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Rangel-ing over Money

Shocking! Outrageous!

The Club for Growth's Social Security Choice blog commented on a press release from Representative Charles Rangel (D-NY). Rangel, in turn, was commenting on President Bush's statement that the Social Security trust fund is "just IOUs that I saw firsthand."

Rangel invoked the "full faith and credit" clause to imply Bush was wrong about calling them "just IOUs" and the blog criticized this reasoning, correctly, because intragovernmental debts and assets exactly cancel to zero. That's fine so far as it goes, but I had a very different reaction to part of Rangel's statement:

If the "full faith and credit" of the United States means "just IOUs" then our entire financial system will come tumbling down. By the President's logic, every dollar in your wallet is just fancy paper backed by the "full faith and credit" of the United States. If President Bush thinks we might default on obligations to Social Security recipients, then is any commitment the U.S. Treasury makes truly secure?

Every dollar in your wallet is just fancy paper backed by the "full faith and credit" of the United States. Read them! Right at the top they all say "FEDERAL RESERVE NOTE", and a note is a debt instrument. It is a claim to some asset. What asset? Another federal reserve note. It really is just fancy paper backed by nothing but the "full faith and credit" of the United States.

It didn't used to be this way. Paper money used to be very, very different. Look at a $100 1922 gold certificate (bottom of that page). The text is dramatically different. It reads "this certifies that there have been deposited in the Treasury of the United States, one hundred dollars in gold coin repayable to the bearer on demand". And a "dollar" was defined as a specific quantity of gold.

The dollar in your wallet used to be fancy paper that you could redeem for gold coin, and gold coin was real money — not a debt instrument. Today, the dollar in your wallet is just fancy paper that can only be redeemed for similar fancy paper.

The dollar is just fancy paper. The Social Security trust fund is worth even less. (At least with enough dollars, you can buy some gold!)

Rep. Rangel might be right about the entire financial system tumbling down. Austrian economists have given ample warning about the dangers of a fiat monetary system.

Tiny Island