Where does Government get its Money?

by

Thinking about government spending and the Austrian school of economic theory, I’ve played a little mental game. I hope you can join me in it.

The question is: Where does government get money? The answer will show us why President Obama’s plan to economic recovery is really a recipe for ruin.

The places a government can get its money from are: taxes, debt, income, fines, or inflation. Let me be more specific.

Taxes are the most obvious way government gets its money. Taxes are money taken out of the collective pockets of the people and put into the collective pockets of the politicians. It is really a filthy way to get money if you consider thievery, robbery, and burglary filthy. After all, it is no different. Politicians may try to justify their deeds, but ultimately they are stealing when they collect taxes. That is why I, personally, hate all taxes and wish we had as few taxes as possible.

Debt is money borrowed. It is the favorite instrument of governments big and small to get money by promising to tax later to pay. Debt isn’t money created out of a vacuum, however. In the real world, there is only so much money to be lent. When government competes for that money, they are willing to pay any price to get it, since they can back their borrowing with the faith and credit of their potential taxpayers. Even though governments can pay exorbitant fees and interest on this kind of debt, there is ultimately a limit to it, and they can reach a breaking point where there simply is no more money to borrow. This happened last year, when several governments went to borrow and there were no lenders at any price.

The problem with government debt is that governments aren’t competing in the debt market like everyone else. They are the elephant in the room. They can outbid anyone, and do so without little worry. If they bring home a good deal, then they get a pat on the back. If they don’t, they blame greedy bankers. But by borrowing like this, they shrink the debt market. That means, less money for businesses and people to borrow to do things like expand their operations or buy a house on credit.

Income is money that government earns by participating as an actor in the free market. They offer some good or service, and they get paid to do so. Some people will put fees in this category. The problem with government participating in the free market in this way is that they can do things other people can’t. It’s like having the referee be a member of a team in a sporting match. It’s simply not fair. But government is more than a referee. It also writes the rules. It can call a foul for simply getting in its way in the free market. In short, a government that participates in the free market soon turns the free market into something else. We should do what we can to keep government off of the playing field and on the sidelines as a referee and a lawbringer.

That said, there are some markets where government is one of the participants, such as the justice market. In these markets, it’s very reasonable to have people who want to participate pay a fee to the government for its services. Ideally, the fees would match the cost of the services so that government doesn’t have to tax or borrow or inflate to provide the services.

Fines are money collected as punishment for crimes committed by individuals or corporations. Fines are a useful remedy, quite easy to collect and quite easy to impose. It’s a very friendly way to punish behavior that, while bad, isn’t completely dangerous. For instance, parking in the wrong spot or at the wrong times, or leaving your yard a mess, or behaving improperly in a free market without hurting anyone. The problem here is what government does with the fines, and what happens when politicians begin to use the fine system to raise revenue. I believe people have a pretty good sense of justice and will be able to identify when governments go too far.

Inflation is the last way that government can raise money. This is what happens when government simply prints new money and issues it. The inflation is a sort of invisible tax. It’s a tax because it reduces the value of all the money everywhere at the same time. However, there is another powerful force called deflation. That’s the force that drives the value of money up as demand for it increases due to an expanding economy. Deflation can be worse than inflation since it discourages people from behaving in ways that will help the economy grow. If government prints money at a rate that keeps the value of money constant, then they can raise money without hurting anyone. Let me repeat this: If government prints money at a rate that keeps the value of money constant, then they can raise money without hurting anyone. This is the “secret” path to success that our Founding Fathers discovered a long time ago. It’s why they didn’t want the banks to be allowed to expand the currency through fractional reserve banking. It’s why we didn’t have a Fed until 1913. It’s how President Lincoln paid for the Civil War without collecting a single penny in taxes. It’s how the Continental Congress paid the soldiers in the Revolutionary War without borrowing a penny.

In conclusion, there are several ways government raises money. Of them, taxes are the most evil, akin to thievery and robbery. Income puts government, which should be a judge and lawgiver, as a participant in the free market, which takes the freedom out of the market. Borrowing puts pressure on businesses and people who want loans to expand their business or buy a home. Fines are suitable only for punishment and not as a means to raise money. Inflation at a proper rate will create money without causing any harm to the people.

