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One of the key characteristics of a viable money is scarcity, and when it comes to their ability to acquire money, governments are universal in their opposition to scarcity. More money for government equals more growth in the size and scope of government. It allows government to pacify the masses with handouts in an effort to purchase loyalty to, and legitimacy for, government.
For the purposes of our example, let’s go back in time to an economy in which gold was the standard for money. Gold emerged as the medium of exchange, as a result of activities in the free market. It may have been exchanged in the form of nuggets, dust, bars, coins, or even warehouse certificates representing a claim on gold. Gold, as a medium of exchange on the free market, preceded government control over money.
Enter government, and its ongoing desire to increase revenues. The first thing to remember is that government produces nothing – all of its revenues must be acquired from the productive activity of its subjects via taxation. A dollar extracted from the taxpayer is a dollar the taxpayer is deprived of using for his own ends. There is a limit then, to the amount a government can tax – at some point, the people will revolt if taxation becomes excessive. Government will have lost its legitimacy in the eyes of the people.
Constrained by the limitations on its power to tax, governments then launched wars, acquiring money by sacking the wealth of the conquered. The people, receiving more government handouts from the spoils, were pacified. Again, though, there is a limitation to the amount of money that can be acquired by conquest. War is expensive, and the further the distance, the more difficult it is to wage and win wars.
Governments employed alchemists to create gold from lead, but were never successful in their scheme. Instead, they sought to seize control of the gold in the marketplace, monopolizing the coining process by minting gold into official coins issued with the kings portrait. These coins were declared “legal tender” and were the only form of money allowed for commerce. Trading in gold dust or nuggets, then, became illegal. Only the government’s officially certified gold coins were legal for trade.
You may wonder, how does government’s seizing of coinage and legal tender laws allow it to increase its revenues? First, by coin clipping. What was a one ounce coin can now be clipped, or reduced in weight. The government can then skim the value off the money by using the clippings, or the weight of gold saved in production of the coin, to finance its growth. The subjects, forced to obey legal tender laws, must trade with this coin that has had some of its value stolen. Here again, though, we find a limitation to the government’s ability to clip coins – at some point, the value will be so reduced that people will refuse to trade with the money and another form of money will emerge in the black market. Next idea? Debase the coin with other metals – mix lead or zinc in with the gold in the coining process. Now, you still have a full-size and weight coin, and you may fool the people – if not, you still have the legal tender law forcing them to recognize its value. Again we find that, at some point the gold content of the coin drops to the point that people will find it worthless and refuse to trade with it.
It is a good time to pause and think about the effects of these government actions on the marketplace. Each attempt by government to enhance its revenues via the manipulation of the money itself increases the supply of money in the marketplace because what government skims, it spends. Since money is simply a good exchanged for other goods, its increasing supply will lower its purchasing power. This is known as inflation. Socialist economics, as represented in the US media, likes to portray inflation as a rise in prices. It is not. In fact, the rise in prices is a result of inflation. This is an important distinction.
We have explored a number of ways in which governments can increase their revenues without increasing direct taxation, but each time we have found limits. And of course governments did, in practice, push these limits throughout history.
Enter the printing press.
When the printing press was invented, governments seized the opportunity to print paper and call it money, and through legal tender laws, force the people to accept the paper as a medium of exchange. It would not be an easy sell, however, so they “backed” their currency with gold. That is to say, a paper dollar could be exchanged, on demand, for a dollars worth of gold. Over time, the people accepted the paper dollars as legitimate, with the full backing of gold promised by government. This was the first and most important step in the evolution of a true fiat currency – a currency with no value outside of government decree.
Over time, governments continually printed more money than they had in gold reserves. But the people were gradually accustomed to accepting the money at face value and became lulled into complacency. A number of steps later, with the connection to gold continually redefined, manipulated, and eventually severed completely, government had found its alchemy.
Now, money is simply what government says it is. It can print it at will, producing a seemingly unending supply for its own consumption, financing its growth without inciting rebellion from the masses who escape direct taxation. Better yet, the theory of money has become increasingly complex, beyond the understanding of the average Joe – to the benefit of government.
The US government, through inflation, has destroyed the value of the dollar – one dollar in 2008 is equivalent to four cents in 1913, the year the Federal Reserve System was unconstitutionally formed. If you had decided to save $1,000 in the 1980s by setting it aside in a drawer, or stuffing it under your mattress, it would have lost 20% of its value today. This value is being stolen from you by government. It is a hidden tax.
With the power to inflate at will, government can pursue its interest in empire and warfare. Politically connected bankers and the Military Industrial Complex benefit from the inflation in the short term – they receive the money at present value, and are able to spend it before its value is watered down in the marketplace. Those in the middle class, on fixed incomes, and the poor pay for the loss in value when the value of money is decreased.
A zero sum game if ever there was one.