The aura of money has existed for
a very, very long time. Ecclesiastes 10:19 asserts: Money answereth all things. During the course of human history many
objects have been used as money to transact sales and pursue commerce including
cocoa beans (in Mesoamerica) and cowrie shells (in Africa, India and China). Paleo-economists
believe the first precious-metal coins were used as money in several places
about the same time, around 600-500BC; in China’s Yellow River valley, in
India’s Ganges River valley and by the king of Lydia in western Asia Minor
(modern Turkey). In 1024, the Chinese government started issuing paper notes in
standard denominations, which showed that banknotes (paper currency) could be a
viable and facile form of money. The first European banknotes were issued in
late 17th century Sweden.
But what about money here in the
United States (US)? Glad you asked. In the 17th and much of the 18th centuries each of the original 13 American
colonies issued their own banknotes (paper money). Thus, Pennsylvania and Rhode
Island each had their own distinct currencies. Understandably, this was a
hindrance to trade between the colonies, probably promoting a fair amount of
barter exchange. Foreign coins, including the Spanish dollar, were also widely
used as currency in the US until 1857. After a previous and unsuccessful
attempt to create a useful, single currency for the new country, the US
Continental Congress authorized the issuance of the US dollar in July 1785,
backed by gold and silver.
US Federal banknotes were issued
as the currency of our nation in 1863 to finance the Civil War. We finally discarded
the Gold Standard in August 1971; meaning the government no longer officially backed
its banknotes with gold bullion stored at Fort Knox and the New York Federal
Reserve Bank. Somehow, we’ve survived much to the surprise of the gold “bugs.” After
1971, the only “promise” the government offers for your $20 Hamilton bill is
another $20 bill.
Naturally, not everyone was happy
about this lack of precious metal “backing.” Remember William Jennings Bryan’s
“Cross of Gold” speech?
It’s what’s lurking somewhere behind Martin Amis’ quote: Money
is a fiction, an addiction and a tacit conspiracy. So it goes…
In January 2020, the US economy has
$1.75 trillion circulating as Federal Reserve banknotes and about $245 million
in coins. Interestingly, the $100 bill – with the almost-smiling Ben Franklin
on its front side – is the most common bill now in circulation, just ahead of George
Washington’s $1 bill. There were 13.4 billion $100 bills circulating at the end
of 2018, representing over 75% of the total value of our currency.
As much as 80% of all our Ben
Franklins is being used outside the US, making them one of our
largest, and unreported, exports. Economically-ruptured Venezuela is the latest
nation to become more “dollarized,” given that its peso is next-to-worthless.
In fact, Ecuador and Zimbabwe officially use US dollars (especially $100 bills)
as their currency. Other countries, including Panama, Cambodia, and the
Bahamas, use the US dollar alongside their own currencies. Ben Franklin has
taken many foreign excursions.
Now there’s a panoply of
alternative “currencies” beyond cash, including credit cards (the pioneering
Diners Club card was first used in 1950), debit cards and various electronic
forms, including the (in)famous Bitcoin, as well as Apple Pay. According to the
Federal Reserve Bank of San Francisco, US consumers use credit and debit cards
for 34% of their purchases, electronic payments for 34%, checks for 20% and
cash for only 9% of (mostly low-value) purchases.
Because money is such an elemental
part of any economy, economists have spent lots of time thinking about it over
the years and examining how the amount of it and its use affects economic
conditions. Concepts such as the “velocity of money”
and “money illusion”
have sprouted from lofty ivory towers. We’ve come a long way from just using
cowrie shells and precious-metal coins.
Money illusion was first discussed
over 90 years ago by Yale professor Irving Fisher who observed that most people
believe the illusion that the face value of their money (say the $20 value of
Hamilton’s bill; the bill’s “nominal value” in econ-speak) represents its actual
purchasing power. That’s not necessarily true. Such people aren’t aware that money’s
purchasing power depends on general price level changes, the $20 bill’s “real
value.” If overall prices rise due to inflationary forces, the $20 bill’s actual
purchasing power is reduced; it doesn’t buy as much as it used to. Thus, this money
illusion is present if there’s underlying broad pressure affecting many goods’
prices, but not (yet) changing people’s income/wage levels.
After 1990 the US average annual
inflation rate has been very low, 1.6% per year, despite the vociferous,
misguided fears of many conservatives. That’s in stark contrast to 1974 and
1980 when the OPEC-induced oil price shocks pushed our annual inflation rate to
11.0% and 13.5%, respectively. Those were the days. Not.
