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According to the Federation of
American Scientists, nine countries account for the approximately
20,500 nuclear weapons known to exist, with the United States having 8,500 of
these. Iran has none. Between 150–200 B61 nuclear bombs, the
primary thermonuclear weapon in the United States, are deployed in Europe at
six bases in five countries, one of which is Turkey, a border state of Iran.
By contrast, Iran has no known
military bases in Canada or Mexico, nor has it imposed sanctions against the
United States, as the United States
and other countries have done to Iran. Yet, Iran is considered a
threat to peace and stability because the International Atomic Energy Agency issued a
report last November saying it very definitely might or might not
be building a nuclear device.
If the United States ends up at war
with Iran, there arises the question of what it will cost and how to pay for
it. Using recent history as a guide, the total financial cost of the Iraq
invasion, including veterans' support, is expected to reach $4 trillion.
Yet in 2002, Bush economic advisor Lawrence Lindsey was fired for saying the
Iraq war could cost as much as $200 billion, which was 3–4 times the
Department of Defense estimate. Even if someone knew how much an Iran war
would cost, no one would believe him. But it's clear we do have an idea of
how we would pay for it: more debt.
On Friday, August 5, 2011, S&P
downgraded US debt from AAA to AA+, citing a failure of government
to stabilize its "medium-term debt dynamics." The previous Tuesday,
Congress had voted to raise the debt ceiling by $2 trillion. S&P's
downgrade, as Gary North viewed
it, was their way of saying, "Yes, the loud noise you heard on Tuesday
really was what it sounded like." It was a crack in the ice, a signal
for smart skaters to head for shore.
Those pushing for more war and more
debt are not smart skaters. How did we go from our core political principle
of "live and let live" to the hegemonic "live the way we say,
or we'll bomb you back to the stone age!"? How did we reach the point
where smart
economists tell us the size of the government debt is irrelevant
as long as we keep the tax slaves rowing faster and faster? Actually, it
began right from the start.
Funding a
"Just War" Unjustly
Unlike the various US invasions in
the Middle East and Asia of the past several decades, there is strong
conviction among many Americans about the legitimacy of the country's
founding war. A legitimate war, or what Murray Rothbard
called a just war,
"exists when a people tries to ward off the threat of coercive
domination by another people, or to overthrow an already-existing
domination." Like all wars, a just war is laced with dangers beyond the
inferno of the battles, especially if war funding relies to a significant
degree on the printing press. The American Revolution is a case in point.
On June 22, 1775, the colonial
delegates who were assembled in Philadelphia, under the inspiration of Gouverneur Morris,[1]
decided to print $2 million in "bills of credit" called
Continentals. The plan was to begin redeeming them in 1779, not with hard
coin, but by levying taxes in the Continentals themselves, which would then
be retired. So appealing was the idea of printing money that by 1779 a total
of $227 million had been issued. The bills were everywhere,
and everywhere despised. In a letter to John Jay, president of the
Continental Congress, George Washington complained
that "a wagon load of money will scarcely purchase a wagon load of
provisions." By December 1779 the Continental had fallen to 42:1 against
specie, and by spring of 1781 the currency was virtually worthless.
Individual states were also
printing money to finance the war, and the British too adopted the printing
press as a war strategy, printing Continentals and using Tories known as "shovers"
to shove the imitations into circulation and thus accelerate the currency's
depreciation.
Inflationists in Congress
viewed depreciation as a clever way to impose the necessary taxes to pay for
the war, though Gouverneur Morris thought it was
too bad Washington's soldiers would suffer the most from this tactic. As the
value of the currency rapidly approached zero, the Continental army turned to
direct theft ("impressment") to acquire their provisions when merchants
balked at trading goods for something worthless.
The Continental was allowed to die
without redeeming it, but in 1779 Congress began emitting "loan
certificates" that were also used as money. A big chunk of this money
hung around after the war as a peacetime public debt. Robert Morris, the
leader of the nationalist faction, pushed for its redemption at par in specie
as a means of stuffing the pockets of associates who had purchased the
certificates at highly depreciated prices.
Redemption was also a way of
rallying support for taxing power in Congress. Under the Articles of Confederation and
perpetual Union, which was ratified on March 1, 1781, the United
States of America was considered a "league of friendship" rather
than a central government, with each state retaining "its sovereignty,
freedom, and independence." Although the articles recognized the
obligation of Congress to pay all debts incurred before ratification, they
did not give Congress authority to coerce such payments from the states.
