Chapter 5, The Hazard Ahead
Governments forbid counterfeiting, as they forbid force, yet they practice both.
Legal counterfeit blends with the genuine money supply and is indistinguishable from it. It is, therefore, more insidious and, through sheer volume, vastly more destructive of the power of the monetary unit than is illegal counterfeit. It inevitably manifests itself in higher prices of goods and services. The public is bewildered by the higher prices, and it requires but slight propaganda by the author of the inflation, the Government, to deflect criticism onto private business which, in the end, is always obliged to bring the bad news of rising prices to the people. The public does not realize that it is, in effect, indirectly paying taxes over the merchant's counter instead of paying them directly to the tax collector. The Government finds this a ready way to increase taxation without being detected.
To collect sufficient taxes to balance an extravagant budget brings citizen resistance if the tax collection is obvious. However, inflation taxation is not only covert; it operates by seemingly putting a dollar into the taxpayer's pocket instead of taking one out. By lavish counterfeiting and spending, the Government increases the number of dollars in circulation and thereby creates an appearance of prosperity.
We delude ourselves, moreover, if we think that deficits, or government "debts," are deferred taxes to be paid by future generations. They are current taxes, paid not only by the non-bondholders to the bondholders as interest, but by the bondholders themselves through the depreciation of the purchasing power of the dollars represented by the very securities that they hold.
Strictly speaking, there is never and there cannot be a government deficit. All government expenses are and must be paid by taxes. What is commonly called taxes is merely that shown in formal tax revenues, whereas the amount which is called deficit is in reality another bracket of taxes - inflation taxes and this the most vicious form, since it disturbs and ultimately destroys the monetary system upon which the entire economy depends.
Even tax-conscious persons think only of the taxes shown by Government revenue receipts. They tell us that the United States is approaching the danger point of a tax collection rate that is thirty per cent of the national income. They do not realize that it has already passed beyond this point, because they do not reckon the unaccounted taxation, actual and potential, through the depreciation of the dollar - inflation taxation. As inflation accelerates, the rate at which conventional taxes are levied will not be able to keep up with the national income - this, despite the false dollar prosperity floating the citizenry into progressively higher income tax brackets. The relative percentage will decline, giving to those who take this narrow view the impression of a decline in taxation. It is but a fool's paradise. Can anyone blame the politician for employing this painless way of plucking the goose?
Under the deficit financing policy of the United States Government for the years 1941 to 1950, inclusive, the figures show:
Expenditures $540 billions
Collected by Levied Taxation 334 billions
Total Deficit 206 billions
Only sixty-one per cent of the cost of Government has been presented in revealed tax levies, leaving unaccounted thirty-nine per cent. It is unlikely that the unaccounted portion will ever be presented in any future above-board tax levies. That would require a surplus budget. Therefore, it will have to be paid through inflation taxation in the form of higher prices over the retailer's counter.
Although we cannot isolate and identify a legally counterfeited dollar from one that is genuine, we can determine the volume of legal counterfeit in our total dollar supply by deducting from the total that part which was created by all governments, i.e. national, state and city, through bank "borrowing."
The forty-eight state governments have the power to deficit finance only to a limited extent, because when they borrow, they can pledge only to pay out of tax income and, therefore, soon reach their borrowing limit. The Federal government, on the other hand, can create an unlimited amount of debt because it does not have to pay out of income; it can pay by its power to issue "money." Hence the Federal "debt" is not a debt in the true sense of the word. It is a promise to pay in terms of its own promise. The obligations of other political divisions are promises to pay in terms of the Federal government's paper, which is not in their control, and therefore these are real debts.
