Hail the Greenback: In God we trust?

(unpublished)

Mohammad O. Farooq, PhD
Associate Professor of Economics and Finance
Upper Iowa University

 

Some say, "money is the root of all evil." Others see money as a necessary evil. It is also said that "love of money is the root of half the evil in the world; lack of money is the root of the other half." The fact is that money has become an integral part of our modern life. Money in our modern monetary systems is known as "fiat" money. It is a government-created money whose value or cost as a commodity is less than its value of money. Gold coin is an example of commodity money whose value as a commodity is as great as its value as money. Today's fiat money does not have any intrinsic value. We put a valuation based on the trust we place on the issuing authority - the government.

Let's take the case of the "greenback" -- the mighty US dollar of our time. Since the end of World War II, US dollar has evolved into the global currency. The convenience of the present time and the prosperity of the future of not only the Americans, but also the world depend so much on the health and stability of dollar. There are many countries whose currencies are pegged to US dollar; another word, the exchange rate of such currencies fluctuates with dollar. There are other "hard" currencies, such as German Mark, French Franc, British Pound, Japanese Yen, and so on, but US dollar continues to steal the show.

On every greenback, as it is popularly called, is written "IN GOD WE TRUST." What might be its implication? This is an avowedly secular nation that keeps not only itself at the cutting edge of secular trends, it also leads others who are standing on one leg to jump on the bandwagon. In what kind of God then do we trust and what kind of trust is it?

This is interesting because fiat money rests on the trust and confidence people repose in their governments. When governments are not trustworthy or are not deserving of our trusts, what might happen? Well, anything is possible. Greenback may still be the dominant global currency, but it is backed by a government that is also the world's leading debtor nation. It has accumulated more than $5 trillion of debt and it is growing by the second.

Government as an institution is not a business and therefore its balance sheet seems to be virtually irrelevant. Were the US government to be evaluated as a business, this super-institution is flat broke or bankrupt - period. With a balance sheet like that of the US government, no business would be able to secure credit. Such businesses would not be creditworthy. However, since government is a taxing authority, its purse is evaluated in a different way. The size of the US government has increased so much because of its apparently unconstrained access to money. Creating money in the US is not the biggest story here, because the money supply here is determined by an autonomous body, the Federal Reserve Board. The important factors are the ability to tax and having access to borrowing. No wonder politics is so attractive to so many. It is said that when money flows like water, you'll find politicians in charge of the drains.

To some, debt is the slavery of the free. It is not paradoxical then that the nation most zealous about its freedom should be the largest debtor. The economists differ as to the implications of such unprecedented level of debt. Some say this is of critical importance. To others, the absolute size of the debt is not as important as is the relative size. The fact is that almost 18% of US budget now goes toward paying not the principal, but interest on this debt every year. The government is adding more to the debt through annual budget deficit. If the Republican effort succeeds, the budget might be balanced in seven years. That still would leave trillions of dollars of debt to reckon with.

There is already growing distrust of government in the US. If the current trend continues, the federal government is expected to be weakened in future. Voters seem to be frustrated with the current establishment swinging between two parties. So far, government has been good in lightening our burdens, especially the weight of our take-home pay. That kind of liberality with the tax revenue might become a matter of the past. Recognizing that government regulation costs money, the hard-pressed federal government might be relaxing regulations in many sectors. The Republican proposal on balanced budget recommends savings from highway projects, veterans services, IRS audit programs, and so on. If for any reason, the oncoming new wave of deregulation creates a new sense of insecurity and distrust, government's credibility gap would widen further.

Greater role of government came about in the aftermath of the Great Depression. There has not been another depression so far. But there are bubbles of troubles. The Savings and Loan crisis and 1987 stock market crash are just a few examples. Could something bigger, really bigger, can happen? Well, very few will bet on that. Furthermore, US economy is still the dominant economy in the world. However, future always characteristically holds for us surprises. Unthinkables become not just thinkable, they can become sweet or sour reality. A decade ago who could predict the dismemberment of the mighty Soviet Union? Today, relative to what it had been, it is a pauper, struggling to keep its head above the water.

Future may have more surprises for us. We need to understand that modern monetary system is not backed by the value of the commodity with which money is made. Rather it directly depends on the credibility of the government. When the dominant currency of the world is also backed by the largest debtor government with worsening credibility, we indeed need the backing of the real Almighty. Therefore, the phrase "In God we trust" is ironical. Government creates the greenback. May be it is saying that in counting on this so-called almighty dollar do not count on us very much - "In God we trust" too about its future.

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