Why Government Is The Problem


By: Thomas E. Brewton

As Friedrich Hayek noted (A Free-Market Monetary System), government monopoly of the right to issue currency is the ultimate source of our economic miseries.

President Reagan, in his first inaugural address, famously said:

In this present crisis, government is not the solution to our problem; government is the problem.

In 1981, when he said it, economic conditions were in many respects identical to those we face today. And for the same fundamental reason: governments almost always arrogate to themselves the exclusive right to issue and/or to regulate the issuance of currency. The Constitution, Article I, Section 8, states: The Congress shall have Power… To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures…

This power, for any government, creates a temptation to over-expand the money supply and debase the currency. Only the unwritten constitution of the nation can guard against it.

During the 20th century, our original ethos, our original unwritten constitution, was eroded by the growing influence of liberal-progressivism’s secular humanism, which reoriented the nation from God-centered personal responsibility to a political-state-centered society in which individuals abandoned personal responsibility and looked to the government to bail them out of every problem. That society, our present one, encourages government to follow the temptation to enlarge the welfare state and to finance it with inflationary expansion of the currency.

The Federal Reserve Board fecklessly swipes at maintaining economic stability while serving as Congress’s handmaiden to create ever more fiat money from thin air.

When President Reagan took office, the massive increase in Federal deficit spending set underway by President Johnson’s 1960s Great Society welfare entitlements had eventuated in the stagflation of the 1970s. President Nixon spent Federal money like a drunken sailor on shore leave, then sought to counter the effects with price-fixing and by taking the dollar completely off its vestigial gold standard. President Carter inherited the whirlwind.

The purchasing power of the dollar, and ipso facto the value of people’s savings, had, by 1981, dropped more than 50%. Interest rates and the increase in the Consumer Price Index had hit modern highs.

Manufacturing was falling into an abyss, as rapidly rising inflation pushed up producers’ costs, at the same time that high quality, less expensive imports began entering our market in large quantities. The Midwest, our industrial heartland, became known as the Rust Bowl because of its shut-down manufacturing plants.

In the financial markets, savings and loan associations and savings banks were being pushed toward bankruptcy, because depositors were withdrawing their funds from low-interest-paying deposit accounts. Thrift institutions, desperately seeking to raise cash to cover the torrent of withdrawals, could not liquidate their portfolios of loans at prices high enough to avoid wiping out their equity capital.

Money market funds came into existence, paying double-digit interest rates comparable to those in the short-term money markets, rates that savings institutions and commercial banks were not permitted to pay under existing bank regulations. Massive flows of funds from banks into money market funds became known as disintermediation.

A major difference between then and now was that the great bulk of thrift institution mortgage loans were sound, though the results were similar. The 1970s problem arose from the impact of interest rates: mortgage loans made at fixed interest rates of 5% could be sold only at huge discounts in an inflationary market featuring short-term interest rates in high double digits.

What brought the United States to its economic knees between 1965 and 1980 was the age-old clash between governments’ (all governments) desire to increase handouts to voters at a faster rate than the growth rate of tax revenues. Higher taxes temporarily alleviate the governments’ problems, but can’t eliminate them. Tax-driven higher production costs reduce the volume of business activity and, with it, the inflow of tax revenues.

Monetary history demonstrates that politicians always are inclined to buy voters’ support by enacting larger welfare benefits that cannot be funded from existing government revenues. At least as far back as the time of the Greek city states (ca. 500 BC), governments “solved” the shortfall by creating money to fill the gap. Then and now, the inevitable result is inflation, which robs citizens of the value of their savings and distorts investment away from productive uses and toward purely tax and inflation oriented ones.

Governments can get away with dereliction of their duty to protect citizens’ property, because they have a monopoly on issuing and regulating the currency.



Thomas E. Brewton is a staff writer for the New Media Alliance, Inc. The New Media Alliance is a non-profit (501c3) national coalition of writers, journalists and grass-roots media outlets.

His weblog is THE VIEW FROM 1776
http://www.thomasbrewton.com/

Email comments to viewfrom1776@thomasbrewton.com

About The Author Thomas E. Brewton:
Thomas E. Brewton is a staff writer for the New Media Alliance, Inc. The New Media Alliance is a non-profit (501c3) national coalition of writers, journalists and grass-roots media outlets.
Website:http://www.thomasbrewton.com/

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