Liberty With Three Short Laws
by Gary North: How
Pat Robertson Ignored My Advice, Jerry Falwell Took It and Pulled
in Billions, and I Made Zilch
Let us assume
that at some point in the future, Congress will pass and the President
will sign three bills. These three laws would strip power from the
United States government on a scale inconceivable even to the Tea
Party's hard core members. They would be very short laws.
States Government hereby abolishes the Federal Reserve Act of
1913 and all subsequent laws relating to that Act.
for filing all Federal income taxes will shift in the next fiscal
year from April 15 to the first Monday of November.
for all Federal taxes is hereby abolished.
Think of what
this would mean. First, the central bank of the United States would
become just one more over-leveraged bank the most over-leveraged
bank in the country. It would no longer possess a grant of privilege
from the United States government. Members of the Board of Governors
would no longer be paid by the U.S. government, nor would any other
employees of the Board. The Board would have to abandon its Web
address: www.federalreserve.gov. No more ".gov."
voters would be reminded in every Congressional election year just
how much money the government is costing them. They would no longer
have from mid-April to early November to forget.
If all Federal
income taxes were due on the same day, this day would become the
most feared and hated day of the year, assuming that it isn't already.
I ask: Why not have this day fall on the day before Federal elections?
tax forms must be mailed by April 15. Think about this date. Before
they vote in November, taxpayers have almost seven months to forget
about tax misery day the previous April, and their next form-filing
day will not come for almost six months. Out of sight, out of mind.
I say, let
every citizen recall his previous day's tax filing and check-writing
experience when he steps into the polling booth to cast his vote.
Let democracy speak!
would have to adopt a program of personal voluntary thrift in order
to set aside the money they owe to the government. Every payday,
they would have to take steps to prepare for the Day of Reckoning.
No longer would the government get the use of the public's money
interest-free for a year. No longer would the government be able
to position itself as a provider of nice refunds: "free money!"
No longer would the government force people to reveal their whereabouts
in order to get their refunds.
tax program makes it easier for governments to collect taxes. The
system was invented by Rockefeller agent Beardsley Ruml. When, in
1942, he came up with a plan to sell Congress on the idea of income
tax withholding, he understood exactly what this would do for revenues
actually collected: multiply them.
Here was the
government's problem in 1942: only about five million out of the
34 million Americans subject to the income tax were saving to pay
it on March 15, 1943. This presented a big problem for tax collectors,
now that wartime taxes had been hiked dramatically. Ruml, formerly
the director of the Laura Spelman Rockefeller Foundation, in 1942
was chairman of the New York Federal Reserve Bank. He was also the
treasurer of R. H. Macy & Co., the department store. As Macy's treasurer,
he well understood that most people resist saving for known expenditures.
He asked: Why not get employers to deduct their employees' income
tax liabilities? He recommended this to Congress in 1942, and Congress
in 1943 passed a tax collection bill that included Ruml's withholding
provision: the Current Tax Payment Act.
Department went to work defending this program. It used staff economist
Milton Friedman to do much of the research.
Did the scheme
work? Beyond the politicians' wildest expectations. In 1942, the
U.S. government collected $3.2 billion from income taxes. It 1943,
before the law was fully operational, it collected $6.5 billion
from income taxes. In 1944, it collected $20 billion. ("Historical
Statistics of the United States," Pt. 2 , p. 1105.)
tax was passed as a wartime measure. Naturally, it was not repealed
tax system is popular with the Federal government for four reasons.
First, the government deliberately over-withholds. This forces taxpayers
to file their forms to get their refunds. They must identify where
they live. Second, it creates a "free money from the government"
emotional response when the refund check arrives. Third, the government
gets to use this money, interest-free, during the taxable year.
Fourth, it makes income taxes and Social Security taxes less painful
and therefore more acceptable.
were abolished, the decline in revenues would be both immediate,
permanent, and spectacular. Then, on the second Monday of November,
there would be desperation across the land. Hardly anyone would
have saved all of the money owed during the year. Where would they
get the money to pay? They wouldn't. So, many would not file. There
would be no way that the Internal Revenue Service could follow up
on all the non-filing residents.
