Governments forbid counterfeiting, as they forbid force,
yet they practice both.
Legal counterfeit blends with the genuine money supply and is
indistinguishable from it. It is, therefore, more insidious and,
through sheer volume, vastly more destructive of the power of
the monetary unit than is illegal counterfeit. It inevitably manifests
itself in higher prices of goods and services. The public is bewildered
by the higher prices, and it requires but slight propaganda by
the author of the inflation, the Government, to deflect criticism
onto private business which, in the end, is always obliged to
bring the bad news of rising prices to the people. The public
does not realize that it is, in effect, indirectly paying taxes
over the merchant's counter instead of paying them directly to
the tax collector. The Government finds this a ready way to increase
taxation without being detected.
To collect sufficient taxes to balance an extravagant budget
brings citizen resistance if the tax collection is obvious. However,
inflation taxation is not only covert; it operates by seemingly
putting a dollar into the taxpayer's pocket instead of taking
one out. By lavish counterfeiting and spending, the Government
increases the number of dollars in circulation and thereby creates
an appearance of prosperity.
We delude ourselves, moreover, if we think that deficits, or
government "debts," are deferred taxes to be paid by
future generations. They are current taxes, paid not only by the
non-bondholders to the bondholders as interest, but by the bondholders
themselves through the depreciation of the purchasing power of
the dollars represented by the very securities that they hold.
Strictly speaking, there is never and there cannot be a government
deficit. All government expenses are and must be paid by taxes.
What is commonly called taxes is merely that shown in
formal tax revenues, whereas the amount which is called deficit
is in reality another bracket of taxes—inflation taxes—and
this the most vicious form, since it disturbs and ultimately destroys
the monetary system upon which the entire economy depends.
Even tax-conscious persons think only of the taxes shown by government
revenue receipts. They tell us that the United States is approaching
the danger point of a tax collection rate that is thirty per cent
of the national income. They do not realize that it has already
passed beyond this point, because they do not reckon the unaccounted
taxation, actual and potential, through the depreciation of the
dollar-inflation taxation. As inflation accelerates, the rate
at which conventional taxes are levied will not be able to keep
up with the national income—this despite the false dollar prosperity
floating the citizenry into progressively higher income tax brackets.
The relative percentage will decline, giving to those who take
this narrow view the impression of a decline in taxation. It is
but a fool's paradise. Can anyone blame the politician for employing
this painless way of plucking the goose?
Under the deficit financing policy of the United States Government
for the years 1941 to 1950, inclusive, the figures show:
Expenditures |
$540 billions |
Collected by Levied Taxation |
334 billions |
Total Deficit |
206 billions |
Only sixty-one per cent of the cost of government has been presented
in revealed tax levies, leaving unaccounted thirty-nine per cent.
It is unlikely that the unaccounted portion will ever be presented
in any future above-board tax levies. That would require a surplus
budget. Therefore, it will have to be paid through inflation taxation
in the form of higher prices over the retailer's counter.
Although we cannot isolate and identify a legally counterfeited
dollar from one that is genuine, we can determine the volume of
legal counterfeit in our total dollar supply by deducting from
the total that part which was created by all governments, i.e.
national, state and city, through bank "borrowing."
The forty-eight state governments have the power to deficit
finance only to a limited extent, because when they borrow,
they can pledge only to pay out of tax income and, therefore,
soon reach their borrowing limit. The federal Government, on
the other hand, can create an unlimited amount of debt because
it does not have to pay out of income; it can pay by its power
to issue "money." Hence the federal "debt"
is not a debt in the true sense of the word. It is a promise
to pay in terms of its own promise. The obligations of other
political divisions are promises to pay in terms of the federal
government's paper, which is not in their control, and therefore
these are real debts.
