In my work, I emphasize the huge influence our monetary system has not only on our economy but throughout society. I use monetary system to mean the underlying principles and concepts as well as our financial system, which is the implementation mechanism for monetary policy. I discuss this throughout my book as well as in articles on this website (for example, see The Foundations and Effects of Our Monetary System). It is impossible to understand society today without appreciating the role that our monetary system plays in shaping every aspect of society, not just the economic structure.
In this article, I will discuss current problems and issues and explain how monetary policy contributed to their development. It may seem that some of the social problems could not be related to our monetary system. I claim, on the contrary, that every social problem we are now dealing with was either caused or worsened by what is possible under our monetary system. Following that background, I will present the likely decisions and circumstances we will face as our monetary system undergoes changes which I believe are inevitable: when money becomes real again.
(For simplicity, in this article, I will approximate some monetary concepts and will make statements without proof. For a more rigorous treatment, refer to the resources mentioned in the first paragraph.)
To begin, I must define some terms. What do I mean by “real money”? Elsewhere in my writing, I often use gold as the money in my examples because (1) gold has been used as money for millennia, and (2) nothing is more real than an absolute gold standard. A gold-based monetary system is “real” because rulers cannot create gold out of thin air. Gold requires real effort and resources to extract from the earth and be refined. Our current monetary system is the exact opposite. It is called a fiat system because money can be called into existence by the will of government or government-licensed banks.
Because we are not going to move to a gold standard, I use “real” to mean a monetary system that makes money creation more difficult than it is now. Here is a simple example to understand how unreal money is at present. The federal debt was less than $5 trillion prior to the 2008 financial crisis. At present, it is about $34 trillion, approaching a multiple of seven. That means that the federal government spent about $30 trillion more than it took in from taxes and other sources. While some of those borrowed funds may have come from honest competition in the loan market, most of it was funded by the creation of money.
By money becoming “more real,” I mean that a time is coming when large deficits can no longer be covered by fake borrowing. In the past two years, money has indeed started to feel more real for most Americans because of inflation and interest rates. We have been operating in violation of a fundamental economic principle: production must precede consumption.
For decades, the United States had low inflation despite monetary creation and borrowing. In fact, some politicians began to think that spending and borrowing did not matter. However, when inflation surged to multi-decade highs, the Federal Reserve acted at once, resulting in market interest rates more than doubling. Thus, Americans are facing price inflation along with high interest rates.
I said when rather than if money becomes real again because reality always wins. For decades, it appeared that we could create money and borrow and live beyond our means without consequences. A special set of world circumstances let us fool ourselves. That time is now past. In addition, our society is facing rapidly increasing costs for government programs. Lastly, we are coming to terms with the reality that economic growth is not going to rescue us this time. Therefore, we must prepare for when money becomes (more) real again.
As money becomes more real, we will have two options related to government programs: reduce government spending and increase taxes. We will see significant changes in our economic and social structures and will have hard decisions to make. The examples below illustrate in concrete terms what this transition might look like.
In preparation for the specific examples, let us review what happens when something is subsidized by the government. We know that in a free market the price of a product is set by supply and demand. We know also that a government subsidy for a product changes the picture. Suppose the government decides to subsidize the price of milk so that consumers never pay more than two dollars a gallon. The government will pay the difference between the market price and two dollars. What will happen? Because that price is below market price, consumers will buy more milk. More milk will be produced. Milk producers will be under less pressure to operate cost-effectively. Milk consumers and milk producers will benefit from this policy. The cost of that benefit will be paid in some way by all members of society, including those who neither consume nor produce milk. We can say that part of the cost of milk has been socialized.
Because I want to look at multiple illustrations, the discussion of each must be brief. My intent is to make what lies ahead of us more tangible. For each illustration, I will show how our monetary system contributed to the problem and discuss the decisions and changes that are coming.
As money becomes more real, we will be forced by reality to make difficult adjustments. On the positive side, those adjustments will help solve our problems, reduce unfair inequality, and better prepare us for a future of freedom and peace.