As soon as
the taxpayers realized that there are too many people to convict,
they would understand the enormous power they possess. Congress
could do nothing. It would have to cut taxes to such a degree that
people will set aside money to pay. It would have to issue high-interest
tax prepayment bonds.
would have to default on its other debts.
I mention this
just as a reminder: the entire system of Federal power rests on
three laws, two of which are essentially technical, namely, the
date for tax filing and tax withholding. These two technical laws
are the foundation of the modern welfare-warfare-nanny state. Remove
these two pillars, and the whole Federal system will come down.
DEFAULT IS INEVITABLE
There is no
school of academic opinion except for Austrian School economics
that seriously suggests that the Federal debt should ever return
to zero, as it was for just one year: 1836. The idea of debt-free
civil government is universally regarded as utopian.
of the Tea Party say that the government's debt is too large, but
no one will gather Tea Party votes by calling for permanent budget
surpluses sufficient to reduce the debt to zero over the next 20
or 30 years. That would require spending cuts that voters today
will not tolerate: Social Security, Medicare, and Medicaid.
All three of
these programs will eventually be cut, either by piecemeal cuts,
or by hyperinflation, or by an outright default by the government.
But today's politicians deny this, so most voters imagine that,
somehow, these promises will not be broken by long-term fiscal crises
in the future. It is not that a sucker is born every minute. On
the contrary, voters who will someday demand that Congress default
are born every minute. In contrast, suckers retire every minute.
They are the sure losers.
"We owe it
to ourselves" is a popular slogan of the defenders of the Federal
debt. It has been ever since the New Deal of the 1930s. It is a
nutty idea. Specific borrowers owe specific amounts to specific
creditors for a specific time period. Nobody assumes that, under
private debt, we owe it to ourselves, yet the idea is taken seriously
by a large percentage of the voting the public when they think of
As the debt
builds up relentlessly, and because nothing is done to stop this,
the statistical probability of default increases. A statistician
can see what is coming. A politician can too, but he is not going
to admit this in public. An older voter should see it, but he has
a built-in preference for not seeing it. He thinks, "I have paid
so much money into the system. I deserve to be repaid." This is
the "just deserts" theory of politics. It leads to ever-greater
Federal debt based on ever-more preposterous denials.
It is not a
question of default vs. no default. It is a question of which kind
of default and when. It is a question of whose ox will get gored.
DEBT, INFLATION, AND DEFLATION
of the Federal Reserve's debt holdings is Federal debt, either Treasury
bonds or IOU's from Fannie Mae and Freddy Mac. Because of the
way that the Federal Reserve operates, this on the surface seems
to create a theoretical problem for those few economists who favor
budget surpluses to reduce the Federal debt to zero. Here's why.
If Federal debt is the legal foundation of the monetary base, and
if the FED's monetary base is the legal basis of the commercial
banking system's issue of loans and therefore its creation of money
(M1), then any attempt to pay off the debt to zero seems to require
one of two things: (1) force the Federal Reserve to deflate, or
(2) force the Federal Reserve to substitute other debt for the repaid
As I will show,
this dilemma need not exist, but it has been raised in the financial
media. Here is the argument. "If the FED is ever forced to deflate
by selling its IOUs from the government back to the government,
there would be price deflation on a scale undreamed of. Prices would
fall by 50% or more probably more like 90%."
Is this true?
Prices have not risen to match the increase in the FED's monetary
base since 2008. This is because commercial banks have increased
their holdings of excess reserves at the FED.
Let us consider
scenario #1: the FED loses its status as a government-connected
agency. Its excess reserves would be withdrawn. The FED would then
go bankrupt, thereby wiping out commercial banks' holdings of excess
If the independent
FED somehow could meet these obligations, commercial banks would
buy Treasury debt or other forms of debt. There would be mass inflation,
then hyperinflation: way over 20% per annum. Commercial banks would
put to use its legal reserves created by the FED in 2008 and 2010.
