Last Thursday we noted that the Federal
Reserve, far from being “the Creature from Jekyll Island” intended to enslave
the human race to the Gnomes of Zürich, was actually designed — and intended —
to break the virtual monopoly enjoyed by the money moguls of Wall Street. How did it happen?
It may come as a
complete surprise to many people, but politicians like to get reelected. Unfortunately, being in the government and
acting responsibly is often the worst way to get reelected. Few people understand what Edmund Burke said
to the electors of Bristol on November 3, 1774 when he was running for
parliament:
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| Anglo-Irish Parliamentarian Edmund Burke |
Certainly, gentlemen, it ought to be the happiness and glory
of a representative to live in the strictest union, the closest correspondence,
and the most unreserved communication with his constituents. Their wishes ought
to have great weight with him; their opinion, high respect; their business,
unremitted attention. It is his duty to sacrifice his repose, his pleasures,
his satisfactions, to theirs; and above all, ever, and in all cases, to prefer
their interest to his own. But his unbiased opinion, his mature judgment, his
enlightened conscience, he ought not to sacrifice to you, to any man, or to any
set of men living. These he does not derive from your pleasure; no, nor from
the law and the constitution. They are a trust from Providence, for the abuse
of which he is deeply answerable. Your representative owes you, not his
industry only, but his judgment; and he betrays, instead of serving you, if he
sacrifices it to your opinion.
One of the best
ways not to get reelected is to raise taxes in order to allow government to
carry out its legitimate tasks. The
corollary to this is that one of the best ways to get reelected is to deliver
benefits to your constituents that somebody else has to pay for.
These two
principles of reelection, as we might call them, are inherently in conflict. If representatives do their job, they are
likely out of a job very soon. If
representatives cater to the worst in their constituents, they are often secure
for decades . . . or until the bill comes due. . . .
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| Charles Conant |
Still, under more
or less normal conditions when government is at a minimal level and tax
revenues are sufficient to keep the government running adequately, there is the
usual grumbling about taxes, but everyone knows they have to pay them. It’s when an emergency comes along that
radical changes take place.
During the Civil
War, for example, the Union had to raise a lot of money — fast. Fortunately, patriotic fervor was at a
highpoint. As Charles Conant and others
pointed out, had the government raised taxes as much as it should have at the
beginning of the war, people would have gone along with it as their patriotic
duty. There would have been no need to
rely on the hidden tax of inflation by issuing the United States Notes, the
“Greenbacks,” backed by government debt instead of private sector assets.
When the
government finally got around to raising taxes to the necessary level, it was
after the initial fervor had worn itself out, and people were war-weary. It seemed like one more burden for an
increasingly unpopular war.
So, why the
delay?
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| Salmon P. Chase |
Unfortunately,
Lincoln’s Secretary of the Treasury, Salmon P. Chase, wanted to be president .
. . and you don’t get to be popular enough to run for president if you raise
taxes. So Chase decided to finance the
Union war effort on debt. By 1864, $1 in
gold would bring $2.64 on the average in paper.
That was if you could find anyone with gold. Added to the inflation caused by the printing
of money, the cost to the consumer and the taxpayer was higher than it really
should have been.
Adding insult to
injury, the effort to restore parity of the gold and paper dollar after the war
allowed speculators to make a great deal of money, and caused a significant
number of bankruptcies as debtors tried to repay loans taken out when the currency
was inflated with deflated dollars. This
meant they had to produce two to three times as much as otherwise to repay the
debt.
So, with that
lesson firmly in mind, what did the politicians do when it looked as if the
U.S. might get dragged into the First World War? Raise taxes and rely on patriotism? No, print money and rely on greed and
self-interest to get reelected.
And it all
resulted from a loophole in the Federal Reserve Act that was intended to retire
the national debt, not increase it.
#30#
