deficit, inflation and national bankruptcy. That's all scare tactics and political theater. The national disgrace this holiday season is the 23 million Americans who are un- or underemployed and have little or nothing to be thankful for. There is no excuse. We are not broke. We can afford to do something about it. We are making excuses using the wrong economic model.

The complaint is that we cannot afford another stimulus. That's simply not true. All the fear mongering about the debt and the deficit, all the inflation scares of the Federal Reserve's quantitative easing and all the wrong-headed ignorance about bankruptcy and collapse of the dollar are based on the outmoded and archaic economic model called the gold standard.

With the gold standard, a country has only a given amount of money that can be spent, invested, taxed or saved. A government on the gold standard cannot issue money unless it has gold with which to redeem it. The United States, not being on the gold standard, there is no limit on the amount of money that our government can print and spend.

If America were on the gold standard, there would be real constraints on spending since the U.S. Treasury would only be able to spend what it could borrow or collect in taxes. The Federal Reserve system, in the same way, would only be able to supply money in proportion to the gold it has backing that currency. Internationally, the United States would have to balance the flow of money it gets from international finance and trade.

Countries on the gold standard have to constrain spending, limit the money supply and control trade in order to avoid deficits and debt, manage monetary policy and keep the currency strong. If a country pretending to be on the gold standard does not obey the rules, it's money will collapse.

The funny thing is, mainline economists, pundits, politicians and even President Obama and the U.S. Treasury are all acting as though we were on the gold standard and that we were bound by all of those constraints. We are not. We do not have to abandon the unemployed, ignore civic needs or put a burden on future generations.

The United States of America is a sovereign country that has a fiat currency. The Federal Reserve can say, Genesis-like, "let there be money – and money appears.” We have had a full fiat currency since August 15, 1971 when President Richard Nixon removed the last vestiges of a connection between gold and the dollar.

When the Federal Reserve wants to expand the money supply, it buys treasury bonds, paying with money it creates out of thin air. The seller of the bond then spends, saves or invests that newly created money. Likewise, when a business borrows from a bank, the bank gets that money from the Fed which creates it. It is not someone's savings as would be the case if we had a commodity money. The money does not have to "come from somewhere."

With a fiat money, the Federal Reserve can create and loan trillions of dollars to the business community when those dollars are needed in the midst of a financial crisis, as in 2008. The U.S. Treasury can run fiscal deficits of whatever size is needed to put the unemployed to work. You can't do that with a commodity money.

Thank God, we are not on the gold standard. If we were, all of those horrible fears would be justified. We would have to institute austerity budgeting, deleverage credit, increase taxes and tighten the money supply. We would have to slow down the economy to avoid inflationary pressure. We would have to worry about a balanced budget, the size of the debt, the debt to GDP ratio, foreign trade balances and the value of our currency. We don't have to do any of this. We should, in fact, be doing the opposite.

With a fiat currency, we can and should create the buying power necessary to put all the people to work, increase national output and make everyone better off. Issuing this money will not cause inflation unless we are already at full employment. Those 23 million are idle resources who, despite nasty claims to the contrary, want to work.

We have much to be thankful for. So long as we are a sovereign nation with a fiat currency, we can spend what is necessary to maintain a fully employed economy, provide public services and pay for national defense. Austerity programs and budget cuts are a poison, not a cure. They are absolutely unnecessary. We can create as much money as the economy needs and there is no chance whatsoever of bankruptcy or collapse of the dollar.

Only an economist would lead the Thanksgiving Day prayer this way: "Let us pray. Lord, we are thankful today to You and Richard Nixon that the US is not on the gold standard."