To the nationalists, the lack of
taxing power and other alleged deficiencies made the Confederation government
"the laughing stock of the Atlantic world," as historian Leonard L.
Richards notes in his masterpiece, Shays's Rebellion: The American Revolution's Final Battle.[2]
Throughout the 1780s, they tried fruitlessly to get enough of them together
to replace the Articles of Confederation. In modern parlance, what they
needed was a "new
Pearl Harbor," a major crisis that could be propagandized for
political ends. In 1786, Shays's Rebellion provided
the break they needed.
Shays's Regulators
As the official story is told,
indigent farmers in western Massachusetts were unable to pay their taxes, so
the courts were sending them to jail and seizing their farms. To avoid the
penalties for defaulting on their debts, the story continues, Daniel Shays
and a few other "wretched officers" from the Revolution led backcountry
rabble to shut down the courts.
Massachusetts Governor James
Bowdoin called out the militia to put a stop to the uprising. When most of
the militiamen sided with the rebels, he turned to wealthy Bostonians to fund
a temporary army. Led by General Benjamin Lincoln, the army prevented the
insurgents from seizing the federal arsenal at Springfield in late January
1787, then crushed the rebellion permanently a week later in a surprise
attack at Petersham. Although the top rebel leaders
fled to other states, most of the others eventually returned to their farms.
Bowdoin agreed to pardon the rebels if they signed an oath of allegiance to
the state, which the vast majority did.
As Richards argues compellingly,
the standard story of Shays's Rebellion as an
uprising of debtor farmers doesn't wash. Richards had discovered by accident
that the Massachusetts archives had microfilmed the signatures of the 4,000
men who signed the state's oath of allegiance. Since many of the insurgents
also included their occupations and hometowns, he was able to gather more
information about them with the help of town archivists and historians. For
example,
·
At the time of the rebellion Daniel Shays
owed money to at least ten men. Of those ten, three were rebel leaders. For
every rebel who went to court as a debtor, another went as a creditor.
·
Colrain, the most
rebellious town, had 12 families involved in debt suits during 1785 and 1786.
Yet only four of these families provided men to the town's total of 156
rebels. Their leader, James White, who led the assault against the
Springfield arsenal, was convicted of high treason. He was also one of Colrain's creditors.
·
In 1786 creditors in Connecticut took
over 20 percent of the state's taxpayers to court. Yet there was no
comparable revolt in Connecticut.
It wasn't debt that triggered the
rebellion, Richards concludes; it was the new state government and its
attempt to enrich the few at the expense of the backcountry.
Like other states, Massachusetts
had issued notes to help fund the Revolutionary War. Immediately upon issue,
they depreciated to about 1/4 par, and later declined to about 1/40 of their
face value. Many soldiers were paid in these notes, then
later unloaded them to speculators at high discounts. Speculators bought
roughly 80 percent of the notes, of which half were owned by just 35 men. Every
one of these 35 had served in the state house during the 1780s or had a close
relative who did.
The legislature voted to
consolidate its war notes at face value and praised the speculators as
"worthy patriots" who had come to the state's aid in its time of
need. But these men did not buy the notes directly from the government; they
bought them for a song from farmers and soldiers, who were now being taxed to
redeem them at full value. The speculators, most of whom
had stayed home during the war, were seeking to benefit at the expense of
veterans.
Poll and property taxes were to
account for 90 percent of all taxes. The poll tax placed a fine on every male 16 years or older. Thus, a regressive tax
ensured a wealth transfer from farm families with grown sons to the pockets
of Boston speculators.
Nationalist versions of the
insurgency spread throughout the states and upset many elites, including
George Washington, who was enjoying a peaceful retirement at Mount Vernon.
According to Washington's trusted friend and former artillery commander
General Henry Knox, who was planning to build a four-story summer home on one
of his Maine properties, the insurgents wanted to seize the property of the
rich and redistribute it to the poor and desperate. David Humphreys, one of
Washington's former aides living in New Haven, told him the uprising was due
to a "licentious spirit among the people," whom he characterized as
"levelers" determined "to annihilate all debts public &
private."
The "rebels," for their
part, saw themselves from the very beginning as Regulators
whose purpose was "the suppressing of tyrannical government in the
Massachusetts State." The Shays Regulators drew on the success story of
Vermont in the 1770s in which Bennington farmers, in a dispute with New York
land speculators, had stopped courts from sitting and terrorized surveyors
sent on behalf of the speculators.
