The old saying goes, “Money doesn’t grow on trees.” Most of us have heard this from a penny-pinching parent, an elder or on television. Most of us abide by its principle, especially as college students. We know money is valuable and hard to come by (depending on the amount), and responsibility is essential to making your dollar go further.
There is, however, a group of people who act as if they have found a money tree, and it keeps producing as long as they want it to. They can keep spending and spending with little consideration to the consequences. I mean, what can be the downside to a tree that just keeps printing money? Of course, the group is Congress, and the tree is a fiat monetary system, where the value is based on the faith in our government.
Under the Constitution, the Congress has the power “to coin money, regulate the value thereof, and of foreign coin, and fix the Standard of Weights and Measures.” This is interpreted to mean that Congress has the power to supply the nation with a monetary system and can set its value as it so chooses.
The value of our money used to be based on a precious metal, such as gold or silver. This system was abandoned under President Richard Nixon in 1971, and our money is now based on the faith we place in the government. This is best put by humorist Dave Barry in his book “Money Secrets:” “Remember the part in Peter Pan where we clap to prove that we believe in fairies, and we save Tinker Bell? That’s our monetary system! It’s the Tinker Bell System! We see everybody else running around after these pieces of paper, and we figure, hey, these pieces of paper must be valuable!”
Our money has no intrinsic value of itself. The money supply is controlled by the Federal Reserve System in conjunction with the Federal Government. The Federal Reserve System buys government securities and regulates how much reserve banks must keep on hand. This allows the money supply to grow or shrink as the economy dictates.
The major problem with the fiat system is the accumulation of debt. In this system, there are no barriers to how much our government can spend and borrow. Although our Constitution gives the legislature the ability to borrow money from other countries, the abuse of borrowing is a destructive habit.
As of January, we owed $3.7 trillion to foreign nations. This is out of roughly $12.7 trillion national debt. The only way we have the ability to pay this back is to print money just to appease our creditors. Such printing will lead to inflation and extreme devaluation of the dollar. The more money in the system, the less valuable it becomes.
Another problem with the fiat system is it allows the debt to grow at dangerous rates. According to TreasuryDirect.gov, the national debt in 1791 was worth $75.46 million. Over a period of 180 years, when the gold standard was finally canned in 1971, the debt had grown to $398 billion.
Although the debt increased and decreased at different rates throughout this period, the average growth of the debt per year was roughly $2.2 billion a year. The debt has grown from $398 billion to $12.7 trillion. This is roughly a $315.45 billion increase in debt per year! With tax revenue valued at $2.1 trillion, there is no way to sustain this growth in debt, curb inflation and pay it off!
This is why I say a precious metal standard must be in place. Since gold and silver have historically been valuable and its extraction from the earth is expensive, their prices have more stability potential than the fiat dollar. In this plan, Congress must back up the dollar with its respective value in gold or silver as dictated by the U.S. market.
As the price of precious metals increases, this allows for some monetary growth. While the price decreases, it allows a shrinking of the money supply. The government would not be able to print more than the market dictated.
Is this a simple fix? Heavens no! Just getting to a precious metal standard would be a balancing act. In order for a government to guarantee a value in gold or silver, it must own enough gold or silver. The amount of gold the government owns about 4,603 tons of gold (or at least that is what is known). The standard would have to go into place when the government can back up every bill with some amount of gold as dictated by the market so that the American people are not shortchanged.
More than likely, we will never see a gold or silver standard for our money. Since Congress would have to give up its source of money for their programs, pork and earmarks.
Let’s face it, they’ve found a money tree. They aren’t giving that one up.
Ryan Green is a junior majoring in electrical engineering. He can be contacted at [email protected].