The Cost of Money

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The President’s request for 87 billion to finance the government’s continuing operations in Iraq has some people worried. Oh, they’re not worried about what our operations are going to do to Iraq, or its people; nor are they worried about the mortality that might result among our military personnel. Their concerns are economic.

"Where is the money going to come from?" is a question often heard. Well, where does any money come from? It’s not mined or produced, like a commodity, although there might, even in this day and age, be some among us who still associate money with something tangible, like precious metals. No, money is created when a loan is made. If you borrow ten thousand from a bank, do you ask where it comes from? You might suspect that the bank has it somewhere, just waiting for someone to borrow it, and the banker would be happy to have you labor under that delusion. In fact, the ten thousand doesn’t exist. When he adds the number 10,000 to your account — hey presto! — it comes into existence. Inflation, (im)pure and simple! So where will the proposed 87 billion come from? From thin air, like all other money. The numbers created can be exchanged via checks, or the familiar paper devices: Federal Reserve notes.

Some express concern that the U.S. will face bankruptcy if it keeps borrowing. After all, its present debt is incomprehensibly large. How can default be avoided? Well, how can you go bankrupt if you print money, or what people accept, for the time being, as money? The Federal Reserve itself, in one of its informative booklets, tells us that government bankruptcy is a virtual impossibility, but something worse than bankruptcy is possible indeed. And what is that? Runaway inflation. The ultimate catastrophe is being able to print "money" which no one takes seriously. At one time during the German hyperinflation of the 20s, the government was printing money so fast it was only printed on one side of the paper. Nonetheless, the people continued to use the stuff until the undeniable absurdity of it became apparent to even the least sophisticated among them. Wiser Germans had long before swapped the paper for desirable commodities: I once read a newspaper account of a German family that had a couple of crated pianos in their living room, knowing that, when the dust had settled, the pianos would be vastly superior bartering agents than bushel baskets of the "money." So bankruptcy, per se, is out of the question.

Finally, there is resentment among many that this money is being spent in Iraq, when it could be put to good use at home: good use being the complainers’ favorite pork barrel. Again, this is a naïve position. If the government/banking axis can create 87 billion to spend in Iraq, it can create that amount — any amount, in fact — to spend anywhere, for anything. The "amount" of money is not finite: money isn’t a thing. Spending X amount here doesn’t mean doing without X amount there. There’s no limit — spend away! Indeed, spending is, of itself, a prime government priority. With no source of money except borrowing, and with each new borrowing increasing the total debt by more than the amount borrowed (let’s not forget interest!) the only hope that the economy can be kept afloat until the next election is to create (borrow) more money. With the debt burden so high, private borrowers might decide they’ve had enough: the interest burden is crushing them at a time when the economic outlook isn’t rosy. So Uncle can step in as the borrower of last resort. It’s the classical situation of trying to borrow one’s way out of debt, but there is no alternative — short of sound money, and an end to fiat. Until that day, to keep the economy under some sort of control and keep prices from rising too rapidly, controls and taxes are necessary. And the people’s acceptance of the government’s fiat allows them to be controlled far more subtly than with whips and chains: economic control is the means by which we’re limited, controlled, and regulated, i.e., governed.

Freedom and fiat are incompatible, but as long as we’ve got fiat, we’ll have ever-increasing borrowing (money-creation) by someone, with the government stepping in to borrow for any reason whatsoever, when the economic situation is bad enough to warrant/justify it.

Dr. Hein [send him mail] is a semi-retired ophthalmologist in St. Louis, and the author of All Work & No Pay.

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