Table 3 (from page 42 of the Riegel book) is titled DOLLARS AND DEBTS JUNE 30, 1950
(All figures in $ Billions)
TOTAL FEDERAL DEBT……………………………...…….257
TOTAL STATE, CITY, and LOCAL DEBT………..…..24
TOTAL DOLLAR SUPPLY
TOTAL BANK-HELD FEDERAL DEBT…………………......…84 (1/3 of Total Federal Debt)
TOTAL BANK-HELD STATE, CITY, and LOCAL DEBT.…..8 (Estimated at 1/3 of Total)
TOTAL COUNTERFEIT MONEY…………………….......………92
TOTAL GENUINE MONEY…………………………........………..83
PER CENT COUNTERFEIT…………………………………52.6
Thus it may be seen in Table 3 that more than fifty per cent of today's dollar is "water" injected by government-created "dollars." But this is not to say that the total supply of counterfeit has yet manifested itself. Actual inflation and potential inflation are two different things. Prices are determined not by the total monetary-unit supply relative to the total goods supply, but rather by the amount of each that actually meet in the market. $175 billion of federal securities are held other than by banks. All of these dollars are being held out of the market, hoarded under the illusion that they will grow through savings. But even with a moderate rise in prices, more is lost from the principal than accrues from interest or dividends. Gradually, this will become more and more evident to more and more people, thus causing holders of Government securities and savings deposits to convert into goods and property. This will bring into the market a flood of dollars that are now inactive.
The resulting price rise will pinch the population of low and fixed incomes and thus throw upon the Government the obligation (under the now prevalent idea that the Government owes every man a living) to issue additional counterfeit dollars. This in turn will cause further price rises, calling for further counterfeit and so forth until the dollar is completely extinguished.
Unfortunately, it is no longer within the Government's power to avert the threatening disaster merely by balancing the budget on the premise that inflation thereby will be arrested and prices will stabilize themselves on a new plateau. For, sooner or later, the trend toward cashing Government bonds by individuals, trusts, insurance companies, savings institutions, etc will set in and mount until there exists a veritable buyers' panic, with prices rising in a runaway inflation. Let us examine what dry wood there is lying around to feed the fire.
Each year, approximately $50 billions of Government bonds mature and are refunded by new issues. This will continue as long as the holders are willing to renew. A part of this sum is held by banks, which can always be counted on to renew. Banks cannot lose by inflation, since both sides of their ledgers are in terms of money and both are current. Their assets and liabilities are both expressed in current dollars, no matter what their power. But businessmen and consumers, who trade in and out of dollars, suffer the attrition that the monetary unit undergoes in the interim of the turnover. They find it to their interest, during an inflationary rise, to keep their cash, or paper promising cash, at as low a level as possible, and the level of their goods holding as high as possible.
Assume, now, that of the holders of yearly maturing Government securities, one half, or the holders of $25 billions, should prefer cash for investment in property or goods as a hedge against inflation. Add to this the $55 billions of savings bonds which are payable any day that the holder sees fit to present them, and we see that there is a total of $80 billions that is a definite fire hazard. Every such dollar demanded of the Government that is not covered by either surplus tax revenues or the purchase of bonds by another private subscriber, must cause one more counterfeit dollar to be injected into the circulation.
We are thus confronted with an inflationary movement, the first in peacetime in the history of the United States. Nothing can stop such a movement but deflation, and deflation can only be brought about by the Government. To bring about deflation, the Government must run a surplus in its budget and apply the surplus to the reduction of its debt. Political expedience bars such a possibility. A government that has not been able to face realities over the last two decades surely cannot now muster the courage to run the surplus budgets needed to reduce the enormous deficit that it has incurred.
Realism therefore compels us to recognize that inflation will continue until the point is reached at which the dollar will be worthless. The Government will find it much easier to let taxation by inflation wipe out its debt than to liquidate its debt through direct taxes by running a surplus budget. The nation born under the slogan, "No taxation without representation," is now practicing taxation by misrepresentation.
Fidelity of Contract
The destructive effect of inflation is not confined to its covert taxing power. That is only its early manifestation. Its later destructiveness lies in its power to amend and finally to nullify the contractual relationships upon which the social order depends. The whole philosophy of freedom is written in the single phrase, Power to Contract. This phrase betokens voluntary action for mutual benefit in the pursuit of self advancement. Such cherished freedoms as freedom of press, speech and assembly and all others are collateral to the master freedom, freedom and power to contract.