These basic ideas are what powers the Austrian school of economic theory. It dictates a government that:

(a) Limits taxes to the absolute minimum, preferrably zero.

(b) Limits borrowing to nothing by balancing the budget each year, and thus limiting spending to almost zero.

(c) Issues currency to keep the value of money flat.

(d) Imposes reasonable fines as punishment and not as a means to revenue.

(e) Limits participation in the free market and thus income.

The problems with the Keynesian economic though is that it simply doesn’t work and has never worked. Keynesian economic thought, the theory that is behind the idea that you can spend your way out of a recession, doesn’t properly account for the market forces that government borrowing bring in to play. These forces are devastating. Unfortunately, Keynesian economic thought is tempting for politicians because it gives them a good excuse to spend and spend and buy their way into the hearts and minds of the people. This is the economic theory that the democrats in congress, along with some misguided republicans, believe in.

We must demand that congress stop acting according the Keynesian school of thought. It is dangerous to our freedom and our economy. We must demand that government actually reduce its size year-to-year and not grow.

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65 Responses to “Where does Government get its Money?”

  1. P Brennan Says:

    What about tariffs? Tax on imports and exports. I think the money from individual income tax is taken from some given to others. No net gain for the government. I.E. realocation of money in order to control.

    • Jonathan Gardner Says:

      Except government doesn’t take $1 from one place and give $1 to another. It pays off its politicians and parties, and all the bureaucrats in between. Even if the money wasn’t siphoned off in a re-election scheme, it would still be worth less in its destination than in its source.

      It’s better for government to leave the money alone than to extract its toll.

    • A Person Says:

      I believe that tariffs were left out as they fall under the category of “taxes”. Or maybe the author(s) didn’t know about tariffs.

  2. Emily Says:

    I was only thinking you’re right, but then I began digging into it and thought otherwise.
    We’re doing a project about taxes and where our money goes but how did the first piece of money get around?
    Obviously we have money because it is made, and I just don’t get why we can’t make more. It’s not like we’re paying to get money or we wouldn’t have any left or to start with.

    • Jonathan Gardner Says:

      Emily,

      As I described, the government can print more money whenever it wants to. This will, of course, cause inflation, unless the new money supply precisely offsets the deflationary forces in our economy. In fact, we have learned, as a human race, that deflation is a really bad thing. That’s why no modern economy is based on gold or silver. You simply can’t create more gold and silver to offset the economic growth in your economy and maintain a stable currency supply to power the growing economy. And without this, your economy collapses due to deflation before it is even getting started.

      If you’re really curious about money and where it really comes from, I would encourage you to think about where the first bit of money came from. Keep in mind that during the Civil War, President Lincoln had congress print more money out of thin air and he paid his troops and he bought supplies with it. This money was called “greenback” because it certainly wasn’t backed by gold. The plentiful supply of this money, in combination with the patriotism of the North, caused it to become the popular currency. In other words, Lincoln created money out of thin air because the people accepted his new money.

      My solution is to end all revenue generation methods except the printing of money. The government should be allowed to spend only as much money as is necessary to keep the currency steady. If our economy grows at roughly 2% per year, this is 2% of our GDP, or about $284 billion. Unfortunately, this would put the vast majority of the people in our government out of work, along with several large financial institutions that depend on manipulating the money supply to make their profits. I don’t see that as bad news, though, since they’ll have to learn to contribute to our economy in ways that benefit us more.

      • Jonathan Gardner Says:

        Ahh, one final addendum. If we ended all taxes and all borrowing by government, the money supply available to businesses would greatly increase. Our economy would grow much faster than 2% a year, perhaps even more than 10%! At the same time, a large chunk of our GDP is government spending. We shouldn’t count that as we increase our money supply to match our economic growth, since it isn’t economic growth at all.