Education and Training: Post High School
We begin with an easy and well-known illustration which often enters the public debate as (1) the cost of college and (2) student loan debt. For decades, we have confused correlation with causation, thinking that any college education would naturally lead to good jobs. We ignored contrary evidence. We ignored the needs of industry. We ignored the variability among people. That is, we ignored feedback from reality. As such, we endorsed the idea of “college for all.” The explicit message to young people was that college was the preferrable path following high school. To encourage that path, the government massively subsidized it. With both social and economic encouragement, many young people attended college without careful cost-benefit analysis.
As always happens with government subsidies, colleges dramatically expanded their offerings and lowered their standards. They steadily raised prices—which have far exceeded the inflation rate for decades. The subsidies grew to keep up with the price increases. Student loans were made with zero consideration for whether the student could repay the loan.
A consequence of this distortion from misplaced incentives is we now have a big mismatch between the skills that are needed by businesses and those possessed by people looking for employment. Many people received college degrees which will not help their employment prospects at all. In fact, their time at college may hold them back because it encouraged unrealistic expectations. Businesses responded to this gap by developing employment-reducing technology, moving jobs outside the United States, and encouraging immigration.
One of the benefits of the 2008 financial crisis was a wake-up call on the subject. However, we still ignored the feedback from reality. Rather than make appropriate adjustments, we doubled down by encouraging even more student debt. The mismatch between employment opportunities and training is much larger now than it was in 2008. Today, as some students are not paying their debts, some government officials want to socialize the cost. Stated plainly, some in government want to forgive student debt and have the rest of the country pay for it.
This is a clear example of how monetary distortion not only damages the economic and social structures but also degrades the moral environment. What moral signal is conveyed if we tell people they are not responsible for decisions they made and debts they incurred? What moral signal is conveyed to the millions of people who struggled to honorably repay their student debt?
Fortunately, a growing number of people are learning from this experience. More young people are questioning the value of college. More are considering noncollege career paths. This trajectory will continue as money becomes more real. How many citizens will be willing to pay higher taxes so that someone else can attend college to receive “training” that has no future benefit for society?
A good case can be made that the government should not subsidize any post high school training. Such a policy would quickly align the training that people pursue with the needs of society. If subsidies are to be granted, they should be equally applied to any form of post high school training—including apprenticeships. Any debt incurred should not be implicitly backed by the government but should be managed like any other free-market loan.
As money becomes more real, some colleges will go out of business. Those who survive will do so by dramatically reducing their spending. They will be forced to offer training for which students are willing to assume full responsibility for payment. At the same time, other forms of training institutions and programs will grow. The result will be a more robust economy and a healthier society.
Retirement, Pensions, Social Security
Beginning in the 1970s, for the first time in history, an entire society imagined the possibility of retirement in which a person might work for 40 years and hope to live comfortably another 25 years without working. We are so accustomed to that concept of retirement that we easily overlook the stunning economic assumptions underlying that hope. It assumes a great deal about our economy: increasing total output, increasing productivity, increasing working-age population, the capacity to earn more than we need so we can save, and a reliable store of purchasing power.
For most Americans, the foundation for retirement income is Social Security (it was never intended to fully support a person in retirement). Fifty years ago, many Americans were covered by private pension plans and relied on them for a significant portion of retirement funding. Personal savings was the third element. Whereas in 1975, 33% of retirement plans were defined benefit (pension), in 2021 that number was 6%. Thus, most people today must fund their retirement by Social Security, personal retirement accounts (IRA, 401-K), and regular savings.
Our monetary system did not directly bring about the idea of a long retirement period. The decades following 1950 were broadly prosperous for the average American. That, along with other positive factors, would have brought about some new concept of retirement even if our monetary system had been sound—and indeed, the system was closer to “real” prior to 1973, when the Bretton Woods Agreement was terminated.
What really encouraged the retirement mindset was the stock market boom that began in the 1980s. We became accustomed to a stock market return that substantially exceeded inflation. Ubiquitous advertisements called for people to contribute to tax-deferred retirement accounts and invest the money in the stock market, with the promise of a long, prosperous, and happy retirement. That plan has in fact worked well for many people. It is not likely to be true in the next few decades.
