Do you know what they are? The textbooks praise them…but should you?
The three things that make modern mass warfare possible are 1) the income tax, 2) the central bank, and 3) the abolishment of the gold standard.
Dr. Gary North wrote a fine article describing this connection here. His article is the background for mine.
What’s the connection between the three? They form an integral relationship.
Let’s begin with war bonds. The government loves to sell war bonds during times of war: see this Google image search.
[At least, they used to. We haven’t declared official war since WW2. Since then, we’ve more-or-less tossed out the Constitution and engaged in perpetual warfare. The President bullies Congress, and Congress doesn’t say “no.” But, the government still loves to sell bonds.]
This serves two purposes: first, it raises money for the massive expenses associated with waging war and, second, it ensures that the public won’t compete with the government over the same scarce resources.
What do I mean by that?
Basic economics says that resources are scarce, and the free-market best allocates those scarce resources through the system of prices: high bid wins. By taking the money out of the hands of the bidders (the public), the government is ensured that they’ll face less competition over the same resources required for fueling the war machine, letting them buy more for less because the public has less money to compete with; they can’t bid up prices.
But there’s a reason the government is able to sell war bonds, and that reason is the income tax.
Through the income tax, the government is able to raise massive amounts of money. They advertise this capability of theirs to potential lenders (creditors) as proof that they’ll always be able to pay back their loans. This builds trust, and those who buy war bonds feel confident that their “investment” will be safe and secure: they’ll get their money back, with interest, without any doubt.
NUMBER TWO: CENTRAL BANKS A LA THE FED
The second big innovation is the central bank. Began in 1694 with the Bank of England, it has been perfected in the Federal Reserve. The Fed was passed into law in 1913 and opened its doors for business in 1914.
Raising money through war bonds doesn’t actually raise enough money to fund the entire war effort. Moreover, what happens if the government can’t persuade the public to fund the war?
This is where the central bank steps up. Since it has a government-granted monopoly over the money supply, it can expand and contract it at will. The central bank buys a large portion of the government’s bonds. We traditionally lump this process together by simply saying “The government is printing money to fund its massive war,” but in reality it’s an agreed-to arrangement between the bankers, who control the money supply, and the politicians, who control public opinion and war initiatives.
The bankers agree to inflate the money supply to buy as many bonds as the government needs to sell in order to cover all of its expenses; in return, the government allows the bankers to maintain their monopoly over the nation’s money supply.
The government spends a portion of the income taxes it collects on the war effort. It spends the money it raises through selling war bonds to the public on the war effort. Whatever bills are left over that aren’t covered by those two sources of funds are paid for with money raised by selling its bonds to the central bank.
Eventually, this inflation of the money supply by the central bank in order to buy government bonds leads to price inflation: cause leads to effect.
In a sense, the government (as long as the central bank is willing to cooperate) through the central bank has an unlimited bank account which it can use to fork over as much money as it needs to ensure that it can pay for the war.
Tapping this source of revenue (the central bank) is not without a true cost: it imposes the inflation tax upon the public. It’s an invisible tax. Whereas we can see the impact of the income tax detailed in our paychecks every month, the inflation tax is insidious because we aren’t so able to examine how much more we pay to the government because of it.
Pictures do help illustrate this principle, though:
NUMBER THREE: ABOLITION OF THE GOLD STANDARD
The final item that needs discussion is this: the abolition of the gold standard.
This item is closely-linked to the central bank. The idea at the heart of the matter is this: who should have control over money — the people or the bankers?
He who controls the money supply is sovereign over the economy. The invention of the central bank alone did not transfer economic sovereignty from the people to the bankers and politicians, however. It certainly made it easier for politicians to spend more and raise more money by allowing the central bank to inflate, but there were limits on just how much the central bank was allowed to inflate.
These limits were imposed by the gold coin standard. Before 1933 (in America), any citizen could exchange their green paper money for actual gold coins. This was called gold-coin redeemability.
The gold-coin standard controlled the limits of banking excess. If local citizens knew that their bank was making bad deals and was actually insolvent, they could go to that bank and withdraw their gold. The whole point was that the public didn’t suspect that the bank actually had enough gold to pay all of its depositors: it had become insolvent by taking too many risks and masking those risks through fraudulent behavior.
