Everyone knows how a country-club works: Members pay dues, and the dues are used to pay for the expenses of running the country-club—maintenance and improvements, kitchen and service staff, golf-course mowing and landscaping, etc. Sometimes a big expense comes along (like putting a new roof on the main club-house) and the cash-flow from the monthly, or annual, dues isn’t enough to cover the one-time cost. In that case, the club would take out a bank-loan to pay for the new roof and the dues would then service the loan. It might be necessary, under those circumstances, to raise the dues to ensure that while the loan is being serviced the kitchen and dining services continue and the golf-greens are manicured. There would likely be a vote by a board of club-directors to determine if a due-increase was necessary.
Many, if not most, people believe this is basically the way the United States of America works: it’s like a very big country-club, and citizens are required to pay dues to keep it maintained and running. The dues are called “taxes” (for some reason) but they amount to the same thing.
Many, if not most people also believe the United States of America is a poorly managed “country-club” because it consistently borrows WAY more dollars than it can possibly pay back with the dues it collects. It is “fiscally irresponsible.” The “club-directors” consistently vote to borrow more and more dollars, while consistently refusing to raise the dues as necessary to service the loans. Many, if not most people—including most of the “club-directors” themselves—believe this “fiscal irresponsibility” will eventually bankrupt the nation, just as a similar irresponsibility would bankrupt even the wealthiest country-club.
Somehow the “inevitable” bankruptcy of America never happens, though. No one seems able to explain precisely why that is. They can only explain that it is “inevitable” because common sense says if you’re a country-club you cannot continuously spend more dollars than you collect in dues, and you cannot continuously borrow money without paying it back. Why does America’s inevitable bankruptcy never seem to happen?
The answer is because America is NOT a country-club.
The easiest way to visualize how and why this is true is to imagine an actual country-club operating in the same way as the United States of America. Let’s call it “Club USA.”
The first thing Club USA does is put its members on notice that dues must be paid with the club’s own paper money—which the club shall print in a secure back room of the club-house basement. Nothing else will be accepted as a payment of dues. In fact, the money the club shall print (to be called a “clubber”) will be prominently printed with the following inscription below the photo-image of the club founder, and signed by both the club secretary and treasurer:
This note shall be accepted as payment for all dues owed to Club USA.
We now have an interesting situation to consider: The club treasurer can turn the crank on the printing press in the basement room, churning out clubbers whenever she feels inspired—or whenever the club-directors direct her to do so. But how do the people who need the clubbers—the club members themselves—get their hands on the clubbers so they can pay their dues?
The first way is the simplest: they earn them. The club members provide some service, or some goods, to the club—perhaps they rake sand traps every morning, or they provide the kitchen with lettuce and carrots from their garden. In exchange for the sand trap raking or the carrots and lettuce, Club USA pays them with the clubbers printed in the basement room. Those members now have the “money” they need to pay their dues.
The members who provide goods and services to the club will earn many more clubbers than they need to pay their dues. What do they do with the rest? They use them, logically, to buy goods and services from other members who also need to earn clubbers so they can pay their dues. In this way, clubbers become a general currency of exchange within the larger community of the Club USA membership.
The second way Club USA members can obtain clubbers is a bit more complicated, but once it’s set up it works just as seamlessly. The club board-of-directors authorizes three or four of the club members (with impeccably trustworthy credentials) to become “club-banks.” Let’s call them “CBs.” After agreeing to a stringent set of guidelines, the CBs are authorized by the club to issue loans to club members “denominated” in clubbers. The CBs don’t give their borrowers actual clubbers—the ability to print clubbers remains strictly within the club’s basement printing room. But the “CB-clubbers” loaned out are essentially the same as actual clubbers because Club USA—as part of its authorization agreement with the club-banks—promises to convert, on demand, the “CB-clubbers” to real clubbers printed in the club-house basement and signed by the club secretary and treasurer.
Voila! Now all the members (provided the CBs determine them to be credit-worthy) can obtain the clubbers they need to pay their dues. Importantly, they’re also able to obtain the clubbers they need to buy goods and services produced by other club members. Or, alternatively, they’re able to borrow the clubbers they need to produce goods and services themselves that other club members might want to buy. If the club members want to borrow from the CBs—whether to buy goods and services, or to produce them—there is never a shortage of clubbers for them to have (assuming, again, the CBs determine the borrowers to be credit-worthy). Whatever number of “CB-clubbers” the club-banks loan out, the club treasurer in the basement room is able to crank out real clubbers to back them up.
But why would a few of the impeccably trustworthy club members agree to become “club-banks” and provide this necessary but complicated and time-consuming loan service to the other members? The reason is because a big part of the agreement they have with Club USA is that they’re allowed to charge interest on the “CB-clubbers” they loan out. Even though the interest they receive might be paid with their own “CB-clubbers,” don’t forget that Club USA has promised to convert those “CB-clubbers”—on demand—into real clubbers printed in the basement room. It’s a promise that Club USA never fails to fulfill.
We could continue this thought-exercise all the way through to visualizing, for example, how the club treasurer manipulates and controls the interest rate the club-banks charge their club-customers, or how and why the club treasurer might decide to issue Treasury bonds that club-banks and club members can “store” they’re excess clubbers in. But the more useful thing we should accomplish before our attention span wears thin is to focus in on the REALLY IMPORTANT things our thought experiment is showing us:
- The club treasurer, operating in that secure room in the club-house basement, is able to create as many clubbers as necessary, whenever necessary, to (a) buy goods and services from the club members, or (b) back-up the “CB-clubbers” the club-banks loan out to club members either for consumption or production.
- Since no. 1 is true, what does the club treasurer do with the dues she receives from the club members? It is obvious she doesn’t need the dues in order to have clubbers to spend—she has, in fact, already spent them, and now they’re coming back to her in the form of the dues! She doesn’t need them for anything other than the paper they’re printed on: She simply grinds them up, puts them back in the paper machine, and uses the recycled paper to print new clubbers as they’re needed.
- If no. 2 is true, the Club USA board-of-directors need to ask—and answer—a few simple questions:
- Are they really collecting dues in order to pay for the expenses of running the country-club? ANSWER: Obviously not, since Club USA is buying goods and services from its members first and then collecting dues afterwards.
- If the directors decide to put a new roof on the club-house and build another nine holes for the club golf-course, do they need to increase the membership dues? ANSWER: Obviously not, since they are going to print the clubbers necessary to buy the new roof and build the nine holes first—then collect dues (as always) and put them in the paper-grinder to create new clubbers with.
- Does Club USA ever need to borrow clubbers from the club-banks (or anyone else?) ANSWER: Why would the club borrow something which it has the sole legal authority to produce? Why would it borrow a “CB-clubber” from a bank, and then convert it, on its own demand, into the “real” clubber which only the club, itself, has the authority to produce? While the concept of “debt” for all the club members is very real, for Club USA, itself, it is a uniquely illogical construct.
- Can the club do something really wonderful for its membership like, for example, provide each member’s children with a free college education? ANSWER: Of course it can, and here’s the reason: Since Club USA is the exclusive producer of clubbers—able to produce as many of them as it wants, any time it needs to— that means the club can buy any goods and services its members are willing to sell in exchange for clubbers—including, for example, classrooms and teaching services to provide a college education for all the membership’s children.
Club USA is obviously an artifact of the imagination. No country-club could really function as we’ve described. The monetary system we’ve attributed to Club USA, however, is NOT imaginary. It actually exists and is operating in the United States today—and has been operating here for over half a century. This is why America is not a country-club—and why our “board-of-directors” should stop thinking and behaving as if it were.