First, it does not make sense that the valuation of our structure of production (as represented by the stock market) can continually outrun the rates of inflation and productivity growth. Second, as money becomes more real it will tend to increase taxes, inflation, and interest rates. In the years ahead, therefore, an individual will need to save a larger part of their income during working years and plan to work longer to fund their retirement.
If price inflation turns out to be a major consequence of money becoming real, even those who have a large balance in their retirement accounts may have to adjust. The resurgence of inflation in the past few years has reduced the purchasing power of money by almost 20%. Thus, many people will need to respond by reducing their standard of living.
The above is only part of the challenge facing retirement. Social Security is now running a deficit; it is paying out more each year than is coming in from payroll taxes. For now, the difference is made up by more government borrowing—yet another force driving up interest rates and inflation. (The “trust fund” is a legal technicality and an economic fiction.)
While the number of citizens covered by private pensions has drastically diminished, the number covered by public pensions has been growing. Some promised pension payments, especially at the level of local governments, are quite generous. Yet a considerable number of public pension funds are underfunded. That is, they do not have enough money to cover their future obligations. At some time, governments at all levels will try to raise taxes to fund pension payments. This will come at a time when citizens without public pensions are struggling to fund their own retirement. Because money will be becoming more real, it will no longer be possible to create money or borrow to avoid raising taxes.
Social conflict will develop as we work through the fairest way to make the necessary compromises. On the bright side, after a multiyear transition, we will have a more balanced and sustainable concept of retirement.
Social Support, The Family, Production
Every society, primitive or modern, must decide how to handle families who cannot adequately support themselves. In a rich society like ours, we can afford significant support. Because ideas matter, the key question is what kind of support.
By the 1960s, America’s understanding of consumption and production was being reversed. In earlier times, the virtues associated with production (work) were primary over consumption. However, under the promise of ever-increasing productivity and prosperity, we began prioritizing consumption. In fact, the governing principle became to manage society for always-increasing GDP, which was tacitly taken as a proxy for the well-being of society. This reversal was a substantial change in our worldview and was to have a profound impact on social policy.
Beginning with The Great Society program in the late 1960s, all government programs directed at poverty (and later at inequality) were based on the idea that what mattered was to increase the ability of all citizens to consume. Borrowing the old proverb, the goal was to ensure that everyone had a fish, with no regard to helping the person learn to fish. As is always true, when something is subsidized, it increases. The cost of social programs steadily increased from that time until the present.
As an unintended consequence, these policies weakened the family structure. We decided to subsidize any arrangement. We did not, for example, require fathers to work to provide for their children. We did not prioritize the development of families that could be self-sustaining and would train children to become good citizens. The reasons are beyond the scope of this article. It is enough to note that common sense, common observation, and many formal studies teach us that a well-functioning family is the best environment in which to develop future citizens. When the family breaks down, young people are less prepared to fully assume their role in society.
Of course, programs that support and encourage consumption—with no offsetting focus on production—must be funded somehow. This funding has been a combination of three things: (1) taxing one group of citizens to support another group, (2) borrowing against the future production of society, and (3) money creation. As money becomes more real, these sources of funding will be more difficult to sustain. As the percentage of citizens who are net payers of taxes steadily dwindles, the resistance to tax increases will increase. As already noted, continued attempts to borrow against the future and to create money will cause higher inflation or interest rates—or both at the same time.
As money becomes more real, social tension and conflict over the funding of social programs will escalate. When those who can work choose not to do so, it creates economic, social, and moral problems. We will need to face squarely the basic principle of a free society: freedom cannot exist without individual responsibility.
Medical Care
The quality of our medical care—for those in the right circumstances—is the best in the world. It is also fragmented, distorted, and expensive. Up to this point, our philosophy about medical care is to spend whatever is necessary. There are limits, of course, but almost any proven treatment will be paid for. Thus, companies have been encouraged to develop new diagnostic tools, treatments, and drugs.