On March 19, 1787, Knox wrote
Washington hinting that he would be given the president's chair at the
Philadelphia convention in May. Knox stressed that Washington would not be
presiding over some middling conference of tinkerers amending a defective
document but instead would be leading a prestigious body of men as they created
a more "energetic and judicious system."
Nationalists at the Constitutional
Convention that spring wanted a stronger central government — an elective monarchy,
in Alexander Hamilton's view. Though they didn't get the results they pushed
for, the nationalists and their intellectual heirs of today have shown that
their lust for a more "energetic" government will not be thwarted
by words on paper.
Hamilton's
Funding Proposals
As Rothbard
notes, there were two ways to fund the debt: One way that was compatible with
the decentralized nature of the union under the Articles of Confederation was
to apportion the congressional debt among the states and let them raise taxes
to pay their share. The other way was crucial to "the cherished
principles of national aggrandizement": give Congress the power to tax
so it can do the funding.[3]
Article I, section 8, clause 1
secured this power.
In January 1790, the 34-year-old
Hamilton, as Treasury secretary, presented his plan to Congress for retiring
the Revolutionary War debt. The $54
million federal debt would be funded at par and the federal government would
assume responsibility for the states' $25 million war debts. The plan
called for converting federal debt into bonds that would mature after an
assigned period of time, paying 4 percent interest on long-term bonds and 6
percent interest on those of shorter duration. The new government would pay
the principal on the debt from a sinking fund established
through the post office. Revenue for the fund would come from an import
tariff and an excise tax on what Hamilton labeled "pernicious
luxuries" that included whiskey. His plan was not to pay off the debt,
but to recycle it. When bonds came due he would have new bonds issued to
replace them. As long as interest payments on the debt could be paid, the
government's credit was assured.
Among those opposing his plan was
Hamilton's former Federalist Papers ally, James Madison, who argued
that repaying the debt at par to current bearers was stiffing war veterans
and farmers for the benefit of wealthy "stockjobbers." He favored a
plan of discrimination, wherein the government would pay the original bearers
the face value of the certificates and the current bearers the highest market
value plus interest.
Aside from the near impossibility
of finding the original bearers, Hamilton opposed discrimination on the
grounds that it amounted to a "breach of contract" if the
government did not pay to the bearer on demand the full value of their
certificates. How else would the government "justify and preserve their
confidence"? The buyer of a depreciated security, Hamilton argued,
is not even chargeable
with having taken an undue advantage. He paid what the commodity was worth in
the market, and took the risks of reimbursement upon himself. He of course
gave a fair equivalent, and ought to reap the benefit of his hazard; a hazard
which was far from inconsiderable, and which, perhaps, turned on little less
than a revolution in government.
In funding wealthy speculators in
this manner, Hamilton was well aware this would concentrate investment
capital in relatively few hands and would encourage them to make further
investments in the federal government. This was a critical part of his
agenda: to strengthen the union at the expense of the individual states.
Senator William Maclay,
one of Hamilton's most vocal critics, brought the public into the debate with
a scathing article he wrote for a Philadelphia newspaper in February 1790. Assumption, he argued, was a means of reducing state governments to
insignificance and of establishing a "pompous Court," by which he
meant an arrogant and powerful central government. "The people will be
meddling with serious matters unless you amuse them with trifles," he
said caustically. A pompous Court in partnership with a pliant press would
keep the people amused as it goes about its task of having the citizenry
subsidize New York's moneyed class. The Treasury will grow in influence, and
thus
shall the capital of the United
States [New York] in a few years equal London or Paris in population, extent,
expense and dissipation, while for the aggrandizement of one spot, and one
set of men, the national debt shall tower aloft to hundreds of millions.
As the debate raged throughout the
spring and early summer, Hamilton, sensing defeat, turned to Secretary of
State Thomas Jefferson for help. Jefferson invited Madison and Hamilton over
for supper and together they cut a deal. In exchange for the needed votes, Hamilton
would agree to relocate the nation's capital from New York to Philadelphia
for 10 years, then finally to a place on the Potomac, where it would be next
door to Virginia, more accessible to the South generally, and removed from
Hamilton's power base. The arrangement was consummated when the Residence Act narrowly
passed both houses in early July, and the funding bill
became law on August 4 by a slim margin.
