The US dollar can be described as a "debt based" fiat currency.
Fiat, of course, because it is created at the command of a chartered institution given the sole authority to use the government's power to create currency: The Federal Reserve.
"Debt based" because the procedure by which these notes are issued proceeds from the Fed's purchase of Treasury debt in the form of US bonds that the Fed holds on its balance sheet as collateral against these notes, notes that are then lent to Reserve member banks
and held in reserve by them with which they create even more "credit money" (debt) by the magic of fractional reserve banking.
It is the fiat currency of the modern banking cartel.
Contrast this current monetary system to the one the US had during the civil war and until 1879, what I refered in the title to "Treasury Fiat":
In this system, there is no Central Bank, the Treasury merely issues its own currency. This money is not convertable into anything and is simply backed by the "faith and trust" of the US government.
At first glance the difference is simple and obvious: Treasury Fiat involves no debt and the seigniorage if charged, becomes income for the Treasury. Fed defenders will point out that since the interest the Fed earns on these bonds is remitted to Treasury along with any "profits" the Fed earns, seigniorage on the currency remains a source of income for Treasury. However, the details in this distinction are not the focus of this screed, it's the debt component that is critical here.
Every system has constraints, be they real or imagined, legal or technical, political or economic. Some systems, suffer all of them. Fiat monetary systems have these constraints, and its the nature of these constraints that is the main difference between these two Fiat currency systems. The banking system's desire to hold treasury debt constrains the debt based system, the economy's ability to tolerate inflation constrains the Treasury system.
The banking system has positioned itself as the primary dealers of the debt that the dollar represents. The banks extract their commission in the form of interest multiplied by the credit money they create from the fraction held in reserve. This is the main feature of the system their cartel created when they conspired to establish the Federal Reserve in 1911.
I contend that it's always in the banks' best short term interest for the US Government to issue as much debt as possible because:
1. they are the primary dealers and extract a risk free premium on each issue they flip
2. Treasury debt enables the Fed to create more new money to lend at a discount to the banks
3. the new money allows the Fed to keep interest rates as near zero as possible ensuring the highest possible margin from the real rates the credit market can bear
Therefore, the banks will always put political pressure on the government to spend more money than the people would otherwise demand and keep taxes lower than the economy might otherwise support. Government debt is the banker's life blood and since their cabal controls the flow of credit, they can always buy the government that creates the most debt. They use the political system to keep spending high and taxes low.
I think a correct read of history illustrates that Treasury was more constrained by the ravages of inflation post civil war in the issuance of currency and therefore the growth of the Federal government too was more restricted than Congress has been since the Fed has taken over this responsibility under Wilson. Because the Federal Government was directly exposed politically and economically to the impact of Treasury's monetary policy it was therefore constrained. It was without irony that one of the hopes in instituting an "independent" Fed was that it would keep inflation in check.
Owing to the dollar's reserve status, not only an anachronism of history but actually a function of market size and power, the vast and amazingly international and liquid secondary market for Treasuries and dollars among banks and financial institutions using them as reserves has provided the Fed with a massive reservoir with which to warehouse the government's debt. What buffer between the finances of the government and the performance of the currency could exist in the Treasury Fiat system? Nothing on the magnitude of the current system. If taxes fall short, and spending is demanded, currency would be issued as this option would always be cheaper and more expedient than paying interest to the bond market, especially since the perpetual debasement would put pressure on interest rates. So long as the dollar could be traded for other currencies, the exchange market would reveal the debasement and inflation would become obvious.
Could Treasury Fiat have been a reserve currency and have this kind of global market power without having had its gold convertibility established by treaty and then reneged? Without an expansive market for Treasury bonds priced in dollars how could Treasury Fiat scale into a reserve base for the world's economy? Without this massive global demand, surely Treasury Fiat currency would have been constrained to the forces of monetary supply and demand of its own domestic economy.
Therefore I contend that the Fed and its banks with their unquenchable thirst for US debt has enabled far more government spending than the Treasury would have been able to support by simply printing the dollar. To tax at the level necessary to pay for the current spending would render us all tax slaves. A "political constraint" to put it mildly. It's the understanding of this dynamic that explains the Fed's original support among progressives, many of whom still defend it today even as they decry the banking excesses it enables. It's this understanding that has made it impossible for military-industrial complex "conservatives" to fight the Fed. For left and right are addicted to debt spending, and understand that current government spending levels on all the things the political establishment demands is only possible under the current debt money regime. These things the political establishment demands because it is an establishment bought and paid for by the Banking Cartel with the very Federal Reserve Notes printed first for the purpose of demanding those very expensive things.
"Follow the money..." Deep Throat