    • Chase H. Says:

      I have no intention to disagree with what Mr. Gardner says, but I would like to put in my sayso. When money started, it started in the private sector with the banks. People found it hard to carry around gold coins just to buy bread, so they would put their gold in banks. The banks, in return, gave the costumer a bank note for the amount of gold they had. If the bank tried to put out more bank notes than gold obtained, they were discredited and nobody would accept their notes. The problem with this was that bank notes from banks not widely known were not accepted. In turn, the federal government decided to take on the job. The Government had a gold reserve in Fort Knox and could only print as much money as they had in the reserve. Sadly, when the wars of the twentieth century came around, the government decided to print more money than they had gold. Instead of discrediting the money of the government, people just accepted it.

  3. Richard Huntzinger Says:

    I stumbled on this article by asking Google to search for a question, which was the same as the title of this review.

    I have nothing to add to your fine explanation. But I have a question: what percentage of members of the House and Senate in Washington do you think understand where government gets its money and why government cannot continue to borrow and spend forever without running into the same problem Zimbabwe and Cuba have today (and Venezuela is moving toward). Why don’t those who understand the truth ever talk about it in public? Polling suggest that about half (50%) of the people think the government has its own money, an endless stream of it.

    Also, since the main source of government revenues is taxes, plus borrowings based on the ability to get the taxes to service the debt, it’s well for people to understand that all government employees, including members ofcongress and heir staffs, and all direct contracts to the government – for instance defense contracts – as well as those who are employed to fulfill those contracts, are paid by those incoming tax receipts, including employee withholding taxes. In other words, people who get paid by tax dollars directly or indirectly do not really pay witholding taxes, though they think they do because they have to file just like everyone else. Does that mean tax receipts are overstated?

    • Jonathan Gardner Says:

      what percentage of members of the House and Senate in Washington do you think understand where government gets its money and why government cannot continue to borrow and spend forever without running into the same problem Zimbabwe and Cuba have today (and Venezuela is moving toward)

      Probably at least 80%. I actually believe a good chunk of them want to bankrupt the US. It certainly appears to be Pres. Obama’s plan.

      Why don’t those who understand the truth ever talk about it in public?

      They do, but obviously this message isn’t repeated far and wide. I mean, Sarah Palin saw Russia from her house seems to be common knowledge (she never said that), but the fact that Social Security is now out of money? That’s unknown out there.

      It’s up to people like us to tell everyone what is happening at the federal level. The message won’t get out otherwise.

      Polling suggest that about half (50%) of the people think the government has its own money, an endless stream of it.

      The communist indoctrination in the media and in the schools is very effective. Ask Bill Ayers what he thinks about it—he’s largely responsible for the fact that the public schools do not teach the truth anymore about this.

      Does that mean tax receipts are overstated?

      It’s really hard to lie about how much money the government actually got in tax receipts. Either the money is there or it is not. The treasury has a bank account just like you and me.

      Right now, today, only 41% of the money spent at the federal level comes from the taxpayers. That 59% will have to be paid by the taxpayers one day, with interest on top. That’s common knowledge. It’s just not broadcast. It’s up to us to broadcast it.

  4. David Says:

    “Deflation can be worse than inflation since it discourages people from behaving in ways that will help the economy grow. If government prints money at a rate that keeps the value of money constant, then they can raise money without hurting anyone. Let me repeat this: If government prints money at a rate that keeps the value of money constant, then they can raise money without hurting anyone”

    I don’t know if you copied the above from another website without reading it but basically what you are saying is that if the price of food, computers, oil, cars etc goes down then its bad for consumers?

    People would prefer to pay $2 for a gallon of gas instead of $3. You don’t have to be Einstein to figure that out.

    • Jonathan Gardner Says:

      Of course people would love the value of the money in their pockets to grow over time. The problem is that this encourages people not to spend their money at all.

      If it makes sense to wait a little longer to buy something, people will wait a little longer to buy something. This means people that manufacture and sell stuff won’t be able to sell what they have or pay their employees and rent. This means they have to lower their prices even more, which drives the consumer’s expectations even lower. It’s a vicious cycle.

