Why Monetary Systems Matter

A Response to Hard Money Misconceptions About Money, Debt, and Government Spending

The Real Source of Economic Anxiety

A follow-up to my post, Why Economic Models Matter.

A friend recently responded to my essay about U.S. national debt with concerns that resonate with millions of Americans:

Inflation has been running rampant since the switch to fiat occurred. The moment we uncoupled the dollar from gold, we enabled unchecked monetary expansion and fiscal deficits... It’s also eroded our purchasing power — this is undeniable - especially for essentials inclusive of automobiles, higher education, and homes of which generation Z, Alpha, and Beta will NEVER own... I just don’t see a world where gov’t knows or understands how to use the money (they print) for the benefit of the masses.

These concerns are real and legitimate. Young people genuinely face barriers to homeownership that previous generations didn’t encounter. Wages have stagnated while costs for housing, healthcare, and education have soared. Retirement savings get eroded by inflation. Working families struggle to build wealth while watching the rich get richer.

But here’s what matters: while the suffering is real, the diagnosis is wrong. And that wrong diagnosis has led Americans to support policies that make their problems worse while opposing solutions that could actually help.

The threat isn’t fiat currency or government spending. The threat is misunderstanding how monetary systems actually function, which limits our economic and political creativity, preventing us from using all available tools to build prosperity. For forty years, confusing hard money thinking with soft money reality has led ordinary Americans to vote against their own interests, supporting policies that systematically transfer wealth upward while believing they’re protecting themselves from inflation.

Not About Capitalism Versus Socialism

Before diving deeper, let me clarify something crucial: this discussion often gets positioned politically as capitalism versus socialism, but those systems have nothing to do with what I’m describing here. This is about how monetary economies work regardless of how production is organized.

Whether a country has private ownership of businesses (capitalism), worker ownership (socialism), or some mixture, if it uses a sovereign fiat currency, the same monetary mechanics apply. The government that issues the currency can always create more of it. The real constraints are resources and productive capacity, not money itself. China’s state-directed economy, Nordic mixed economies, and America’s market economy all operate with fiat currencies and face the same operational realities.

The confusion between monetary systems and economic systems serves political purposes. When someone says “we can’t afford universal healthcare because that’s socialism,” they’re conflating two separate issues. The monetary question (can we create the money?) is separate from the organizational question (should healthcare be privately or publicly provided?). Understanding monetary operations doesn’t predetermine whether you prefer market solutions or government programs. It just clarifies what’s actually possible within either framework.

Hard Money Misconceptions About Money

Most Americans believe we left the gold standard in 1971 and started “printing money,” which caused inflation and economic insecurity. This narrative suggests returning to “sound money” principles would restore prosperity. But this gets the causation completely backward.

Until 1971, under the Bretton Woods system, the U.S. dollar was convertible to gold at $35 per ounce. Other countries could literally demand gold for their dollars. By the late 1960s, we were running out of gold as countries like France exercised this right. Nixon ended convertibility not as some reckless experiment but because we faced the prospect of literally running out of gold reserves.

Since 1971, we’ve operated in what economists call a “soft money” or “fiat currency” system, as opposed to the “hard money” system backed by gold. The government creates money when it spends and destroys money when it taxes. This isn’t metaphorical; it’s the documented operational sequence. When Congress appropriates funds, the Treasury instructs the Federal Reserve to credit bank accounts. New money comes into existence through keystroke entries.

Former Federal Reserve Chairman Beardsley Ruml stated explicitly in 1946 that “taxes for revenue are obsolete” for sovereign currency issuers. The Federal Reserve Bank of St. Louis confirms:

As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent.

This fundamental shift in how money works changes everything about economic policy. But most people still think about money using gold standard logic, believing it must be “backed” by something tangible or that creating it necessarily causes inflation. This confusion has been weaponized against working families for four decades.

Hard Money Misconceptions About Debt

The misunderstanding of government debt might be the most consequential error in public discourse. Under hard money thinking, debt represents money the government must somehow acquire to pay back, like a household mortgage. This leads to panic about “mortgaging our children’s future” and demands for austerity.

But in our soft money system, as I explain in my essay on government underspending, the national debt is simply the accumulation of dollars the government has spent into existence that haven’t been taxed back out. Treasury bonds aren’t really “borrowing” in any meaningful sense. They’re savings accounts at the Federal Reserve, offering a safe place for dollar holders to earn interest.

Japan demonstrates this reality perfectly. For three decades, Japan has run massive deficits with government debt exceeding 250% of GDP. According to hard money thinking, Japan should have faced funding crises, runaway inflation, and currency collapse. Instead, they’ve experienced persistent deflation, near-zero interest rates, and maintained a strong currency. The debt simply represents yen the Japanese government created that the private sector chose to save in bonds rather than spend.

The political consequences of misunderstanding debt are severe. When politicians claim we “can’t afford” social programs because of the national debt, they’re applying hard money logic to a soft money system. The real question isn’t whether we can afford programs but whether we have the real resources (workers, materials, infrastructure) to implement them without causing inflation.

Hard Money Misconceptions About Government Spending

The third major misconception concerns government spending itself. Hard money thinking treats government spending like household spending: you must first acquire money (through taxes or borrowing) before you can spend it. This leads to the familiar refrain that government should “live within its means” like a responsible family.

But operationally, this is backward. The government must spend money into existence before it can tax it back. You can’t pay taxes in dollars that don’t exist yet. The sequence is: government spends first (creating money), then taxes (destroying money). The gap between spending and taxation is what we call the deficit, which equals the dollars left in private hands.

