The Myth of Infinite Money

To the Editor,

“The Myth of Taxpayer Money” (March 17) argues that the federal government should not worry about raising taxes to pay for new spending because it can simply print money. Although the idea is appealing, the author’s claims about the American monetary system are factually incorrect.

He writes, “The government creates money by spending and destroys it by taxation,” and “when you pay taxes, … money is removed from circulation.” But taxation does not destroy dollar bills in circulation; it simply transfers them from individuals to the government. The total supply of money in circulation is set by the Federal Reserve, which is distinct from the federal government.

The author also writes, “If the federal government wants to pay you $100, they can tell your bank to increase the number in your bank account by 100.” This again confuses fiscal and monetary policy. The Federal Reserve, not the government, controls the money supply. The government cannot increase the number in your bank account without taxing or borrowing from someone else. In theory, the federal government could convince the Federal Reserve to expand the money supply to fund its spending, but this would be a difficult task: The Federal Reserve’s express purpose is to determine monetary policy independently from the political process. For reference, readers may look to Economics Professor N. Gregory Mankiw’s Principles of Economics, pages 627-629, for an explanation of the money supply.

The author’s broader point is that the federal government should increase spending without worrying about revenue, linking the removal of fiscal constraints to the end of the gold standard. While he fails to advance any specific policy proposals, taking his argument to its natural conclusion would imply that any country using a fiat currency not tied to real resources — in other words, nearly every country in the modern era — would have unlimited spending power. However, the sovereign debt crises in Latin America in the 1980s, Asia in the 1990s, and Europe in the 2010s illustrate real consequences of unchecked spending that range from hyperinflation to lower capital accumulation. Limitations on federal debt are not simply theoretical constructs from “mainstream discourse” in economics as the author suggests; they are historical facts.

We encourage The Crimson Editorial Board to retract the article based on its factual errors without regard to its political stance.

Justin C.T. Lee ’19 is a graduate of Eliot House. Laura M. Nicolae ’20 is an Applied Math/Economics concentrator in Winthrop House. While at the College, they co-captained the Harvard College Federal Reserve Challenge team.