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Former Ambassador to the United Nations Nikki Haley recently said, “Spending trillions of dollars won’t solve our problems. Spending trillions of dollars is the problem.” But I ask you, “Is it the problem?”
Only someone that believes money, as we know it, is real would say something like that. To understand the reality of money you must first ask yourself “what is money?” My definition of money would be a piece of paper that you can either buy something with or receive for something. The idea of money dates back all the way to 5000 B.C. where people exchanged metal objects for goods and services. A more modern definition of money would be a backed standard such as the gold standard which is what America used until 1933. In this system the government sets a monetary value to an ounce of gold, let’s say for example an ounce of gold is worth five hundred dollars, therefore one United States dollar would be worth 1/500th of an ounce of gold. During the great depression in 1933, the United States abandoned this system, and in 1973, they eradicated nearly all remnants of the system.
In modern America, we live on a fiat money system. To understand this system, you must first define fiat, which according to the Oxford English Dictionary means authoritative sanction, authorization. So, fiat money would naturally mean money that is authorized by a government. The biggest component of the system of fiat money is that it is not backed by any physical commodity. Hence, the value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than a backing commodity.
From the title of this article, you might have gotten the wrong idea and that that I was crazy enough to believe that paper money, itself, is not real; realistically that would be absurd.
Of course, the paper is real, but by most standards is worth no more than printer paper that you can buy at your local Office Depot. The idea, the authority behind money is what is worth something, the “fiat” if you will.
The construct that most people hold is that for every dollar that they have in their wallet, in their bank account, or on their Venmo account, there should be some small bit of gold locked in a vault on some military base. That simply is not the case. Because that is not the case, whenever a stable government takes the notion they can create more money, worth almost as much as every dollar that was printed before it; as long as the demand supports the supply of more money.
After all this information, you might ask yourself the question “am I even real?” Well… that is a question for a completely different blog post. Instead, here I will discuss the quote that proceeded this post:
“Spending trillions of dollars won’t solve our problems. Spending trillions of dollars is the problem.” - Nikki Haley
While I love a good conservative one-liner just as much as the next guy, this just doesn’t stand true, when put up against a simple economic test.
To explain this, I point to the Keynesian Economic Theory. British economist John Maynard Keynes believed that if the government would inject the economy with cash, then it could pull itself through a recession, or in his case the depression.
Anyway, how does this relate to Haley’s quote? Due to the COVID-19 pandemic, America has found itself in some sort of recession, and the Biden administration believes that if the federal government would invest in core areas of American industry, then it will pull the country out of recession. To comprehend this, I turn you again to economics, specifically the multiplier theory which is the ratio of change in natural income deriving from a change in government spending. In layman’s terms, one dollar spent by the government will result in an economic impact greater than one dollar. In December of 2019, the Federal Reserve Board of Governors estimated that the current multiplier is about 1.197, meaning that if the federal government spent one hundred dollars the economy would be positively impacted by $119.70. Thus, the current infrastructure bill in which Haley is referring to totals to about $1,200,000,000,000.00 with the multiplier effect that results in a positive impact on the economy totaling over $1,430,000,000,000.00.
Keynes believed that the only way his theory would actually work was if the government did not raise taxes in response to its investment into the economy. According to the White House, the aforementioned bill does not require new tax revenue to support its expenditures. Undoubtedly, you might ask why you should believe that. You also seem to believe that when the government says your dollar bill is worth a dollar, so why not believe this too!
How exactly are they going to pay for it then? If they are not going to raise taxes, then where will this money come from? They are just going to print it in the basement, figuratively of course. And that my friends, simply put, is why money is not real.
Shelby Disney is a McConnell Scholar in the Class of 2025. He is studying finance and political science at the University of Louisville.