Debt and Taxes

August 19, 1999

In a just world, it would be accepted as axiomatic that any movement toward tax relief amongst a people as heavily taxed as we are, would be greeted with cries of joy; and any politician who opposed it would forfeit any chance of election.

Proof that our world is turned upside-down is the fact that tax relief is vigorously resisted by the Democrats, who love to posture as the party of the beleaguered working man. Moreover, it does not even seem to have captured the imagination of the voters. How can this be? Would a drowning man spurn a life-preserver?

The apparent answer is that a substantial percentage of the American public believes that taxation, though oppressively high, must be continued, for at least two reasons: One, to pay down the national debt, and Two, to maintain government programs at their present level. Nonsense, on both counts!

Of course, my word for it counts little; I am nobody. But fifty-six years ago, the father of the withholding tax, Beardsley Ruml, gave a speech entitled Why Taxes for Revenue Are Obsolete. Ruml was chairman of the New York Federal Reserve Bank at the time, and he was speaking to the American Bar Association. The speech was printed in the January, 1946, issue of American Affairs. (It is widely available on the internet) It was ignored then, and remains ignored to this day, although its message is simple, undeniably true, and profoundly important.

Mr. Ruml stated that "the necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true of a national government. Two changes of the greatest consequence have occurred in the last twenty-five years which have substantially altered the position of the national state with respect to the financing of its current requirements. The first of these changes is the gaining of vast new experience in the management of central banks. The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold." Expanding on this theme, Ruml declared "The United States is a national state---whose currency, for domestic purposes, is not convertible into any commodity. It follows that our Federal Government has final freedom from the money market in meeting its financial requirements." Mr. Ruml did not explain why this applied only to the federal government, and not to state and local governments, but the answer is simple. The state and local governments are denied access to the printing press. In other words, gentle reader, the government prints what the citizens accept as money. So why does it need to tax?

Mr. Ruml gave four reasons. "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 estates 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."

Does taxation help reduce the national debt? How can it? Our "money" comes into existence when it is loaned, and principle is loaned, but principle plus interest (which was NOT created) must be repaid. That cannot be done without further lending. Debt payment, in other words, is impossible given our present federal monetary system, although individuals and firms may at least settle their own debts. For example, General Motors borrows to retool for the new models. It passes the cost of its borrowing along to the dealers, who borrow to purchase the cars. They, in turn, pass their borrowing costs along to the consumer, who borrows to pay the dealer. The individuals pass their borrowing costs along via demands for higher wages, or by charging higher fees. Or perhaps they simple settle for a reduced standard of living. A Federal Reserve Official told me twenty years ago that interest accounted for about twenty percent of the figure on the price tag. Presumably, it is greater today. The concern expressed about the national debt, therefore, is a psychological ploy; there is no way to repay debt with borrowed fiat money. Or, as the Federal Reserve System itself has pointed out, the debt IS our money; get rid of it and we'd have nothing to spend, not even fiat. Only by creating new debt can old debt be serviced; there is no way to get out of the debt-trap short of quitting the system.

Well, there is one way: simply order the Bureau of Printing and Engraving to print a 100 trillion dollar bill, or whatever, and be done with it. What would prevent the bankers, however, from simply spending it and driving prices through the ceiling? Even though the debt is as imaginary as the money, it is a dangerous weapon. Expose the invalidity of the debt, and destroy the economy. Of course, the economy will self-destruct eventually anyway, but nobody wants it to happen on his watch.

Obviously, given the insights of common sense, as well as Mr. Ruml's confirmation, taxation has nothing to do with government spending, and debt repayment is out of the question. The expressed concern of the politicians, that tax cuts may result in decreased government programs, is as bogus as the money itself. What we, sadly, accept as money can be created with the stroke of a pen; the nasty old Republicans can't shut off any government activities with their tax cuts as long as the government wants them to continue. But the taxes must be collected nonetheless, as Mr. Ruml remarked, to maintain the dollar's "value," and insure that the favored groups get their perks, in return for their support.

It's all a con game. Smoke and mirrors. There isn't any money; there can't be any genuine debt. No system of laws can possibly justify a private corporation, the Federal Reserve, having its "notes" designated an "obligation of the United States" and a legal tender, while those of other corporations are not. And it's about time--in fact, long past time--for the American people to wake up and realize that any government which can "monetize" its debt, can provide all the benefits the people want, without taxation.

If political candidates are going to give us straight talk about the economy and the national debt, they should begin by reading Mr. Ruml's half-century old speech. In 1946, foreigners could exchange their paper "money" for the real thing; today that is impossible, thus eliminating the last obstacle to full-bore inflation. It is truer today than it was in 1946: we are taxed to maintain the illusion of value to our scrip, to enable the government to favor one group over another, and to redistribute wealth according to the latest ideological conceits. That is the simple and obvious truth. If no candidate will tell us that, it means that he is either ignorant, or part of the system.

The great concern expressed about surpluses or losses, about the size of the national debt, about the maintenance of spending programs, is like the concern of the emperor about his new clothes, or the concern of an architect about the proper foundation for a castle built of dreams. First things first: a genuine, sound dollar. If that means the end of government as we have come to know it, and the return to Constitutional government, hooray!

In 1792 the U.S. Congress adopted a bimetallic standard (gold and silver) for the new nation's currency - with gold valued at $19.30 per troy ounce