In the previous posting on this subject, we
gave a few reasons as to why printing up money and handing it out (or even
spending it on things that don’t generate a payback) is a really bad
idea. We also mentioned that when we
addressed the subject again, we would present what (in our opinion) ought to be
done . . . so here goes. . . .
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| Jean-Baptiste Say |
As we see it, the economic problem is not to
ensure that people can consume, per se, but that they can produce
marketable goods and services that, per Say’s Law of Markets (did you
get the word play there? Don’t you just
hate it when writers point out to you how clever they are?) can be traded for
the goods and services they want to consume.
As Say pointed out more than two centuries
ago, we don’t really purchase what others produce with “money,” but with what
we produce. That’s why meddling with the
monetary standard or inducing inflation or deflation is so bad and why it
screws up an economy: it changes the exchange value of anything valued in terms
of money . . . which is pretty much everything.
Thus, the plan to create $2
trillion of additional money backed by government debt when there is
already, what, nearly $24 trillion of
money backed only by government debt? out there a really, really, really
bad idea. If nothing else, who is
supposed to repay the existing debt, much less an additional 8% or so on top of
that . . . plus whatever the interest charges are on that? Can you really run an economy or a country on
getting something for nothing? Greece
tried that and it doesn’t seem to have worked very well at all.
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| Georg Friedrich Knapp |
No, the only financially sound — and moral —
way to issue money is to back it with something of actual value owned by the
issuer. In theory, government debt in
the form of bills of credit (a fancy word for “government debt”) is backed by the taxes that the government will
collect in the future to redeem the debt it issued.
That’s why another name for “bills of credit”
is “anticipation notes” — the debt is issued in anticipation of
collecting enough taxes to redeem it.
The problem, of course, should be obvious: the government that issues
the debt doesn’t actually own (yet) the taxes it hopes to collect to redeem the
debt. The people presumably to be taxed
own the wherewithal with which the taxes are to be paid . . . and the theory in
the United States (and one of the reasons the colonies broke from Great Britain
in the first place) is that taxes are unjust unless levied with the consent of
the people paying them.
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| John Maynard Keynes |
Unfortunately, per what is rather interestingly
called “Modern Monetary Theory” (because all non-modern people are stupid) —
based on the theories originated by the socialist economist Georg Friedrich
Knapp in the 1880s — the bills of credit issued by government to back the money
supply represent a non-repayable debt the nation owes itself.
As Knapp explained in The State Theory of
Money (translated into English in 1924 . . . but Keynes spoke fluent German
and cited Knapp in the original), the State as the ultimate owner of everything
in the economy issues claims against the general wealth of the economy in the
form of bills of credit.
If there is not enough money in the economy,
the State emits more debt. If there is
too much money in the economy, the State taxes away the excess and uses the
proceeds to redeem some of the bills of credit.
In Knapp’s pure theory, the State never taxes for revenue, only
to adjust the amount of money in circulation.
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| Harold Glenn Moulton |
Of course, as Dr. Harold Glenn Moulton
pointed out in his pamphlet, The New Philosophy of Public Debt
(Washington, DC: The Brookings Institution, 1943 . . . a rather frightening
little book, by the way, which is probably why Brookings has refused permission
to reprint it), the idea instantly occurs to people that if the government can
simply issue debt to cover its expenditures, why tax at all? Let inflation take care of “too much money”
without taxation by raising the price level.
As Moulton noted,
The implications of the new
philosophy of public debt from the point of view of taxation are engaging. If the growth of the public debt is of no
moment, one might at first thought be inclined to ask — Why go to all the trouble
and expense of collecting taxes? Why
burden the public with ever-increasing levies?
Indeed, if the purpose of fiscal policy is not to balance the budget but
to obtain the largest possible “net income-creating” expenditures — as measured
by the size of the cash deficit — why
not promote the desired end by canceling all taxes? (Harold G. Moulton, The
New Philosophy of Public Debt.
Washington, DC: The Brookings Institution, 1943, 71.)
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| Beardsley Ruml |
Now, Moulton was responding to a pamphlet written
earlier in 1943 by Beardsley Ruml, Chairman of the Federal Reserve Bank
of New York, in which Ruml had claimed that what later became known as “Modern
Monetary Theory” (MMT) would enable governments to issue as much debt as they
thought they needed without resorting to taxation!(!)!
Moulton noted,
however, that even those who thought that governments could do this did not
actually advocate governments abolishing taxation. Why?
Because it would mean governments would lose the power to compel citizens
to act in desirable ways. (To constitutionalists,
of course, abolishing taxes would mean that citizens would lose the power to
control government!) As Ruml admitted in
his article responding to Moulton’s response to Ruml’s original pamphlet under
the heading, “What Taxes Are Really For”:
1. As an instrument of fiscal
policy to help stabilize the purchasing power of the dollar;
2. To express public policy
in the distribution of wealth and of income, as in the case of the progressive
income and estate taxes;
3. To express public policy
in subsidizing or in penalizing various industries and economic groups;
4. To isolate and assess
directly the costs of certain national benefits, such as highways and social
security.
Take a closer
look at No. 3 on the list: “To
express public policy in subsidizing or in penalizing various industries and
economic groups.” Translation: Do as the
government tells you or it will destroy you with taxation; "the power to tax is the power to destroy" (although Justice Holmes declared that was not the case while his court was in session). Be obedient, and the government will reward
you.
None of Ruml’s response,
however, actually addressed one of Moulton’s main concerns: with government in
charge of the economy through control of money and credit,
.
. . [i]t will be necessary to make a choice.
With unlimited debt expansion we cannot prevent inflation without the
use of totalitarian methods of control.
No compromise or half-way measures can adjust the difficulties. The choice is between regimentation and
inflation. (Ibid., 88.)
So, what are the
alternatives to “unlimited debt expansion”?
We will pick that up in the next posting on this subject.
#30#