No need for a U.S. government shutdown

Solutions to the U.S. debt crisis can be found in its own history
By Robert McGarvey, Economist, Genuine Wealth

On Friday U.S. President Barack Obama threw down the gauntlet to Congress when he said “Don’t shut down the government; don’t shut down the economy.”

It seems the evil debt ceiling demon has returned from the dead to terrify us all once again. Unless the politicians can agree to a deal to cut spending or raise the debt ceiling by October 17, the U.S. Treasury says it will not have the money to fund the apparatus of government and it will have to shut down.

The spirit of compromise necessary to reach a deal seems to be non-existent. Obama claims he will not negotiate with Republicans and, according to Republican House Leader John Boehner, the price of a deal would have to include the delay or
dismantling of the President’s most important legislative initiative, his Health Care plan.

Is the richest and most powerful nation on earth about to commit political “harikari”? Ironically, harikari is an apt metaphor. This ritual form of suicide was perfected by the Japanese to preserve honor in the face of failure or disgrace. It has always
seemed extreme and unnecessary to Westerners. What’s interesting about the present debt crisis is it is also extreme and unnecessary.

Why? Because fiscal crises of this nature have been successfully resolved before. The last time the U.S. overcame a crisis on this scale was during World War II.

When the Empire of Japan launched its surprise attack on Pearl Harbor, December 7th 1941, the United States was both unprepared militarily and still in the midst of a major recession. Unemployment had recovered somewhat from the nadir of 1933, but remained high. Capital was in short supply and banks were nervous. War could not have come at a worse time; the United States was broke and the economy was going nowhere.

The challenge of fighting and winning a world war on two fronts against the vastly superior forces of Nazi Germany and Japan was unimaginable. Yet it had to be done, and done in ways that did not fatally weaken the United States financially or alter American core values.

Given the weakness of its starting position, conventional economists have no satisfactory explanation for what happened next. The United States had fought the most violent and costly war in history after an almost total diversion of capital and labour  away from productive commercial enterprise to armaments and other war materials, most of which were lost or destroyed in battle. The war effort had also necessitated a total mobilization of the American workforce, involving hundreds of thousands
of men and women. Economic theory suggests that after a government had finished paying for that kind of effort the country ought to have been broke, certainly lumbered with a mountain of debts.

However, that’s not what happened at all. At the end of hostilities the United States had the world’s most advanced economy, a fully employed workforce and a rising middle class that was the envy of the world. The United State was not entirely debt free but it had enough reserve capacity to finance the Marshall Plan, fueling a suite of remarkable economic recoveries in the occupied territories, including recently defeated Germany and Japan.

The reality is, as the military crisis deepened the U.S. government quietly bypassed the bond markets and private bankers, and through the Treasury Department assumed the sovereign monetary authority it needed in order to finance the war effort.

Many economists cast doubt on this process, pointing to the $186 billion in war bonds that the U.S. government sold and the fact that tax revenues doubled as evidence of war indebtedness. These resources, they claim, paid for the war, not sovereign control over the money supply.

Historian Maury Klein in Call to Arms, a detailed analysis of the period, points out the truth of the matter. War bonds and tax increases came well after the enormous wartime investments had been made. The reality of the situation is, when the war started there were no domestic savings for the government to draw upon. Klein points out that full mobilization of the workforce was a necessary prerequisite to the success of those traditional financing options. Full employment provided both the income and personal savings that became, in time, the source of new tax revenues and war bonds.

No, there is no need for the United States government to shut down; neither is there – in theory – any need to incur more debt in financing government programs. The government simply needs to learn the lessons of its own history. Consider that the Second World War is not the only example of sovereign monetary control in the U.S. There is also the example of President Lincoln’s sovereign ‘Greenback’ dollar, which paid for the Civil War and the famous ‘paper’ currencies Benjamin Franklin introduced into Colonial Pennsylvania to engineer their remarkable economic recovery in the 18th century.

History teaches us an important lesson that we seem to have forgotten. The creation and circulation of money is a public, not a private, right. The U.S. Treasury has all the authority it needs to keep the wheels of government turning, if only they had the innovative spirit of their predecessors.

Robert McGarvey is an economist and co-founder of Genuine Wealth, a Canadian enterprise whose mission is to help businesses, communities and nations mature into flourishing economies and enterprises of wellbeing.

This column is provided by Troy Media,

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