In a money economy, contracts are spoken and written in terms of the monetary unit, which in turn is based on the compact of fidelity implicit in its issue. By violating this fundamental compact through the issuance of counterfeit, all contracts existing in society are altered by reason of the changed meaning of the word that expresses the monetary unit, as, for example, the word dollar. While a small deterioration of the unit of account impairs contracts previously written, a runaway or total inflation actually destroys all existing contracts and prevents the making of new ones. This is because the rate of deterioration makes it impossible to faithfully fulfill even short-term contracts. This means the complete destruction of commercial credit, resort to cash transactions, and, finally, abandonment even of cash transactions in favor of barter.
Thus it is that under a political monetary system which permits legal counterfeiting, there can be no such thing as fidelity of contract. Neither contracting party can guarantee that the government will not exercise its counterfeiting power, let alone estimate the extent of the abuse. A government may pay lip service to personal enterprise and denounce socialism and the police state; yet, by counterfeiting money, it robs enterprise of its indispensable tool, fidelity of contract.
Weathering the Storm
We have seen that inflation is epidemic and worldwide, attacking the stronger as well as the weaker units. We have seen how far monetary deterioration has gone and how the decline of the dollar obscures the real decline of all foreign exchange units, inasmuch as they are all rated in terms of current dollars. We observed, too, that the United States Government has been following the policy of transfusing blood from the strongest unit, the dollar, to the weaker units, thereby deferring the collapse of those units but threatening the ultimate collapse of the entire structure. To these considerations should be added still another which, though little observed, will contribute its part to the collapse of the international political monetary system. This is the reserve of gold and dollars held by foreign governments and central banks. The Federal Reserve Bank of New York reported these reserves of gold and dollar balances, as of March 31, 1950, to be $15,690,000,000. Russia's secret gold hoard is not included. The sole support of these reserves, including Russia's, is the United States dollar. As the dollar declines, the value of these reserves declines, although this is not realized because the weight of the metal and the dollar valuation ($35 per ounce) remain unchanged. Thus by weakening the dollar through inflation, the United States has been steadily diminishing the reserves of foreign nations and promoting their ultimate bankruptcy.
This is a cold, mathematical picture of a coming collapse. It lacks all the colorings of human reactions of reason and emotion. But in reality the experience will be anything but cold; it will be wrought and fraught with passions. Men cannot calmly watch their fortunes fade, least of all when others are profiting by the fade-out. Broadly speaking, the entire debtor class will benefit by the depreciation of their debts, and many men, foreseeing this, will pile up debts as a means of thus acquiring property cheaply. Trust funds, visualized by their testators as permanent, will be wiped out, and not only private individuals dependent thereon, but educational institutions, hospitals and charity institutions, will find themselves bankrupted. Insurance companies may weather the storm, but their benefit payments will decline to a small fraction of what the insured paid in, and the companies will emerge emaciated and shrunken if, indeed, they survive at all. The Government's entire Social Security program and veterans' benefits will be reduced to the vanishing point, unless the Government sees fit to increase payments as the dollar declines. But this will, of course, only further feed the raging flames of inflation.
Many businesses, following the normal markup on costs without anticipating replacement costs, will be wiped out, and their owners will be added to the unemployed. Social unrest will intensify racial problems. Morality will loosen. The climate will be riotous, rebellious, and dissolute. America will be tried as she never has been tried before.
But the whole experience will be bearable, provided that we can prevent exchange from breaking down. There is a way that this can be done. A new monetary unit, one that would be immune to legal counterfeit and, hence, not subject to inflation, would permit a complete separation between old dollar contracts and new contracts, thus permitting the old ones to wash up in the course of inflation without disrupting current business. This is a new inflation strategy never before tried. It would make it possible for the nation to go through total inflation without chaos and all the while maintaining an orderly domestic and foreign policy. Inflation does not destroy wealth; it merely shifts it. There are of course many painful adjustments, but the wiping out of a nation's monetary unit through inflation is in itself not calamitous, and for many it is a positive gain. Society can tolerate the neutralization of past commitments, but the social order breaks down if there is no common language in which new ones may be entered. A new and stable monetary unit must be provided to serve the current business of living.