Hooray for Catastrophes!

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Looking very down-to-earth and serious, without jacket or tie, the President posed in front of St. Louis Cathedral in Jackson Square and solemnly informed the world — or whatever part of it was paying attention — that the federal government was going to rebuild New Orleans. Never mind that the Constitution, to which Mr. Bush swore fealty, does not authorize such activity, and by that very fact, prohibits it. The figure bandied about is 200 billion dollars, which, by my calculations, works out to about 400,000 for each resident of that ill-fated city. That ought to do it, but, of course, if it falls short, there will be more.

There is widespread concern about such spending. Where will the money come from? Will taxes go up? Could the United States spend itself into bankruptcy?

Not to worry. Far from being a catastrophe for the federal government, hurricane Katrina was a godsend. It’s been almost as good as 911, except that it doesn’t provide an excuse for ongoing spending, as in Iraq, which, in some unfathomable way, was linked to 911. The explanation lies in the nature of our monetary system, which is so simple and undeniable that it is universally ignored or denied.

Technically, there is no money involved. If money is gold or silver coin, which can be assayed for purity and weighed for its "dollar" amount (the dollar being an amount, by weight, of a specified purity of gold or silver coin) there has been no money used for buying and selling in America for at least a generation. So no need to worry about running out of money; there isn’t any, and hasn’t been any for decades.

So what replaced it? Two nearly identical things: 1) bank credit, or checkbook money. This is the amount (of nothing!) indicated by the numbers on checks. Known as the "liabilities of commercial banks," these numbers come into existence with the stroke of the banker’s pen, or, nowadays, a keystroke of his computer. Are you going to borrow 100,000 from the bank? Then the banker will simply add that number to your checking account, or give you a check bearing that number, and away you go. Instant inflation! 2) federal reserve notes. These are known as "obligations of the United States," although the United States’ only "obligation" is to make change (and that is not a legal requirement) if you give them a bill and ask them to honor their obligation. They are printed by the Bureau of Engraving and Printing, upon orders from the Federal Reserve. This cash is a nuisance, and a danger to the authorities, since it allows individuals to deal with one another privately, without leaving a paper trail. The banks and government discourage its use. The numbers printed on the "notes" (they are not, in any sense, genuine notes) have the same significance as the numbers in checking accounts, and may be interchanged with them. In no instance do the numbers stand for anything, represent anything, or entitle the holder to anything.

So: can the United States go bankrupt? Hardly! The banks, which, in effect, own the United States, create money with the stroke of a pen. Bankruptcy is out of the question.

But why is this Katrina expense a godsend for government? What passes for money is created out of thin air, as I mentioned. But this "money" isn’t given away; it’s loaned. There is only one source — the banking system. It is analogous to a town that obtains its water from a single well. The owner of the well dispenses water liberally, but anyone taking water from the well must, eventually, replace it — with interest. How is that possible? It isn’t — unless the well owner lends the water for repayment. In other words, residents of that town will be forever trying to borrow themselves out of debt, which, in turn, will grow larger and larger. So it is with American debtors. But eventually, reality has its way. The burden of debt becomes so great that further borrowing is recognized as foolish, even to the least acute of the bank’s customers. Borrowers pass along the cost of their borrowing as much as possible, but eventually it becomes impossible, or next to impossible, to sell a $5 item for $10 because of the added burden of interest. In addition, the constant infusions of debt (or "money") into the economy dilute the purchasing power of the debt ("money") already there, forcing prices up. If borrowing stops, the money supply contracts, debts may not be paid. If the IOUs of the bank’s customers become worthless, the bank can no longer list them as "assets" against which more "money" can be created. Disaster. There must always be more borrowers if the "money" supply is not to contract, with dire consequences. If the private sector has had its fill of borrowing, then Uncle steps in. Of course, there has to be an excuse for the borrowing (I note that the U.S. is going to the moon again, requiring lots of money. The sky’s the limit!) Now along comes Katrina, and the money-managers can breathe a sigh of relief. What better excuse for creating billions.

Will taxes go up? Sure. Inflation, itself, is a tax. You may have noticed that the present incarnation of the income tax, and the federal reserve act, landed in the law books in the same year: 1913. One allows money to be pumped into the economy, thus satisfying everyone’s demand for easy money; the other provides a mechanism for siphoning it off, thus regulating the economy lest too much credit cause an explosion of prices. It also creates the illusion that the "money" is scarce and valuable, and the government couldn’t exist without some of yours. It’s a brilliant system; unfortunately, it wasn’t designed to benefit you or me.

Disaster is inevitable. The object is to avoid having it happen on your watch. To accomplish that, money must be pumped into the system to enable the payment of at least most of the loans. Private firms and individuals are smart enough to recognize the absurdity of throwing bad "money" after worse. Government is smart enough also, but somebody has to do it! It can always think of justifications for spending, but a natural disaster like Katrina is made-to-order! It’s an ill wind indeed, that blows no good.

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

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