I clapped for this article because it points out the overwhelming econ illiteracy in the US, not because I’m a fan of cryptocurrencies.
While Nixon removed us from the Bretton-Woods agreement, making our currency fiat, in ’71, we effectively used the fiat system domestically since FDR suspended the currency’s convertibility to gold in ’34.
It would not have been possible to end the great depression, much less ramp up production for WWII, with a commodity or fixed exchange rate pinning our currency. The government would have done fine for its existing obligations, as it held the gold reserve, but the general economy simply had no money to tax or borrow. People quickly found out that the “net” money supply is always what is created by Congress, not that created by bank debt when poor decisions in the business/banking sector made it all go away.
Without a gold reserve to defend, government spending and taxation were essentially disconnected except where they intersected to determine deficits and debt, which is now only an accounting entity informing Treasury of the amount of money created by Congress and not yet used to pay a federal tax obligation. This was noted by Beardsley Ruml, President of the New York Federal Reserve, and he penned a paper titled: “Taxes For Revenue Are Obsolete” in ‘45.
The condensed gist of his paper is that while taxing and bond sales never directly funded government spending they did allow needed policy room between the money supply and the value of the gold reserve to enable spending by Congress. He elaborated upon that by stating that the only constraint left to the ability of Congress to spend for the public purpose was the availability of resources and labor, which is always the causal issue in inflation, not an arbitrary number representing money in circulation.
Even after effectively using the power of the purse to mitigate the suffering of the depression, ramp up production to allow the US to be a critical factor in defeating fascism, and paving the way for the greatest economic period in the history of the world, the reality of our sovereign (having no foreign denominated debt) fiat currency is largely denied by mainstream economists and politicians who posit our national debt as an obligation to be repaid from future productivity, not the untaxed past productivity (store of value/savings) that it is.
Our economic reality is that “ANY” suffering that can be mitigated with spending at the federal level is entirely a political decision, not economics and that taxation beyond what is needed to prevent inflation or realize social goals is counterproductive.
