Wednesday, April 5, 2017

Good as Gold, IX: Debt or Taxes?


 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:
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. . . .
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?
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#

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