The FED could
buy Treasury debt only if other holders of Treasury debt would accept
its newly created money. But why would anyone accept payment from
an over-leveraged private bank that no longer has any connection
with the U.S. government?
Let us consider
scenario #2: the government lets the FED remain as the central bank.
The government then starts to pay off its debt. The ultimate result
would be for the central bank and the commercial banks to hold no
Federal debt. That would mean a shift of the asset base from IOU's
issued by the government to IOU's issued by others: maybe foreign
governments or maybe corporations.
There is a
myth that the U.S. government would create mass deflation if it
ever began to pay off its debt. This is because the FED holds Treasury
debt. But for every bond purchased by the government and retired,
there need be no deflation. It depends on the reaction by the public.
If depositors think the banks' assets are liquid and safe, they
will not make a run on the banks. Neither will other agents who
extend credit to banks. The bank can buy other IOU's to replace
The FED can
buy U.S. bonds from any holder. It would take decades for the Federal
government to buy back all of its on-budget bonds that are held
by the public. There would be time for all banks to replace Treasury
bonds with IOU's issued by other agencies.
In a fractional
reserve banking system, debt undergirds the issuing of money. But
it is a matter of historical precedent that government debt has
be used by the central bank as its asset base. There is nothing
in theory that requires this.
economic textbook accounts of central banking indicate that central
banks buy government IOU's with newly created money. The question
is never raised in the textbooks about how the government could
ever reduce its debt to zero without creating mass deflation. This
is because textbooks rarely discuss the feasibility of debt-free
government. Such a vision is presented as utopian if it is even
So, the argument
that debt-free government would produce mass deflation is limited
to non-economists, most likely Greenbackers who call for the issuing
of fiat money by Congress. They are opposed to government debt and
fractional reserve banking, but they favor fiat money issued by
Congress. They used to be associated with the far Left, but these
days, they are associated with the far Right. They are inflationists
and defenders of the welfare State. I have been writing against
them for 45 years.
There is no
theoretical reason for the reduction of Federal debt to zero to
mandate monetary deflation or price deflation. Fractional reserve
banking will at some point deflate, but only because governments
can no longer raise enough money to bail out the banking system.
bank can cease buying Treasury debt for this reason: to keep buying
it means hyperinflation. That would end the automatic purchase of
Federal debt. That would in turn raise interest rates and produce
Great Depression II.
the central bank can keep buying Federal debt and produce hyperinflation,
which will lead to a post-inflation deflation, when zeroes are knocked
off the currency.
In either case,
the cause of the deflation is not the paying off of the Federal
debt. On the contrary, the cause is the ever-greater increase in
possible. I do not think it is likely in the near future. It will
take three laws: (1) the abolition of central banking; (2) the temporal
connection between tax day and voting day; (3) the abolition of
withholding taxes. If and when we get all three, the government
will shrink back below the definition of tyranny provided in the
Bible governments that tax at 10% or higher (I Samuel 8:14, 17)
Rabushka, the pre-eminent student of taxation in colonial America,
has pointed to the history of American taxation after the Federal
Reserve but before the New Deal and withholding taxes. Most people
are unaware of this.
reflecting its colonial antecedents, the scope of the federal government
remained small, consuming only 3 percent of the national income
as recently as 1929. The states remained the principal source of
taxing and spending, consuming 7 percent of national income in 1929.
It took the legislative measures enacted during the Great Depression
to change the compact between the American people and their government,
raising the share of taxes levied at all levels of government from
a tenth to a third of the national income in peacetime, higher during
wartime. The colonial roots of American taxation were lost in the
transformation that took place in the twentieth century.
I would settle
for going back to 1912. Wouldn't you?
1775 would be much better: closer to 1% of national income going
to Great Britain in taxes.
Maybe we can
get a new Declaration of Independence to return us to the "tyranny"
of 1775. "When in the course of human events, it becomes necessary,"
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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