I believe there is a newer version
of Prof. Fisher’s money illusion. It has arrived along-side several progressive
Democrats’ plans for dramatically changing the scope and operations of the
federal government.
Bernie Sanders
and, to a lesser degree, Elizabeth Warren have expansive ideas about
reprioritizing domestic policies to guarantee every man, woman and child their
“basic economic rights” (BERs). Bernie has stated, “We must take up the
unfinished business of the New Deal.” His unfinished BERs consist of:
Quality
health care
|
As much education as needed to succeed
|
A good job paying a living wage with
12-weeks family leave
|
Affordable housing
|
Living in a clean environment
|
A secure retirement
|
The possible
costs of providing Medicare for All, “free” college tuition, elimination of
student loan debt, government-guaranteed jobs, increased Social Security
payments, renewed environmental protection and other, unstinting progressive
programs have been dutifully estimated. One guesstimate stated these programs
could cost $42.5 trillion (T) over the first decade.
This titanic sum, $42.5T, would almost
double the size of the federal government’s current expenditures. In the
current fiscal year the government has budgeted $4.75T for all its expenditures,
which represents about 21% of our GDP. Possibly doubling the size of the
government over a fairly short period would be a very big deal that so far
doesn’t seem to have garnered very much real (or nominal) discussion; it’s an illusory
topic.
In a sense, because these costs are
so profuse, and in the future, we seemingly don’t have to worry now. This
thinking is consistent with the liberal Modern Money Theory which suggests that
the government can pay for its expenditures and achieve full employment by
issuing more money.
The above sum does not include
undertaking the extensive Green New Deal (GND) programs announced last February
by Rep. Ocasio-Cortez and Sen. Markley. If implemented, the GND endorses a
“ten-year mobilization” that would include large-scale, national social
programs like universal health care, food security and government-guaranteed
jobs as the “new deal” portion of the GND. Its substantial Green initiatives
portion would include creating net zero emissions energy production from both a
thoroughly updated, totally non-fossil-fueled national electricity grid and an
electrified national transportation network.
Ten-year cost estimates for the
GND programs by Doug Holtz-Eakin, previously director of the Congressional
Budget Office and very familiar with government fiscal programs and expenditures,
are $52T to $93T. Mr. Holtz-Eakin believes the bulk of the estimated costs would
be faced in implementing the GND’s new deal programs, although the Green
initiatives would also have a very substantial price tag due to their inclusive
scope and tight schedule.
The trillions of dollar sums for
the progressives’ programs and the GND are unimaginably large, and thus subject
to a more modern type of money illusion, principally because of these programs’
size, complexity and span.
If we arbitrarily assume there’s a
25% overlap between the GND’s new deal programs and Bernie’s BERs programs and
use the mid-point of the mentioned GND cost estimates, the grand total of the
combined efforts of the GND and BERs for ten-years would be $97,000,000,000,000
or ninety-seven trillion dollars. It’s nearly five times as big as our current
GDP, the world’s largest.
To get a better visual sense of
just how large $97T is, imagine Ben Franklin $100 bills that have been tightly
stacked upright on their long side, so we can answer the question; gee, how
long a heap of such Franklin $100s would equal $97 trillion? Not how large is
$97T; how long is it? This stack would go around the world about 2¼ times at
its circumference; a bit more than 56,400 miles of $100 bills. That’s a lot
of money.
Our inability to sense just how
large these numbers (and the programs’ expenditures/activities) could be is
likely why we can’t fathom exactly what is being proposed. It’s a next-to-impossible
illusion to imagine in much detail because it’s so big. Certainly, the Law of
Unintended Consequences will be functioning throughout these efforts, as always.
This very progressive political
vision would be very distinct from others that are now being promoted by
different candidates. But should we as a nation try it? That’s what the true
left-field progressives pretty much demand. When asked, how can we afford this?
They evasively reply, how can we not afford it; continuing the illusion. Our
collective answer is what this year’s primaries and election, in a mere 285
days, will hopefully help decide. The inaugural Democratic caucuses and primaries begin
in a mere 12 days across farmy Iowa.
Not to worry if you don’t get to
Des Moines in time. After Iowa there are 56 more Dems primaries and/or
caucuses, including the Northern Mariana Island caucuses, the Democrats Abroad primary
and last but certainly not least, the US Virgin Island caucuses on June 6. No
wonder we call it a party. I hope our money and programmatic illusions will be
at least partially dispelled after mid-July’s convention. As Adam Smith aptly
stated, all money is a matter of belief. So is politics.
