State Cons

by George F. Smith

The State continually fails and destroys, yet it persists.  You say, “Of course it persists – it has the guns.”  True, but it’s not like we’re standing around with our hands up, nor is that what the State wants us to do.  Its destructive interventions notwithstanding, it wants us to create as much wealth as possible so it will have an ample source of plunder.

How it goes about the plundering process is critical to its success. The golden rule is: the victims must approve of it.

Let’s look at how this works with its two greatest sources of loot, income taxes and central banking.   Government created both in the same year, 1913 – erecting in effect its two main pillars.  Without them, the State is a pussycat, begging for a dish of milk.  With them, the State, in a country as rich as the U.S., becomes the greatest destructive force of all time.

Under altruistic guidelines, taxing the rich to extinction is morally acceptable because being rich is proof of moral degeneracy.  Even if a rich person’s money were earned, he or she is at fault for not giving it away.  But there’s a problem: the rich are a minority, and even if their wealth is confiscated, it can’t support the unlimited power lust of state rulers.  Besides, most of the rich are politically active, which means they write the laws or influence how the laws are written, and they’re not about to legislate themselves into oblivion.

This leaves the ever-so-plump middle class.  They’re the ones who buy most of what the rich produce, so it wouldn’t work to tax them out of existence.  Yet the State must wring as much as possible from this income group. The problem becomes how to keep the people servile while transferring their wealth to state coffers.

In a neat bit of demagoguery, the State got people to favor the pay-as-you-go method in 1943.  It won their approval gradually, beginning in 1935 with Social Security, which was collected by coercing employers to withhold it from payroll checks. Then in 1941, Roosevelt allowed the Japanese to wipe out the U.S. naval forces at Pearl Harbor, creating an atmosphere of patriotic fervor and intensifying the mindset of obedience and sacrifice needed for more state transgressions. In 1942, Congress nudged closer to withholding by passing the Victory Tax – a flat five percent tax above a $624 deduction – that the state sucked from paychecks like it did with Social Security.  But withholding was still not a sell. A guy named Beardsley Ruml took care of that by proposing that government cancel taxpayers’ 1942 tax “liability.”  Ruml, who was treasurer of Macy’s and chairman of the Federal Reserve Bank of New York, said to the people: Give us withholding – just for the duration of the war, of course – and we’ll give you a year’s free ride.  The people fell for it, though they ended up paying 25% of their 1942 taxes anyway, thanks to Roosevelt.

Not surprisingly, when the war ended, withholding didn’t.  In her book, Dependent on D.C., Charlotte Twight recounts the efforts of a small business owner, Vivien Kellems, who brought suit against the government in 1950 after the IRS had seized money from her bank account to cover taxes due she had already paid, on time.  Withholding, she argued, was “deliberately designed to make involuntary tax collectors of every employer and to impose involuntary tax servitude upon every employee.” [1] Though the trial allowed her some redress against the IRS, the judge refused to allow Kellems to challenge the constitutionality of the 1943 act.

Not only was withholding exempt from constitutional challenge, it has spawned similar tax-extraction mechanisms in the years since, including “information reporting” on interest and dividend income in 1962 and efforts to make independent contractors subject to the act during the 1970s and early 1980s. [2]

As cons go, withholding ranks as one of the greatest, but it’s not in the same league with central banking.  Withholding can’t hide from the fact that it’s a form of plunder.  Not so with central banking.  It has the reputation of being the backbone of our economy, the engine of our prosperity.  Although Alan Greenspan has his critics, few of them charge him for what he is – the head of the state’s monopoly on counterfeiting.

Congress created our central bank, the Federal Reserve, on December 23, 1913 – ninety years ago.   According to the preamble to the act, its purpose is to “furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.”

Before we can make sense of the Fed’s preamble, we need to recall a few points about the nature of money and the nature of the state. Money originates on the market as a medium of exchange, usually gold, silver, or in some cases copper.  A commodity such as gold is expensive to mine and in relatively short supply.  But once it has become generally accepted as money, there is no need for any more. Unlike other goods, an increase in the money supply confers no social benefit; it merely dilutes the value of each unit.

The state, by its nature, is a parasite; it feeds off the productive ability of those it rules.  To avoid revolts, it looks to seize wealth surreptitiously.  Since it has a legal monopoly on coercion, the state usually takes control of the money supply so it can counterfeit the monetary unit.  As the first users of the newly printed money, the state has the advantage of purchasing goods at current prices.  The first recipients of its counterfeited money also benefit when they spend it, but after awhile the increase in the money supply, following the law of supply and demand, drives prices up. 

The state knows its printed paper can’t compete with a specie like gold, which is why it strictly enforces its legal tender laws. Through the institution of the Fed, the state thus becomes what Murray Rothbard calls the Grand Counterfeiter.  [3]

When the Fed counterfeits, it puts more money into the economy and spending initially rises.  “But the resulting ‘prosperity’ is phony; all that happens is that more money bids away existing resources from the poor suckers who are down at the end of the line to receive the new money, or who never even receive it at all.”  [4] Besides raising prices and destroying the purchasing power of the monetary unit, state counterfeiting also acts as “a massive scheme of hidden redistribution,” punishes thrift and hard work, rewards the politically connected, and funds the vast array of government “missions.”

And now we begin to see the meaning of the Fed’s preamble – by “elastic currency,” it means the ability to inflate the money supply. Since inflation is another name for counterfeiting, it is sold to the public as a tonic, something that’s good for us in the right doses. We can also see what comes under “other purposes,” since the Fed funds government’s welfare and warfare projects.  As Rothbard states, “instead of being reviled as a massive thief and destroyer, [the Fed] is hailed and celebrated as the wise manipulator and governor of our ‘macroeconomy,’ the agency on which we rely for keeping us out of recessions and inflations, and which we count on to determine interest rates, capital prices, and employment.” [5]

Without the Fed’s ability to function as the state’s credit card, we might have had ninety years of peace and prosperity.  But the tradeoff would have been an “inelastic” monetary unit, and who would want that?


1 Twight, Charlotte A., Dependent on D.C.: The Rise of Federal Control Over the Lives of Ordinary Americans, Cato Institute, 2002, p. 120

2 Ibid., p. 122

3 Rothbard, Murray N., Taking Money Back, http://www.mises.org/rothbard/moneyback.asp

4 Ibid.

5 Ibid .