Consider what happened during COVID. The government created trillions in new money through spending. Did we first raise trillions in taxes? No. Did we “borrow” from China? No. The Federal Reserve simply credited bank accounts as instructed by Treasury. The money was created, not transferred from somewhere else.

My friend expressed skepticism about this process:

I just don’t see a world where gov’t knows or understands how to use the money (they print) for the benefit of the masses.

This skepticism reveals how deeply hard money thinking pervades our understanding. The Federal Reserve employs hundreds of PhD economists who model complex sectoral interactions and manage sophisticated interventions. During the 2008 crisis, they created targeted facilities for specific market segments within days. During COVID, they prevented complete economic collapse through unprecedented but carefully calibrated actions.

The issue isn’t whether government understands monetary operations. Central banks demonstrate this understanding daily through complex open market operations, international currency swaps, and targeted lending facilities. The real issue is that political constraints, rooted in public hard money misconceptions, prevent using this sophisticated understanding for broader public benefit.

The Real-World Consequences of These Misconceptions

When people believe hard money misconceptions about money, debt, and government spending, they support policies that actively harm them:

Austerity During Recessions

The European austerity disaster of 2010-2015 demonstrated the human cost. Based on hard money thinking that governments must “pay down debt,” countries cut spending during economic weakness. Greece’s GDP contracted 27%, unemployment hit 28%. Spain and Portugal saw similar devastation. Millions suffered because policymakers applied household budget logic to sovereign currency issuers.

Underinvestment in Public Goods

For forty years, we’ve been told we “can’t afford” to maintain infrastructure, fund education, or provide healthcare because of debt concerns. Meanwhile, our bridges crumble, teachers buy their own supplies, and medical bankruptcies devastate families. The money could be created instantly; we lack only the political will born of understanding.

Wage Stagnation and Wealth Concentration

From 1979 to 2020, productivity grew 61.8% while median worker compensation grew only 17.5%. Workers produce more value but capture less of it. This wasn’t caused by monetary factors but by policy choices justified through hard money thinking: we “can’t afford” minimum wage increases, we must keep taxes low to “encourage investment,” we must accept inequality to maintain “fiscal responsibility.”

As I documented in “How Corporate-Friendly Accounting Rules Create a $30 Trillion Transfer from Consumers into Wealthy Pockets,” these wealth transfers hide behind seemingly neutral economic rules that most people don’t understand.

Breaking the Cycle: From Misconception to Understanding

The 2021-2022 inflation episode perfectly illustrates how hard money misconceptions mislead policy. When inflation appeared, the immediate diagnosis was “too much money printing.” But the Federal Reserve Bank of Kansas City documented the actual causes: semiconductor shortages, port congestion, energy price spikes from the Ukraine invasion, and millions leaving the workforce.

The Economic Policy Institute found corporate profits accounted for over 50% of price increases versus 11% historically. This wasn’t monetary inflation from government spending but supply disruption combined with corporate pricing power.

Yet the hard money diagnosis led to raising interest rates, risking recession to fight inflation that wasn’t primarily monetary. A proper understanding would have focused on addressing supply chain issues, increasing production capacity, and limiting corporate pricing power.

Historical Proof That Soft Money Understanding Works

When policymakers have understood and used soft money capabilities, the results have been transformative:

After World War II, the GI Bill and Federal Housing Administration took homeownership rates from 43% in 1940 to 64% by 1960. The government created money for no-down-payment loans. Between 1945 and 1966, one-fifth of all single-family homes were financed through government programs. This wasn’t “fiscal irresponsibility” but using monetary capacity to build the most prosperous middle class in history.

Similarly, successful government programs demonstrate sophisticated monetary understanding: Social Security (0.6% administrative costs), Medicare (2% overhead versus 8% for private insurance), the interstate highway system, the internet, GPS, and most medical breakthroughs.

The Path Forward: Understanding Enables Prosperity

As I explored in “Why Economic Models Matter,” the persistence of failed economic theories isn’t accidental. Models based on hard money thinking consistently make wrong predictions about inflation, debt, and government spending yet continue to dominate policy discussions because they serve political purposes.

Understanding our actual monetary system doesn’t mean unlimited spending without consequences. Real constraints exist: inflation when demand exceeds productive capacity, resource limitations, environmental boundaries. But these are different from the imaginary constraints of “running out of money” or “unsustainable debt.”

When we recognize real versus imaginary constraints, different questions emerge:

• Instead of “how will we pay for it?” we ask “do we have the resources?”

• Instead of “is the debt too high?” we ask “is wealth concentrating too much?”

• Instead of “are we printing too much?” we ask “are we mobilizing capacity effectively?”

Generation Z, Alpha, and Beta absolutely can own homes if we choose policies that make homeownership achievable, just as the GI Bill did for previous generations. Workers can capture fair shares of value they create if we strengthen their bargaining power. Healthcare and education can be affordable if we treat them as public goods rather than profit centers.

But achieving this requires overcoming forty years of hard money misconceptions that have convinced ordinary Americans to vote against their own interests. It requires understanding that the threat isn’t government spending or fiat currency but the deliberate confusion that prevents us from using our monetary system’s full capacity for public good.

The real question isn’t whether we can afford to invest in prosperity for working families. It’s whether we can afford another forty years of artificial scarcity based on imaginary constraints while real wealth continues concentrating among those who understand how the system actually works.

The choice is ours. But first we must understand what choices are actually available. And that starts with recognizing that most of what we’ve been told about money, debt, and government spending for the past forty years has been wrong, not by accident, but by design.