Table 3
DOLLARS AND DEBTS - JUNE 30, 1950 (All figures in $ Billions)
Thus it may be seen in Table
3 that more than fifty per cent of today's dollar is "water"
injected by government-created "dollars." But this is
not to say that the total supply of counterfeit has yet manifested
itself. Actual inflation and potential inflation are two different
things. Prices are determined not by the total monetary unit supply
relative to the total goods supply, but rather by the amount of
each that actually meet in the market. $175 billion of federal
securities are held other than by banks. All of these dollars
are being held out of the market, hoarded under the illusion that
they will grow through savings. But even with a moderate rise
in prices, more is lost from the principal than accrues from interest
or dividends. Gradually, this will become more and more evident
to more and more people, thus causing holders of government securities
and savings deposits to convert into goods and property. This
will bring into the market a flood of dollars that are now inactive.
The resulting price rise will pinch the population of low and
fixed incomes and thus throw upon the government the obligation
(under the now prevalent idea that the government owes every man
a living) to issue additional counterfeit dollars. This in turn
will cause further price rises, calling for further counterfeit
and so forth until the dollar is completely extinguished.
Unfortunately, it is no longer within the government's power
to avert the threatening disaster merely by balancing the budget
on the premise that inflation thereby "will be arrested and
prices will stabilize themselves on a new plateau." For,
sooner or later, the trend toward cashing government bonds by
individuals, trusts, insurance companies, savings institutions,
etc. will set in and mount until there exists a veritable buyers'
panic, with prices rising in a runaway inflation. Let us examine
what dry wood there is lying around to feed the fire.
Each year, approximately $50 billions of government bonds mature
and are refunded by new issues. This will continue as long as
the holders are willing to renew. A part of this sum is held by
banks, which can always be counted on to renew. Banks cannot lose
by inflation, since both sides of their ledgers are in terms of
money and both are current. Their assets and liabilities are both
expressed in current dollars, no matter what their power. But
businessmen and consumers, who trade in and out of dollars, suffer
the attrition that the monetary unit undergoes in the interim
of the turnover. They find it to their interest, during an inflationary
rise, to keep their cash, or paper promising cash, at as low a
level as possible, and the level of their goods holding as high
as possible.
Assume, now, that of the holders of yearly maturing government
securities, one half, or the holders of $25 billions, should prefer
cash for investment in property or goods as a hedge against inflation.
Add to this the $55 billions of savings bonds which are payable
any day that the holder sees fit to present them, and we see that
there is a total of $80 billions that is a definite fire hazard.
Every such dollar demanded of the government that is not covered
by either surplus tax revenues or the purchase of bonds by another
private subscriber, must cause one more counterfeit dollar to
be injected into the circulation.
We are thus confronted with an inflationary movement, the first
in peacetime in the history of the United States. Nothing can
stop such a movement but deflation, and deflation can only be
brought about by the government. To bring about deflation, the
government must run a surplus in its budget and apply the surplus
to the reduction of its debt. Political expedience bars such a
possibility. A government that has not been able to face realities
over the last two decades surely cannot now muster the courage
to run the surplus budgets needed to reduce the enormous deficit
that it has incurred.
Realism therefore compels us to recognize that inflation will
continue until the point is reached at which the dollar will be
worthless. The Government will find it much easier to let taxation
by inflation wipe out its debt than to liquidate its debt through
direct taxes by running a surplus budget. The nation born under
the slogan, "No taxation without representation," is
now practicing taxation by misrepresentation.
Fidelity of Contract
The destructive effect of inflation is not confined to its covert
taxing power. That is only its early manifestation. Its later
destructiveness lies in its power to amend and finally to nullify
the contractual relationships upon which the social order depends.
The whole philosophy of freedom is written in the single phrase,
Power to Contract. This phrase betokens voluntary action for mutual
benefit in the pursuit of self advancement. Such cherished freedoms
as freedom of press, speech and assembly and all others are collateral
to the master freedom, freedom and power to contract.
In a money economy, contracts are spoken and written in terms
of the monetary unit, which in turn is based on the compact of
fidelity implicit in its issue. By violating this fundamental
compact through the issuance of counterfeit, all contracts existing
in society are altered by reason of the changed meaning of the
word that expresses the monetary unit, as, for example, the word
"dollar." While a small deterioration of the unit of
account impairs contracts previously written, a runaway or total
inflation actually destroys all existing contracts and prevents
the making of new ones. This is because the rate of deterioration
makes it impossible to faithfully fulfill even short-term contracts.