Most Americans do not pay directly for their medical insurance. Insurance is provided through their employer or through the government. For those who must purchase their own insurance, they must do so through a highly regulated market. This means that most Americans have no incentive to do cost benefit analysis or select services based on price and quality. Even if for some reason they were motivated to do so, the medical system is so complicated and opaque that it would be impossible. Even experts struggle to determine the real cost of medical care.
As a result, the cost of medical insurance continues to rise. More companies are now deciding they can no longer afford the full cost of insurance and are shifting costs to the employee in terms of premium sharing and rising deductibles. Because of increasing costs and regulations, some companies are dropping medical insurance altogether. When this happens, employees will, if they can afford it, turn to the government marketplace to buy subsidized private insurance.
Over half of Americans are covered by insurance that is fully paid by government, most under Medicare or Medicaid. This percentage is increasing for two reasons. First, more Americans are reaching the age for Medicare coverage. Second, for political reasons, Medicaid and related programs are growing. Any attempts to control the costs of these programs, for example, by denying coverage for treatments, are met by strong resistance from the beneficiaries—and understandably so. Those beneficiaries, of course, are voters. No politician wants to create that problem for themselves.
More than half of the cost of government insurance must be paid by general revenue. That is, less than one half of the cost is paid by premiums and payroll taxes.
So here is our situation. Medical costs keep rising. The structure of our medical care system, and this includes social and political influences, is such that almost no one has both the power and the incentive to reduce costs. As the cost of private insurance goes up, more of that cost is transferred to employees personally, which in some cases results in increased government subsidies.
When money becomes more real again, medical care costs will come under pressure. Government medical insurance will have to compete with all other government expenses. When it is no longer possible to create money and borrow freely, the debates will begin. Initially, the focus will be on raising taxes. That can only go so far. Attention will then turn to reducing coverage of treatments. Ultimately, the debate will turn to “healthcare rationing,” which will cause vigorous and emotional moral debates. As we look ahead to that possibility, we can keep in mind that all economic goods are rationed in one way or another. Anything that people want or need and that requires resources to provide or produce must be “rationed” in some way. For most things, rationing is managed naturally in the marketplace.
Medical care, for good reasons, holds a special moral element in the rationing mechanism.
We cannot know how things would have developed if money had been more real beginning decades ago. One possibility is that medical care costs would be more transparent, individuals would want to and be able to do cost-benefit analysis. It is possible that some of the most expensive treatments would not have been developed at all. Certainly, more citizens would have given more attention to maintaining their health rather than relying on ever-advancing medical treatment. It is also possible that we would have paid more attention to the growing gap between lifespan and healthspan. If any of those possibilities had developed, it would have reduced our upcoming tough decisions. As it is, when money becomes increasingly real, we are likely to change our underlying philosophy for medical care. Some things may no longer be affordable.
Inequality (Differences)
Had money been more real over the past fifty years, many of the problems captured in the word inequality would not exist today (or would be minimized). Because inequality means different things, I often use difference instead. Equality cannot mean equal outcomes. First, that has never been achieved in any society—except universal poverty. Second, it is antithetical to a free society. Thus, our goal should be to minimize those things that unfairly favor some groups over others.
Inequality is most often applied to economic characteristics. If, however, we primarily focus on the economic realm, we will misunderstand the real problem. We need to understand the two most powerful drivers of unfair differences. The first driver is our changing beliefs about human nature. Somehow, over the past fifty years, we have lost our grasp of two crucial elements. Societies work best when stable, nuclear families are the norm. People need a sense of agency; they need to act to improve their circumstances. Remarkably, some of our attitudes and many of our policies, tacitly—though sometimes purposely—ignore those characteristics.
The second driver is a monetary system that enabled the first driver to exert its effects without correction. It enabled us to avoid and ignore feedback. When money can be created and borrowing can be done freely, the symptoms of bad policies can be mitigated, and the consequences can be postponed. Under a sounder monetary system, the natural consequences of our “human nature” mistakes would have been recognized and addressed long ago.
