Many years ago, when I was young, I remember telling a mother, whose children I had played with, that I would explain money when I grew up. In the mean time, I have taken several courses in economics. A year or two ago, a columnist for a local paper asked if anyone could explain money to him. The request brought to mind the early ambition of mine. Even with the courses I had taken, I did not understand money – how money gets into the economy and how the money supply expands.
Some time around the time of the money request, the thought popped into my head questioning me about what I knew about the deficit. I thought maybe the deficit was the money supply. Shortly after that, the Republicans began to make a big issue of the deficit.
My original college education was in hard science, so I am used to thinking in terms of conservation laws. For example, in a closed system, no matter what happens, the energy of the system remains the same. So I questioned, do conservation laws apply to money? Here are what were some of my thoughts.
If money is conserved, then the money supply would be totally supplied by the government and the deficit would be the size of the money supply. The government would have had to have given all of the money supply away for free. Has the government given all of our money supply to us for free? If money is conserved, how could the debt be payed back without removing all of the money from the money supply plus some (the interest)? How is money created in the economy if the money does not come from the government? Only the government can supply money. Why does the government borrow any money if the government can just give money away for free? Why does the government tax? The money supply has to expand as the population size increases, to accommodate a larger economy. How is the expansion done? Is money given away for free?
I have read that the Australians paid off the Australian national debt, so, obviously, there is more to the question than that the national debt is the money supply. In my next blog, I will write about what I discovered reading my college introductory economics book.