During the peak of the Financial Crisis in 2008 the Federal Reserve embarked on a program called Quantitative Easing. At the time it was called the “nuclear option.” Under this plan the Federal reserve purchases assets that are falling in price or have few if any bidders. This gives the sellers (generally banks) cash in exchange for an asset that may have to be valued at next to nothing and injects liquidity into the banks, who the Federal Reserve hopes will now be able to extend credit into the economy.
The dollars used to purchase these assets did not come from borrowed funds or taxation. If you are confused as to how, suddenly, the government came up with trillions of dollars you didn’t know it had, when there is constant disagreement between politicians as to how to spend limited resources, you are not alone.
In 1946, Beardsly Ruml, the Chairman of the New York Federal Reserve Bank wrote an article titled “Taxes for Revenue are Obsolete.” In it he stated that two facts made taxation for revenue irrelevant:
1) The US has control of a central banking system and
2) an inconvertible currency (meaning it is not convertible to a commodity like gold).
Those two factors mean that a government is not constrained for any reason from revenue generation and needn’t tax people or businesses for the purpose of revenue.
Beardsly went on to say that “the inevitable social and economic consequences of any and all taxes (at the federal level) have now become the prime consideration in the imposition of taxes.”
Beardsly states that taxes serve four principal purposes of a social and economic character:
1) “As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
2) To express public policy in the distribution of wealth and of income, as in the case of progressive income and estate taxes.
3) To express public policy in subsidizing or in penalizing various industries and economic groups.
4) To isolate and assess directly the costs of certain national benefits, such as highways and social security.”
Modern Money Theory subscribes to a functional use of taxation in pretty much the same way Beardsly Ruml laid out his thoughts in 1946. “Money printing,” is often used as a pejorative term for how money is created by the federal reserve, but banks do this all the time when they lend funds. When a bank gets money in reserves, it lends that money out several times over and doesn’t expect that all the people who put money in reserves with them will ask for it back at the same time. Below is a link to the actual article Beardsly wrote in 1946.
Hope this is helpful.
Jeremy P. Green CFP, CTFA, CLU, CEBS, MSFS, AEP, EA
Wealth Strategist & Expert Witness Consultant
Wealth Strategist Designs