Still, the issue did not die. On
December 16, a date immortalized by the Boston Tea Party in 1773, Virginia's
General Assembly issued a formal protest. Unlike many
heavily indebted northern states, Virginia had already imposed taxes to
redeem a large part of its debt and had expected the balance to be
extinguished in the near future. Hamilton's plan of assumption would benefit
the more profligate states while imposing heavy taxes on Virginians for which
the Assembly had no way of providing relief. Furthermore, since no clause of
the Constitution gave Congress the authority to assume the debts of the
states, and given that obedience to the law of the land was held as a
"hallowed maxim," Virginia could not "acquiesce in a
measure" that was clearly unconstitutional. As the perpetuation of debt
in England has threatened everything that relates to English liberty, the
Assembly noted, the same can be expected in the United States if assumption
is not repealed.
It wasn't.
The eight Massachusetts men in the
House had been badly split on many issues regarding the new government, but
on assumption they were united, because the debt would be funded by means
other than direct taxes. According to Governor John Hancock, the consolidated
debt of Massachusetts was $5,276,955, of which $5,055,451 ended up in
Hamilton's program. Institutions claimed $347,097 of this amount, while the
remaining part belonged to 1,480 individual citizens. Included in this group
were speculators living in or near Boston who would be awarded almost 80
percent of the monetary total.[4]
State leaders in Massachusetts had
tried to pay off the state's war debts by 1790, and for this they had imposed
an onerous tax scheme borne mostly by farmers in the west. Hamilton's plan
removed this burden. Since many of them were subsistence farmers, rarely
buying anything from the outside world, the new taxes amounted to almost no
tax at all. The federal debt thus had little effect on their everyday lives.
The taxes that drove them to shut down the courts in 1786 were gone.
Conclusion
Hamilton's funding proposals were
step one in a fiscal policy that later included a rudimentary central bank
and a proposal to protect favored American industries from foreign
competition. By hijacking the legal system, Hamilton did indeed manufacture a
"revolution in government," one that overturned the revolution of
1776. Though ostensibly constrained by the new constitution, he reinterpreted
key clauses in such a way that the government could do almost anything, as
long as it was declared to be in "the public interest."
Somehow, ordinary Americans found
themselves to be the public whose interests required subordination to the
decrees of the government.
The Whiskey
Rebellion of 1794, in which Hamilton joined President Washington
and 13,000 conscripts and officers from the creditor aristocracy of the
eastern seaboard to crush penny-ante tax protestors in western Pennsylvania,
dramatized this point.
So did the War to Prevent
Southern Independence and every war or crisis
since. So did the Sixteenth
Amendment, the Seventeenth
Amendment, the Federal Reserve Act, the Current Tax Payment Act of
1943 (withholding), the Patriot Act,
the National
Defense Authorization Act — I leave it to the reader to fill
in the rest.
Today, with Hamilton's "implied powers"
interpretation of the Constitution deeply ingrained in public rhetoric, a
major political figure like Nancy Pelosi can respond contemptuously
to a question about ObamaCare's constitutionality
without fearing congressional censure.
As the US national debt continues its ascent to
the heavens with the blessings of
leading economists, the massive tower of IOUs sways to and fro at
the mercy of political currents. Will Asians continue to buy the debt? Will
the Fed be pressured to monetize
more of it? Will the Fed say, "Enough!" and let interest
rates soar? Will the government, with its dedication to endless war
and cheap money, take over the task of obliterating the dollar so it can
fulfill the grandiose
dreams of the political class?
Or will people finally say,
"Enough!" and remove the government from monetary affairs
altogether?
Fortunately, the ideas of Austrian
masters such as Mises and Rothbard
are permeating American politics, and not just in the presidential race.
No longer can the Federal Reserve print without detection and foundational
analysis, as witnessed by the success of such books as Meltdown and The
Politically Incorrect Guide to the Great Depression and the New Deal,
as well as the countless blogosphere commentaries and speeches bringing light
to the Fed's perfidy.
In 1971, after severing the
dollar's last tie to gold, President Nixon announced,
appropriately, "I am now a Keynesian in economics." With the ice
cracking under Keynesians and their promise of a free lunch,
there could soon be a leader who can rightly proclaim that Austrian economics
has saved the day.
Notes
[1] Conceived in Liberty, Volume IV,
Murray Rothbard, Mises
Institute, Auburn, AL, 1999, p. 379
[2] Shays's
Rebellion: The American Revolution's Final Battle, Leonard L. Richards,
University of Pennsylvania Press, 2003, p. 25
[3]Conceived in Liberty, pp.
394–395
[4]Shays's, p. 157
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