Wednesday, April 6, 2005

Econ 101

Got a dollar bill in your wallet? Have you ever read what it says on it?

It’s called a Federal Reserve Note, and it says that “This note is legal tender for all debts, public and private.” That’s it. There is nothing more to that piece of paper than the fact that the United States Government and the Department of the Treasury says it is worth one dollar and you can exchange it for a dollar’s worth of something else, like food or .43 of a gallon of gasoline. That’s what’s known as the “full faith and credit” clause, and our entire economy — indeed, the entire economy of the world — runs on such full faith and credit; that the government would stand behind the currency it issues in whatever form — bills, notes, and bonds — and will pay its debts.

It didn’t used to be that way. Up until about forty years ago, a dollar bill was a “silver certificate” and you could exchange it for an actual dollar’s worth of silver. But Congress decided that our economy was based on trust — much the same as the bank trusts you to pay your credit card bill — and they took us off the silver standard and asked us and the world to accept that we would be good for our debts.

This bit of Economics 101 has apparently escaped President Bush.

President Bush on Tuesday turned a government file cabinet in the hills of West Virginia into his Exhibit A for why Social Security needs urgent change.

To dramatize Social Security’s future solvency problem, the president peered into the four-drawer ivory cabinet inside the Bureau of Public Debt office here along the Ohio River. In the second drawer was a white three-ring binder filled with pieces of paper providing physical evidence of $1.7 trillion in Treasury bonds that back Social Security benefits.

“Imagine,” Bush said in a speech a short time later at West Virginia University at Parkersburg. “The retirement security for future generations is sitting in a filing cabinet.

“It’s time to strengthen and modernize Social Security for future generations with growing assets that you can control, that you call your own — assets that the government can’t take away.”

[…]

The pieces of paper Bush saw are not real Treasury securities. In today’s computer age, investors no longer get honest-to-goodness Treasury bonds they can hold in their hands. However, by law, the bureau creates paper bonds to put in the file cabinet just in case anybody, like Bush, wants to see the trust fund.

While the paper IOUs are not negotiable instruments, they still represent trust fund Treasury bonds that are backed by the full faith and credit of the United States.

So unless President Bush wants us to go back to the silver standard, he’s going to have to trust that the Treasury will stand behind the bonds that it issues. It seems to work for everyone else, including our debt holders. That’s why it’s called a “trust fund.” Duh.