“How do you mean that?”
“Well, in my day money could be exchanged for gold, not very easily, but it could be done. How can one be sure that this new money is anything but pieces of paper?”
“As I told you before, the government will accept it for taxes, and for services such as the postal service. But you want to know what it is worth in terms of real wealth, just as the old style dollar was worth so many grains of gold. Very well. If you present a draft for a thousand credit units or dollar bills to any one of several government warehouses, the bursar will give you an assorted group of basic commodities of weights and standards specified by law.”
“Where does the government get these commodities?”
“Grows or makes them, buys them in the open market, and may occasionally accept some of them as taxes.”
“That seems awfully cumbersome compared with the gold standard.”
“It is cumbersome, but it’s worthwhile for it gives a much more nearly stable medium of exchange than gold. As a matter of practice the government keeps very small stocks of commodities because with a stable standard for money the public prefers cash or credit at the Bank of the United States to the trouble of handling bulk in commodities. They are satisfied to know that they can get real wealth in specified amounts, if they choose.”
“How about foreign trade? This sort of money would be a nuisance there.”
“Gold, as well as platinum, silver, and other convenient commodities, is still used in foreign trade exchange. The government buys and sells these commodities in the open market as a convenience to its citizens.”
“I guess that clears it up. It still seems complicated.”
“It is, Perry, more or less. But it isn’t anything to the anarchistic maze that your old money system was. Let’s get back the tax problem. The fact that there is no necessary one-to-one relationship between taxes and government expenditure is startling at first, but is evident from the nature of money. Money in the hands of an individual is a token of a debt to one of us owed by all of us. This token in the hands of the government states that all of us, i.e. the government, owe a debt to all of us, i.e. the government—an absurdity. One cannot owe oneself a debt in any but a poetical sense. Money in the hands of the Federal government is a scrap of paper and ink. It is significant only when held by individuals or groups of individuals.
“We recognize nowadays that Federal taxation is a deflating process, and that Federal government spending is an inflating process. Each process has important secondary effects through which it can be used to regulate for the general welfare. Taxation may be used to prevent unwholesome concentration of wealth. It may also be used to prevent too great a difference in the net income of individuals. The issue of new money is an even more powerful instrument in shaping our economic life to suit our wishes. It is a means of ensuring social security for the entire population through the dividend or inheritance checks. It can stimulate production and prevent inflation of prices through the use of the discount. It is used to assure an equal start for every child. In fact the knowledge of how to use money enables us to inhibit or encourage almost anything without coercion. If we desired, we could institute as near complete a socialism in the United States as we wished, without confiscation and taking over the tools of production. The present set up suits us now. We can change it if we like, when we like, for we understand the economic mechanism. The economic determinism of Marx is an exploded bugaboo, and the American people are the masters, not the slaves, of their economic system.”
Davis took a sip of sherry, and looked slightly giddy. “You’ll forgive my enthusiasm, I trust. This is my subject and I am sometimes carried away by it.”
“I am not surprised,” replied Perry. “You have reason. I confess I don’t see all those implications just yet, but it sounds amazing.”