      Historically, you can see societies based on the gold or silver standard go through a rapid advancement and then it peaks and all of a sudden, nobody but the most powerful and wealthy people in the country have money anymore. These economies don’t have a variable money supply that can be increased to meet the economic growth. This means that when they do get economic growth, all the money flows into the hands of those who can wait the longest before buying something—that’s the wealthy.

      On the other hand, if money supply increased with economic growth, then the rich have no reason to hold on to their money. They will spend it as soon as it becomes available to get the most out of their money. This means the money is constantly flowing throughout the entire system, rather than stopping in the bank accounts of the rich.

  5. David Says:

    There is a thing called supply and demand. It states that when the price of an item or product goes down, then people will buy more of that product.

    For example if the price of a chocolate bar goes from $2 to $1 then more people would buy the bar. Therefore the demand for the bar increases, which will cause the manufacturer to make more bars.

    “The problem is that this encourages people not to spend their money at all”

    Prices of products going down actually make people spend more of their money not less.

    • Jonathan Gardner Says:

      You are correct. However, the changes you cite are under equal conditions. That is, “all other things being equal”.

      Consider what happens as the amount of money available diminishes. As money becomes more scarce, demand for goods and services across the board will also diminish. This means the price must fall for supply to meet demand.

      As the price falls to meet the falling demand curve, supply falls as well. This means people make and sell less stuff. This means a lot of people will lose their jobs and companies will make less money. This means there is even less money available, driving demand down further. This is the vicious cycle of deflation.

      What makes matters worse is people’s expectations. As prices fall universally, people begin to expect prices to continue to fall. This kind of price fall isn’t due to increased efficiency. In other words, companies aren’t selling stuff cheaper because they will make more money that way. It’s the kind of price free-fall that means less stuff is sold and companies make a lot less money.

      You don’t have to rely on theory to see this process in action. A large number of productive economies were tied to the gold or silver standard in the 19th Century. You can observe what happened to their economies as their economy expanded but their money supply did not.

    • Scott Says:

      If you know the price of that same chocolate bar that dropped from $2 to $1 will only cost $.75 tomorrow, would you wait for it? This theory already exists in reality…Black Friday deals!! If you really want an expensive present the week before Thanksgiving, you might wait until Black Friday to make that purchase knowing that it will be half off or so. In the free market, demand increases as price decreases, ceteris paribus. One of the demand shifters is expectations, and since we are expecting the price to drop due to deflation, there is a shift in the demand curve rather than movement along the existing curve. So, the demand does not increase along the curve due to a drop in price, but rather a decrease in the entire demand curve due to the expectations of the future price of the good.

      • Scott Says:

        And therefore, deflation is exponential since it is expected. In other words, deflation causes the price to drop, then decreasing demand cause the price to drop further which is obviously a devastating cycle.

  6. Theo6 Says:

    Paper money is a symbol of trust. I provide you a service or sell you a product and you give me paper. I take it because I think I can trade that paper for services or goods from someone else.
    Anyone can print money. We do it all the time when we take an IOU from someone else. They are printing paper money and you are taking the paper based on trust. It helps if there is an asset to back up the IOU but it is not necessary. Can the borrower be trusted?
    And that is the heart of the problem with paper money. Is it backed with a reliable asset or is it just paper?

  7. joe Says:

