Most are aware that our federal government carries a fair amount of debt.  It’s a factoid easy to remember and rally against, and it is frequently attacked with flawed arguments and a general misunderstanding of the facts.  Monetary policy is one of those ”wax philosophic” ego-stroke topics blowhards like to talk about LOUDLY at parties, but only a tiny group of ultra-brains truly understand the chaotic reality of global commerce.

The dizzying array and complexity of the commercial transactions that occur on any given day (a natural and healthy byproduct of our fractional reserve system, by the way) sends ripples throughout the world’s economy, triggering events that trigger events, often culminating in a profit (in U.S. dollars) realized by our government.  Many people would presume that this profit is used to pay off government debt, and most presume that debt reduction is the prudent thing to do. 

However, for reasons I struggle to understand, using government profit to pay down government debt has a habit of leading to a stagnation in the creation of money.  As money growth slows, the Federal Reserve’s money supply dwindles, shrinking the cash disbursements it makes to reserve banks.  The end result is less money distributed to member banks and, ultimately, private citizens.

In order to keep a level of liquidity in the market sufficient to foster monetary growth, the government reintroduces cash profits into the market by procuring large private securities acquisitions.  This practice looks no different than Uncle Jim investing his excess cash into the stock market: he’s converting his profits into a liquid security that should back his cash investment by increasing in value over time.  However, unlike Uncle Jim’s portfolio, government-owned securities (valued in U.S. dollars) cannot secure the U.S. dollars that purchased them; even the government can’t fool logic enough to secure currency with secured currency…

So what secures the U.S. dollar?  From where is it granted its value? 

Ask ten random Americans what one U.S. dollar is worth, and you’ll likely get ten answers.  Some will equate it to a tiny gold nugget stored in a mythical vault at Ft. Knox; others will equate it with a proportional increase in individual rights.  Many economic theories explain that it represents a tiny but uniform fraction of our economy, whereas a few very unhappy conspiracy theorists think it holds absolutely no value whatsoever.

These theories fail to accurately explain our currency’s real value: government sponsorship.  By awarding “legal tender” status to the U.S. dollar alone, competitors have never had a reason to issue competing private currencies.  After all, if a government offers legislative, judicial, and executive protection only to markets trading in dollars, little incentive exists to risk anything in a market trading unprotected slips of paper. 

In order to protect the dollar, the government asks us to bestow “full faith and credit” into the inherent value of a dollar, not because they’ve promised to protect whatever value the marketplace assigns to the dollar, but because a marketplace will always find value in a currency system backed by a large and capitalistic democracy.  And there’s the twist many don’t see - a dollar doesn’t represent what a buyer can do in the market, it represents what lengths the government will go to when protecting domestic market transactions; its value is proportional to its secure status as America’s only ”legal tender”.  

This inherent value makes the dollar a flexible and fungible item that people will gladly take in return for goods or services they own.  A baker will exchange bread he produces for a dollar because he knows another merchant will accept it in exchange for something the baker may need later. 

You and I swipe electionic bank cards because writing checks is a pain in the ass.  Our parents wrote checks because carrying big sums of cash can be a risky proposition.  Gramma and pop-pop carried cash because hauling around tradeable property cramped their style.  Just as a debit card (tied to an account with a positive balance) acts as a proxy for a personal check, and just as a personal check (guaranteed by a bank) acts as a proxy for paper money, paper money (guaranteed by the government) acts as a proxy for goods or services.  A swipe of a card attached to an empty account can purchase nothing; a check drafted from a closed checking account has no value; and a dollar protected by nobody has no legal force. 

So what does it all boil down to?  The entire world’s economy unwittingly rests on the backs of 535 spoiled members of Congress, 1 embattled and unpopular president, and a Supreme Court fat and greasy with power.  Full faith and credit indeed…