Tuesday, March 15, 2011

How Uncle Sam Gets Your Money


In an article I wrote in October 2009, titled, "What the Treasury Department is not telling Americans about the National Debt" I explained how the government actually gets money. I pointed out that there are only three ways that a government can get funds to inject into the economy: tax, print or borrow.

Suppose government does the first: raises funds through taxation. In such a case, government can then only inject into the economy what it has first suctioned out, a point that was made with characteristic lucidity by Daniel Hannan in THIS short video clip.
  
Now although Western governments make liberal use of this option, the amount of revenue that is available through taxation is necessarily limited. For example, in order for America to meet its present commitments through taxes alone, the federal tax rate for each American household would have to increase by 42% by 2040 (a figure does not take into account the liabilities to business, and therefore to tax revenue, that always come as the corollary of burdensome taxation).
 
The other option is that government can print money ex nihilo. The problem is that governments which do that have never been able to resist the temptation to completely debase their currency, resulting in hyperinflation. All Western governments have handed over the authority to create money to private central banks (America’s version of this is called the Federal Reserve). But the banks do not create money through printing presses. Instead, they create new money electronically every time they issue a loan for more money than they actually have on deposit. The reason they can get away with this is because only a small percentage of commerce takes place with actual physical money. The commercial banks in America end up creating $98 for every $1 held on deposit, which means that most of the money in circulation is actually debt money. Since every loan increases the money supply (a supply that is represented in bank ledgers rather than hard cash), it also depreciates the relative value of the money held by everyone else. Thus, central banking is also inflationary. However, the requirement to pay interest curtails the borrowing to a certain degree. On the other hand, when governments print money or mint debased coinage, as in Weimar Germany and the last three centuries of the Roman Empire, they tend to completely debase the currency in a shorter period of time than happens under a central banking system.
 
What this means is that if the American government wants more money to spend then it can raise through taxation, the only option is to go to the banks and ask for a loan.

  


Further Reading

"What the Treasury Department is not telling Americans about the National Debt"


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