Valuable Lessons from Federal Spending and Debt

Tuesday, August 9, 2011
Valuable Lessons from Federal Spending and Debt
by Jacob G. Hornberger

Americans are getting some great lessons in both economics and history in the federal spending-debt crisis.

Yesterday, the Federal Reserve announced that it definitely intends to keep interest rates low for two more years. Translation: We will inflate (and debase) the currency to whatever extent necessary to get the economy rolling again.

This is precisely what has been going on for decades. Do you see now why the value of the paper dollar is worth about 5 percent compared to what it was worth in 1913, when the Federal Reserve was established? What the Fed is doing now is what it has been doing since it was established in 1913 and especially since the advent of the welfare-state way of life since the 1930s.

Here's what has happened, in a nutshell.

Around the turn of the 19th-20th centuries, America began a dramatic turn toward statism, turning away from economic liberty and embracing the principles of socialism and regulation that were being expounding by the progressives. That movement was reflected in the adoption in 1913 of the 16th Amendment (income tax) and a central bank, the Federal Reserve.

During the 1920s, gold was still the official money of the United States, which it had been since the founding of the Republic. The Fed inflated the quantity of bills and notes, creating a false economic prosperity during the "roaring 20's."

Sensing that the government could not honor its debts, people began redeeming their notes for gold. Panicking, the Federal Reserve over-contracted the supply of its notes, bringing about the 1929 stock-market crash, which statists have always blamed instead on "the failure of free enterprise."

President Roosevelt used the crisis as an opportunity to impose an entirely new economic system on America, one based on the principles of socialism, interventionism, regulation, and fascism. (See, for example, Three New Deals: Reflections on Roosevelt's America, Mussolini's Italy, and Hitler's Germany by Wolfgang Schivelbusch and this review of the book by David Boaz of the Cato Institute). FDR also used the crisis to adopt a new monetary system, one that rejected gold coins and silver coins as the official money of the United States and instead relied on irredeemable paper notes issued by the federal government.

That enabled FDR to embark on a massive federal spending spree for his new welfare state without having to worry about people demanding payment in gold for the increasing supply of paper money. Like every one of his successors after that, FDR could spend to his heart's content. With FDR's New Deal and adoption of a fiat money standard, the floodgates were opened for unrestrained spending for an ever-growing welfare state.

Over the decades, however, the amount of spending was not limited to the amount of taxes being collected. The number of people on the dole ­ and the total amount of the dole itself ­ continued to climb. In fact, welfare was not just limited to Americans. It was later expanded to foreigners, including dictators, in the form of "foreign aid."

Then came the adoption of the national-security warfare state in 1945, which meant that the feds now had a double spending problem ­ welfare and warfare.

That meant ever-increasing spending and borrowing, much higher than the amount of money that was being raised by taxes.

No problem. Federal officials just borrowed the money to cover what the tax revenue was unable to cover. The government's "national debt" continued climbing.

Whenever the debt got to be a problem, however, that's when the Fed would step in, just as it is stepping in now. Its job was to pay off the debt with newly printed money. The additional supply of money would debase the value of the currency then in existence, which would be reflected by rising prices in society.

This was an ideal situation from the standpoint of government officials. They could spend and borrow to their heart's content, and few people would suspect that it was the federal government causing the prices to rise with its inflationary policy. By this time, most people were graduates of public (i.e., government) schools and so, not surprisingly, they blamed inflation on such things as speculators, greedy people, big business, and big oil and had a well-ingrained tendency to trust the government and defer to authority.

Some people understood what was going on, however. They saw through the lies and deception. They understood the relationship between the welfare-warfare state way of life and the ever-growing spending, borrowing, and inflation. They knew that one good way to protect their assets from inflationary confiscation was by buying gold and silver.

FDR cut them off the pass. He made it a felony offense to own what had been the official money of the United States for more than 100 years. The last thing that federal officials wanted Americans to do was to be able to protect their wealth from welfare-warfare state confiscation.

Today, it is legal for Americans to own gold. Not surprisingly, the price of gold is soaring. Why? Because thanks to the Internet, there are many more people who have figured out what government is doing to them, to their assets, and to their money with its welfare-warfare spending, borrowing, and inflating. They know that government isn't going to reduce spending but instead is going to use the Federal Reserve to inflate the debt away. And they know that owning gold and silver is a way to protect themselves from what the government is doing. That's why they've been buying gold for the past several years.

But make no mistake about it: The antipathy that FDR and his statist cronies had toward gold is no different today. Federal officials hate gold, not only because it provides people with the chance of avoiding confiscatory inflationary policies but also because a soaring gold price can be signaling that government is up to no good.

Over the decades American society has become increasingly dominated by the welfare-warfare sector, which has served as an ever-heavier burden on the private sector that sustains the government sector. Periodically this dysfunctional system produces bubbles and economic crises. And each time the Fed has used inflation to prop up this dysfunctional system, sending false signals of prosperity into the marketplace. That's what the statists are calling on the Fed to do again ­ print and spend in the hopes that it will work one more time.

But today, more people are aware of how the feds have played this manipulative game and aren't falling for it. They've been burned one time too many with fake and false Federal Reserve induced prosperity. They're not investing, they're not expanding, they're not hiring. In fact, many of them are simply closing up shop and retiring. Thus, the jury is still out as to whether the Fed will succeed, one more time, in propping up the system with another round of artificial prosperity.

Ultimately, such a system cannot last. It is fake and false and at some point the whole house of cards will come crashing down. This could be that time. We might well be witnessing the death throes of the welfare-warfare state.

But if not, it's just a matter of time. Economic prosperity and rising standards of living can only come about through sound, solid private-sector saving and investment ­ through the rising accumulation of real capital, not inflationary printing of irredeemable paper money, which leads a nation into bankruptcy.

So, the bad news is that the government continues to do what it has done for decades, moving America in an increasingly bad direction. The good news is that there are now countless more people who have learned lessons about history and economics and who now realize that libertarian principles provide the means of putting our country on the right track.

http://www.fff.org/blog/jghblog2011-08-10.asp