Last Thursday we
closed the previous posting in this series by noting how Henry VIII Tudor’s
debasement of the English and Irish coinage did not affect as many people in
the same way it would have had the two countries been more dependent on a cash
economy. It was bad, of course, but the
fact that most trade and even daily transactions were carried out by means of
direct barter and contracts well into the nineteenth century limited the evil.
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| Issuing a charter to the Bank of England. |
Toward the end of
the eighteenth century, however, governments discovered they could manipulate
the value of a currency by issuing debt-money (government contracts
representing a vague promise to pay out of future taxes, or “debt backed by
debt”) in place of asset-money (private sector contracts representing a
obligation to deliver a specific amount or value of goods and services, or
“debt backed by assets”). It was then
that economic growth and financial wellbeing of ordinary people became subject
to the whims of the powerful, whether in the private sector (capitalism) or the
public sector (socialism). Added to the
growing concentration of capital ownership in fewer and fewer hands as a result
of the shift to the cash economy and concentrated control over the means of
acquiring and possessing capital, manipulation of the monetary and tax systems
was a disaster for ordinary people.
It all began
innocently enough, or so it seemed. When
the “merchant adventurers” who organized and founded the Bank of England
requested a charter for this new type of bank, they did not intend for the
institution to become a money machine for the State or really have anything to
do with government at all, other than to operate within the law . . . which
meant it required a charter.
The idea was that
they would establish a bank for banks, spreading out risk and ensuring that
member banks would always be able to get adequate “accommodation,” meaning they
would always be able to obtain adequate credit and access to reserves to meet
sudden obligations. To do that they put
£1.2 million in gold and silver to pool the reserves of the individual member
banks and capitalize the venture.
And that was
their first mistake.
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| William III, Short of Cash |
The government
(as always) was short of cash. The
merchant adventurers were short of a charter.
It seemed the most natural thing in the world for the government to
demand what amounted to a bribe in the form of a “loan” of £1.2 million, to be
replaced with “government stock” (i.e.,
debt), secured by the government’s ability to collect taxes in the future and
repay the loan (which it never actually got around to doing).
At one stroke the
Bank of England changed from being an institution designed and intended purely
for private enterprise, and became the single largest creditor of the British
government. It was, however, a creditor
with a difference: it was only allowed to be owed money because the government
— the debtor — recognized the debt . . . which it could repudiate at any time.
Fortunately, the
British government kept the reins on spending, not getting too far beyond what
it could collect in taxes. Additional
debt consisted primarily of government bonds sold for cash, i.e., existing pools of savings. With the Bank of England being the chief
financial agent for the government, and still attempting to fulfill its primary
role of stabilizing the money and credit system and providing adequate
liquidity for the private sector, the government could not simply issue more
debt for the Bank to buy when it needed cash.
The bulk of the Bank’s business remained acting as a clearinghouse,
discounting and rediscounting private sector financial paper, and issuing notes
backed by private sector paper when more circulating media were required for
business and commerce.
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| Total War requires a great deal of cash. |
Then came the
French Revolution and the Napoleonic Wars.
This was not the limited type of warfare to which Europe had become
accustomed, with relatively small private armies using military action as an
extension of politics (or its failure, depending on how you look at it). This was something new, the concept of total
war, the complete mobilization of a nation’s resources to carry out conquest or
defend against it. A great deal of
Napoleon’s success in battle was due to the fact that he was one of the first
world leaders to understand the concept while his first opponents did not, and
thereby created momentum and a myth of invincibility.
The Man of
Destiny also created something else: the need for government to spend vastly
beyond its means to prosecute a war.
Historically, it has rarely been possible for a government to tax people
more than 20% of GDP, although it has been possible to go up to as much as 25%
in emergencies. Total war, however, requires
a much greater proportion of GDP, although how much more can be wrested from
the economy without the economy imploding is a matter for a much more in-depth
analysis than is possible on a blog — even this one!
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| The Man of Destiny — Napoleon Bonaparte |
The question for
a government involved in the total spending that accompanies total war is, How
do you increase taxes beyond the level that is ordinarily — or extraordinarily
— collectible?
The answer? By backing the currency with government debt
instead of private sector assets . . . a technique that can only be done if a
government has access to the central bank as a buyer of its debt instruments. The “hidden tax” of inflation can vastly
increase the ability of a government to tax and shift wealth from the private
sector to the State — and it’s a tax (loan, really) that the government can levy without the consent of the governed and doesn’t have to repay,
because it’s in the form of value lost to the issuer of the debauched currency:
the government.
A government can,
in this way, tax more than GDP,
because the inflated currency bids up the prices of everything in the economy,
not just current production. To correct
Proudhon’s glib aphorism, property isn’t theft, inflation is theft — and the
government is the thief.
And yet “Modern
Monetary Theory” (MMT), based on the theories of Georg Friedrich Knapp and John
Maynard Keynes, assume as a given that backing the entire money supply with
government debt — a 100% tax on everything in the economy — is the only right
way to regulate a currency.
And that creates
a few problems as well. . . .
#30#