As money becomes increasingly real, we will be forced to shift from prioritizing consumption to prioritizing the development of productive capabilities. This shift will have huge benefits beyond the direct economic impact. As a result, we will naturally emphasize the virtues associated with productivity. This shift will naturally bring about increased personal responsibility and a reduction in dependence on government—which, of course, is shorthand for dependence upon fellow citizens. While at first thought it might appear paradoxical, this shift will help all of us better understand our responsibility to society. A free society requires careful attention to both the individual and the community. It requires self-interest properly understood.
While a discussion is beyond the scope of this article, the structure of employment that is part of our overall structure of production is much different than it would be had it developed under a more real monetary system. As money becomes more real, the structure of employment will gradually change to better accommodate more of our citizens. That is, as money becomes more real, employment opportunities will improve for a larger percentage of our citizens.
Capitalism
Capitalism is the name given to the economic system we currently have. It is a poorly defined and poorly understood word. Those who like the results of our economic system applaud capitalism. Those who dislike the results condemn capitalism. Because most formal definitions make use of “private property,” that is often what is applauded and condemned. As I explain elsewhere, this is a dangerous situation because both perspectives misunderstand the impact of our monetary system upon the structure of our economic system. Most of what is blamed on capitalism is the result of the way the monetary system is used within our system. The problems have nothing to do with private property or the free market.
Already, some people are calling for capitalism to be drastically restructured or, in extreme cases, to be replaced by some other system. This is most unfortunate and must be resisted. If economic experience of the last 150 years has proven anything, it is that private property and free markets are the best path for improving the material well-being of entire societies. Even Karl Marx acknowledged that reality. Thus, if we want continued prosperity and to improve economic inequality, we must keep these characteristics of our economic system. The essential requirement is to understand how the monetary system itself has enabled those aspects of capitalism that are criticized.
As money becomes more real, the blaming of capitalism may intensify. We can avoid terrible mistakes during this transition if we replace the connotation-rich capitalism with something else. Even the generic economic system is preferable because it might encourage us to look at the specific elements of our system. If we do so, and if we are willing to study carefully, we will see the role played by the monetary system. As money becomes increasingly real, and if we don’t damage our system along the way, our economic structure will gradually improve for the benefit of everyone, especially those who are currently in the lower socioeconomic brackets.
Summary
We have become accustomed to spending beyond our means. Decades of a fiat monetary system let us ignore and postpone the real costs and consequences of much that has taken place. “The government” spent money to (1) compensate for social problems, (2) provide benefits to many citizens, not just those on social support programs, (3) fund foreign relations, and (4) fund many other special projects. Much of that spending would not have happened if citizens had to reach into their pockets and pay higher taxes. The bill has now come due. It falls to our time to deal with the accumulated debt and solve problems that have grown over the decades.
As money becomes increasingly real in the years ahead, we will make uncomfortable adjustments and hard decisions. Here are a few examples of what we are likely to see. A smaller percentage of students will attend college as traditionally understood. Government funding for post-high school training will decrease. We will modify our expectations for retirement and will need to save more money from current earnings and rely less on investment gains. Social support policies will be scaled back. This adjustment will fall heaviest on those who are least prepared to be self-sufficient citizens. This will require transitional help from the rest of society.
The value of the traditional family structure will be recognized. Public policy and attitudes will slow the breakup of family structures and, hopefully, help reverse the trend. Medical care will be increasingly subject to cost-benefit analysis. We will face tough decisions—possibly moral decisions—about what treatments will be funded.
In general, expenses that have been absorbed in our rapidly increasing national debt will be (1) reduced by cutting back government spending, (2) partially offset by increased taxes, and (3) paid out-of-pocket by ordinary citizens.
The above adjustments—which will range from uncomfortable to exceedingly difficult—will result in social and economic changes that make it possible for more citizens to flourish. More citizens will be self-sustaining. Increased personal responsibility will increase our national capacity for sustaining freedom. It can be hoped that along the way we will learn how to be truly tolerant of those who think differently than we do and resist trying to coerce others to think and act the way we prefer. Tolerance, properly understood, is a requirement for us to work together through the upcoming transitions. We need to resume our role as citizen rulers so we can cast our political, economic, and social votes wisely.