We’re Asking the Wrong Question About the Debt Ceiling

Just in time for Halloween, the specter of a nation-paralyzing debt crisis threatens to rise once again from the crypt of bad ideas that will not die. In the coming days, as the Senate debates whether to pass the bipartisan budget deal unveiled Tuesday and passed on Wednesday night by the House, we may well see more faux handwringing, dire warnings and vilification of the government from Senate Republicans, along with calls for ever greater
cuts to social programs. Senate Democrats, meanwhile, will likely issue a few noble statements about government serving the people, and agree to no cost-of-living adjustment for social programs as well as the proposed increases to the Pentagon’s slush
fund in order to increase the debt ceiling.

Sadly, frustratingly, this ongoing “crisis” over the debt ceiling is largely a self-generated illusion arising from a superstitious, outdated understanding of money. (This is apart from the leaders who do understand this and use the ensuing fear
to further private agendas.) Yet, like belief in ghosts and zombies, it can lead to policies that cause much social harm.

Despite the ubiquity of money – something that controls or touches upon virtually every aspect of modern life – relatively few people understand how money has evolved in the past century and how money originates and operates today. (Twentieth-century
industrialist Henry Ford was reported to remark: “It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”)

For most of economic history, money was embodied in material objects of value like gold and silver or tokens of value. Being physical objects and generally somewhat rare, the supply of these was limited to the metal and gems one could mine, the cattle
one could raise, or the art one could create or otherwise appropriate through purchase, conquest or theft. People with intelligence, power or other means were able to accumulate these, thus having access to a life of comfort, ease and abundance – while
others were left to suffer and starve. Moreover, because of its ability to grant or withhold the “good life,” much mysticism and superstition has evolved around the nature of money and the means to acquire it.

Today’s money, however, is quite a different phenomenon from the above – and the failure to recognize this fact forms the basis of our illusory debt crisis. The vast majority of modern central bank-issued money is “virtual.” Today’s money exists in purely
electronic form in computerized bank ledgers, checking accounts, credit accounts and the like. Further, the general abolition of the gold standard in the last century severed any hard-and-fast link between currency and a physical object of value. Accordingly,
whereas the former money was physically limited in supply – and therefore could be scarce – today’s money supply expands and shrinks as loans (i.e. debt) are made and repaid. There need be no scarcity of money as it can be created in whatever amount
is needed (though there are reasons not to do so infinitely).

Whereas the prior physical money was accumulative, today’s central bank money, being issued as debt (loans to the US Treasury and other borrowers) is essentially the reverse. For the former, more gold or coupons redeemable for the same equates to more
money. In the latter case, the greater the money supply, the greater the national debt. For those unfamiliar with the way modern money works, this is often difficult to “grok” upon first hearing, but were the national debt to be entirely paid off today,
there would be no money in circulation (except for physical coins and bills, which comprise about 3 percent of the money supply).

The Proper Question About the Debt Ceiling

The looming debt crisis is based on confusion between the two types of money described above. If money continues to be viewed as a finite, scarce, physical resource, and we can’t dig more dollars up from the “dollar mine,” we then end up struggling over
questions like, “How do we apportion the scarce dollars to meet the national needs we deem most important?”; “Which programs are getting too much/too little money?”; and “Which programs must be sacrificed in order to fund the others?”

Virtual currency is not in fixed supply. Therefore, the question is not how much money (i.e. how much debt) is too much or too little, but simply, “How much money is needed to conduct the necessary business of the nation?” “Necessary business” includes
not only finance and the corporate production of goods and services, but also maintaining and modernizing public infrastructure, educating children, ensuring that all have adequate health care, and funding schools, parks and libraries. The money supply
does not need to be infinite, but simply adequate to meet all of the needs at hand.

Conceptualizing Money as a Tool

Money is commonly thought of as stored wealth: “riches,” “booty” and “loot.” This was understandable when money was embodied in gold and silver coins and other precious objects. Yet today’s virtual money might more accurately be thought of as a tool –
a device that enables work to be done. If a job needs doing, it is important to have the proper tools, and in the quantity necessary to get the job done thoroughly, promptly and efficiently.

From this perspective, can you imagine building a house that requires dozens of workers, yet the general contractor only supplies two hammers and two saws for the job, expecting the workers to compete for their use? Or can you imagine a crafty worker
who decides to make extra “profit” by arriving on the job early, locking up all the hammers and saws, and then renting them out to the other workers?

Or can you imagine a schoolteacher giving a test to 30 students but only providing 20 pencils, expecting students to compete for them, in order to determine who is really the best all-around student?

Absurd as these scenarios are, is this not precisely what we are doing with the national money supply? Bridges need repairing, workers need at least a living wage, children need feeding and schooling, everyone needs health care – but oops, sorry! All
of the money is busy producing iPads, automobiles and office parks. Again, the fact that this appears to be an either-or scenario is primarily due to our unawareness about the evolved nature of money.

Debt and Its Problems

The legislative fight over a debt ceiling has an appearance of legitimacy because there is a problem with too much money in circulation. Anyone who has been through Economics 101 knows that “too many dollars chasing too few goods” generally leads to inflation.
(Note, however, that the same is also true for any commodity currency. That is why gold is the “gold” standard because, far as we know, there is a limited supply of gold.)

The use of bank-issued, debt-based currency is convenient in that it enables the money supply to readily be expanded or contracted as needed. The primary problem with debt currency is that it comes with an interest charge. When a new loan is issued, the
money to pay interest charges on that loan does not exist at the time. In order to generate that money, the economy must be expanded. That is why there is such relentless pressure to “grow” the economy. Whether or not eternal growth on a finite planet
is sustainable is another matter, but if you are a believer in the benefits of economic growth, increasing debt at a reasonable rate of interest should not be the horror that it is often portrayed during budget debates.

The fact that a national debt exists at all results from the decision in 1913 to transfer money creation powers from the US Treasury to the Federal Reserve central banking system. The latter, despite what its name may suggest, is a private, for-profit
corporation. Whereas the Treasury has the ability to issue currency as credit, the Fed money we use today comes as debt. The federal government borrows our money from the Fed (T-Bills) and we as taxpayers ultimately pay the interest charges.

Whether this central bank, debt-based monetary system gives us the most bang for our buck is open to debate, but it is currently the system we have to work with. Accordingly, we must proceed with a clear and honest understanding of its operating principles
in order to move forward toward creating the kind of country in which we all hope to live.