    i just hear the story about the chicken they gave to eat, thats no the only way for them to make money they have other ways aswell from farmacuticals to even the sweets your children eats the flouride in the water the anabolic steriods in cattle the antinatural substances in our crop apples pears tomatoes ecs. Those are just a few ways the gov is making money out of us ,i’ll explane to you how they make money out of farmacies first of all the farmacy involve must first create a virus, whatever he calls it and he must have a cure for it,but needs to have a timespan for the virus to infest, then after many years they ‘ll find a cure but was long before made, interesting!.all our fruit and feg that is out there had there vitamins and minerals were all striped from them,now you have to buy vitamin supplements to stay on track the chemical in your body that reacts to a natural enzime can no longer do so because the natural factor is taken out of it no more sunlight for our chicken they must sray in their cages for their hole liftime regulated by light 2hours sleep 12hour eat groce,chicken can’t sleep with the lights on how can you drive pass countyfair in kwazulu natal and see the ad ”please don’t hoot the chicken is sleeping” awsome advetisement,so can you go on beefmaster in warrenton,karanbeef in senekal rural ,eventuly you’ll end up using medical fund ,your money at your cost after all most hospitals are linked to the gov and they will sweap you naked of your money, think they really care about you? They care about your money thats a fact all democratics work like that linked to a monutary fund that is driven by dept ,tax payers money ytd estimated R1.5 triilion amazing is’t it everybody wants to put their hands on that money, how can your gov wrote off dept R200million and gave him additional some R250mill from another country thousands of miles away but don’t want to write off his own countries dept (taxpayers)sounds redacule? No ,not at all this just a way gov is taking whats actually yours,did you know it pays to get your own money out off the bank?….next year you will need an additional license to drive your car if you drive code 10,14 and why they dont ban alkahol in south africa so people can’t drink and drive murder ,woman be raped children hungry,parent jolling ecs ecs this is our democratic country a strong law system with corrupt officials and conspiracy…….

    • Jonathan Gardner Says:

      You would do well to slow down, think things through, and reanalyze a lot of your assumptions. Unfortunately, the thoughts that are spewing from your head, despite how crazy they sound, are no different than the thoughts falling from the heads of the democratic party in the US.

      If everyone’s actions were simply dictated by their own natural desires to live and thrive, and if the simple rule was “don’t harm others”, then a lot of the problems you describe would go away. When government gets involved, it shifts the goals and perverts the natural desires of the people to live and let live.

  8. joe Says:

    im working for a big beverage company penbev in cape town,every body thinks its a good comp.from the outside wait till your working for them groce! No incentive no shift allowance and no sick leave what a waist, forklift operator rate R16.67 p/h with a continental shift 3day 3night 3off seasonal work right through the year without laying off working for 3 years without getting remunaration for that years pass if you get a permanent contract it would be compulsory for for you to take a medical fund from peninsula beverage that deducts +-R400.00 from your weekly salary so that money goes strait into their budget
    Fundemently making use of seasonals with actually no benefit in working for such little money and needs matric to get noticed ,now you havea forklift driver without matric and would never be made permanant working for 3-5 years without getting there

    • Jonathan Gardner Says:

      Life is hard, and it’s even harder when you have an intrusive government that tries to tax the “rich”. That tax money comes out of your pocket, because it comes out of your salary, benefits, and out of the prices you pay for everything you buy to survive. If you think the “rich” live in a separate world wholly unconnected with your own, imagine what the world would be like without them? Who would have the money to build the factory, let alone lay down the cash necessary to acquire the resources to manufacture anything efficiently? Who would have the money to build the hospitals and pay taxes?

      South Africa is currently suffering from an oppressive government with the “tax the rich” mentality, and you, the worker, are paying for it all.

      • William Jones Says:

        I think you are missing the point about taxing the rich more.

        The level they are paying now in the USA is lower than ever before. They have been reducing how much they pay year after year and the middle class has been paying more to offset this. Corporations pay less as well. GE, for example, has shown a profit over the past years from income taxes. The federal budget relies more and more on taxes from individual income every year. Capital gains taxes are 15%, the majority of the wealthy receive their income this way, and with tax breaks and incentives they offset that amount even lower.

        The middle class does not have this option.

        As for the wealthy building more factories and creating jobs just ask yourself this: If them making more money creates jobs and stimulates the economy, then why are we not seeing the most prosperous time in the history of the USA right now? The most prosperous era was the 40’s, 50’s, and into the 60’s. A time when the our society was most equal in terms of income.

        As the income divide has grown, our problems have grown.

        As for South Africa, comparing the USA to South Africa is comparing apples to oranges. If you want to compare countries then compare peer countries, such as our European brothers and a few of the Asian industrialized countries, like Japan.