Fractional-reserve banking is fraudulent. It means that the bank guarantees that someone can withdraw all of their money at anytime they want, but then they also promise someone else to loan them your money. They just hope you don’t wise up and decide to make good on their agreement. Usually it works because people often don’t withdraw all their money at once.
It’s a confidence game: as long as the public is confident that their money is actually at the bank (it isn’t), then they won’t try to pull it all out at once.
When the con-game was up, this resulted in what was called a bank run. Modern public school textbooks and college textbooks say they were evil, but in reality it’s the opposite. God commanded us: “Thou shalt not steal.” [Ex. 20:15] Saying that bank runs are evil is saying that God is wrong because you are saying it’s okay for bankers to steal, and then it’s wrong for the people who have been stolen from to defend their property rights.
Bank runs would force competing banks to change their policies. If they knew that when the public got a whiff that they were sitting on a pile of bad loans they would make a run on the bank and force them out of business, then this would keep the banks in line. [The FDIC, coupled with unlimited central bank inflation, essentially ended bank runs…and not for the better.]
Not only did the gold coin standard restrain local bank excesses, but it also restrained the ability of the government to grow in size. When price inflation started rearing its head, people would start withdrawing their gold from the banks because they knew that though the value of the dollar would decline, the gold would maintain its purchasing power.
This meant that the central banks could only inflate the money supply so far before price inflation started forcing runs on the banks and outcries from the public. This would tend to reverse the policy of “loose credit.”
This meant that the public was able to control the politicians and the bankers. Therefore, two steps were taken to end this restraint on government expansion: the confiscation of the public’s gold in 1933 by Franklin D. Roosevelt and the imposition of national price and wage controls by the government during WW2.
The public didn’t necessarily witness price inflation during WW2, they simply became poorer: massive amounts of money were transferred to the government thanks to the Fed’s inflation, and they bought up all of the goods at (artificially) cheap prices. The public saw empty shelves, not stocked shelves and higher prices.
After WW2, then, the fix was in, as they say. The public could no longer pull their gold out of banks and force a reversal of inflation; what if the public wanted to go to war, but once they experienced the price inflation (the true cost) that went with it, they decided they didn’t want to support the war anymore? Where would that leave the politicians and bankers who benefit from war?
They couldn’t risk that.
After WW2, only the central banks of other countries could influence a government’s spending policy. The central banks still traded in gold; it was legal for central banks to swap their dollars for gold. But Nixon ended this by “closing the gold window” in 1971 when other nations, due to the US’s massive deficit spending funded by central bank inflation, started redeeming their dollars for physical gold from The Fed.
They forced an international run on the (central) bank, in other words. Nixon stiffed his creditors and ended the last vestiges of a gold standard (government-backed, as it was).
Now, there appear to be no limits on central bank inflation. All central banks inflate together. It’s a race to the bottom. Endless wars on scales never before imagined can be funded. The most massive welfare programs in the history of mankind can also be funded.
This massive spending cannot go on forever without consequence — even though it seems like it can. Wars will lose their primary sources of funding.
The income tax makes the sale of war bonds –and the massive amounts of money it raises for the war effort — possible because it bestows confidence on the borrowers that the government will be able to raise enough money after the war has ended to pay them back. This will be challenged when the public finally loses trust in the Federal Government’s ability to repay its debt.
Since 2008, the Fed has been inflating the money supply at a rate much higher than in the history of central banking. It has had to do this to maintain stability in the banking market. It is now also supporting the mortgage market. But this monetary inflation will come home to roost, and then there’ll be a day of reckoning.
What is coming is The Great Default. The government will be forced to renege on its promises (debt) when the monetary inflation finally turns into massive price inflation and forces interest rates through the roof.
The Fed will be faced with an option: continue inflating until hyperinflation takes over and destroys the dollar (and their retirement portfolios) or stop inflating to induce The Great Depression II.
I think it will stop inflating so that it retains control over the dollar and saves the pension funds of the central bankers who call the shots. As a result, the government will be forced to default because the Fed will no longer be there to buy its bonds. It will not be able to sell the bonds to the public, either. It will be selling bonds to fund the enormous interest payments that are coming. The public will be spending its money elsewhere.
The government’s infinite supply of money will finally dry up.
Then we’ll finally bring the troops and the warships home. We’ll finally do as presidents have been promising to do for years: pull out of the Middle East.
The era of the empire, of the nation state, is drawing to a close. It’ll be a great day for liberty. It’s another reason to vote to End the Fed.