One cause of confusion about our money system is people are using precepts developed about our old commodity money, while today we use a fiat system. We decoupled from gold in 1934, from silver in 1964, and gold with foreign countries in 1971. Today’s total fiat money system means we can create or borrow as much money as we see fit.
In 1948, Congress charged the Federal Reserve with creating full employment and controlling inflation. There can be no inflation as long as we have high unemployment and unused production capacity. This is why money and employment are linked. The control on money creation is that we stop creating when we reach close to full employment.
The Fed has created much money, so why don’t we have full employment? It is because of a flaw in our money distribution system. The Fed creates reserves for our commercial banks and the banks put new money in circulation by making loans. Banks can’t make loans to the unemployed or underpaid workers, so most of the new money sits in the banks.
Because of that fact, the stimulus package was passed. It put money directly into the hands of people and states to circulate. The old thinking about debt, deficit and inflation caused Congress to cut the funding, so the stimulus package didn’t get the job done, so the recession goes on. Congress didn’t know or didn’t want to know the Fed could destroy the money as fast as they create it.
Dean E. Owens
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