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. . . .
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.
|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.
|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.
|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.)
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#