This means the complete destruction of commercial credit, resort
to cash transactions, and, finally, abandonment even of cash transactions
in favor of simple barter.
Thus it is that under a political monetary system that permits
legal counterfeiting, there can be no such thing as fidelity of
contract. Neither contracting party can guarantee that the government
will not exercise its counterfeiting power, let alone estimate
the extent of the abuse. A government may pay lip service to personal
enterprise and denounce socialism and the police state; yet, by
counterfeiting money, it robs enterprise of its indispensable
tool, fidelity of contract.
Weathering the Storm
We have seen that inflation is epidemic and worldwide, attacking
the stronger as well as the weaker units. We have seen how far
monetary deterioration has gone and how the decline of the dollar
obscures the real decline of all foreign exchange units, inasmuch
as they are all rated in terms of current dollars. We observed,
too, that the United States Government has been following the
policy of transfusing blood from the strongest unit, the dollar,
to the weaker units, thereby deferring the collapse of those units
but threatening the ultimate collapse of the entire structure.
To these considerations should be added still another which, though
little observed, will contribute its part to the collapse of the
international political monetary system. This is the reserve of
gold and dollars held by foreign governments and central banks.
The Federal Reserve Bank of New York reported these reserves of
gold and dollar balances, as of March 31, 1950, to be $15,690,000,000.
Russia's secret gold hoard is not included. The sole support of
these reserves, including Russia's, is the United States dollar.
As the dollar declines, the value of these reserves declines,
although this is not realized because the weight of the metal
and the dollar valuation ($35 per ounce) remain unchanged. Thus
by weakening the dollar through inflation, the United States has
been steadily diminishing the reserves of foreign nations and
promoting their ultimate bankruptcy.
This is a cold, mathematical picture of a coming collapse. It
lacks all the colorings of human reactions of reason and emotion.
But in reality the experience will be anything but cold; it will
be wrought and fraught with passions. Men cannot calmly watch
their fortunes fade, least of all when others are profiting by
the fade-out. Broadly speaking, the entire debtor class will benefit
by the depreciation of their debts, and many men, foreseeing this,
will pile up debts as a means of thus acquiring property cheaply.
Trust funds, visualized by their testators as permanent, will
be wiped out, and not only private individuals dependent thereon,
but educational institutions, hospitals and charity institutions
will find themselves bankrupted. Insurance companies may weather
the storm, but their benefit payments will decline to a small
fraction of what the insured paid in, and the companies will emerge
emaciated and shrunken if, indeed, they survive at all. The Government's
entire Social Security program and veterans' benefits will be
reduced to the vanishing point, unless the Government sees fit
to increase payments as the dollar declines. But this will, of
course, only further feed the raging flames of inflation.
Many businesses, following the normal markup on costs without
anticipating replacement costs, will be wiped out, and their owners
will be added to the unemployed. Social unrest will intensify
racial problems. Morality will loosen. The climate will be riotous,
rebellious, and dissolute. America will be tried as she never
has been tried before.
But the whole experience will be bearable, provided that we can
prevent exchange from breaking down. There is a way that this
can be done. A new monetary unit, one that would be immune to
legal counterfeit and, hence, not subject to inflation, would
permit a complete separation between old dollar contracts and
new contracts, thus permitting the old ones to wash up in the
course of inflation without disrupting current business. This
is a new inflation strategy never before tried. It would make
it possible for the nation to go through total inflation without
chaos and all the while maintaining an orderly domestic and foreign
policy. Inflation does not destroy wealth; it merely shifts it.
There are of course many painful adjustments, but the wiping out
of a nation's monetary unit through inflation is in itself not
calamitous, and for many it is a positive gain. Society can tolerate
the neutralization of past commitments, but the social order breaks
down if there is no common language in which new ones may be entered.
A new and stable monetary unit must be provided to serve the current
business of living.
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