  9. Meg Says:

    You said that the government is stealing from the people when it collects taxes, but I disagree. Its not practical to think that the government could make enough money to run an entire country without taxing the people. Its been tried: before the Constitution was written, the Articles of Confederation didn’t give Congress the right to tax. It fell apart, because it was unable to get anything done. It couldn’t enforce its laws and effectively protect the people, as was shown in Shay’s Rebellion. The government was too weak. You say that the government is stealing from the people by taxing them, but the government is providing us with a very vital service, and taxes is a way of paying for that service. Without government, or with a government too weak, anarchy would reign.

    • Jonathan Gardner Says:

      Just because it is necessary to do something bad to survive doesn’t make it good. If people in the government understood clearly that the money they have to budget is not theirs but in fact was obtained by extortion and force by the people, and that the people allowed this for a very specific purpose, then I think they would be more responsible with it. The government wouldn’t require trillions or even billions of dollars to run because the money would be spent extremely frugally, and the need for tax revenue is so minimal compared to the wealth of the people.

  10. Brian Ahman Says:

    On the whole I like your article, especially the part which includes inflation in the mix. However there are two key things which I feel obligated to point out.

    One is the exclusion of tariffs as a source of income.

    Two is that Abraham Lincoln did use taxes to pay for the War Between the States. He was the first president to start an Income Tax and created the first incarnation of the Internal Revenue Service.

    For me, on the whole these points do not significantly detract from the commentary and conclusions but are worth noting and factoring into the equation.

    • Jonathan Gardner Says:

      Tariffs are just another tax.

      Abraham Lincoln did impose an income tax on the people, but as you may know, it takes a while to actually collect taxes when the union army needed money immediately for men and supplies. I don’t have exact numbers, but I believe that the issuing of the greenback raised more money for the war than the income tax did.

  11. Brian Ahman Says:

    You are right, tariffs are just another tax. I was not thinking in terms of the difference between taxes paid directly or indirectly by the people when I commented — oops.

    Income tax fact aside, I still like the discussion being taken in the direction of issuing greenbacks and the resulting inflationary pressure being a form of generating revenue. Doing some homework for myself, I am discovering the significance of the greater issue in political history, its Constitutional basis (or not) and application in current times. Thanx for aiming me in that direction.

    • Jonathan Gardner Says:

      The only reason we do not have Congress issue currency, as it is supposed to do under the constitution, is because the Fed is able to make a killing for the group of people who own and run it. When people realize how corrupt the Fed is, and where the money actually went, they will have pitchforks and torches ready.

  12. Brian Ahman Says:

    ah yes, the Fed — that group of private bankers. ostensibly created to help ease the wild swings of boom & bust (aka the business cycle) and to keep the government and economy from needing a bailout.

    before the Fed, j.p. morgan as an insanely wealthy individual twice had to bail out the economy. video biography of morgan can be found at:

    while i am no fan of the Fed and i have no solution to provide, i cannot help but wonder what it would be like to have a group of politicians in charge. especially given that politicians are known to be easily corrupted and that control of congress, with the winds of political change, swings back and forth between parties and probably would keep changing things.

    in some ways i find that thought more frightening than having a group of private bankers, whose self interest is evident but constant, in charge. better the devil you know than the one you don’t?

    as i said, i cannot offer a solution given my concerns that the government tends to not be very good at running a business, is corruptible and always changing. alas, the lessor of two evils is still evil.

    there will always be the poor among us because there will always be the greedy.

    • Jonathan Gardner Says:

      At least with politicians, they have to count the votes. If what they decide to do does not make the majority of their districts happy, they will not do it, or they will be replaced. Having the Fed is a relief for congresscritters because they have someone to blame when things go wrong. Otherwise, we’d have a new congress everytime congress screws up our economy.

  13. Economic ignorance: Painful to read. « Retrophoebia Says:

    [...] the question: Where does that money come from, and where does it go?  Well, there are essentially five sources of funding.  Chief among these are Taxes and Borrowing.  Taxes are taken directly from citizens [...]

  14. John Says:

    Your article has an error: “when government simply prints new money and issues it” . Wrong. The government does not print it’s own money. All money in the world is debt. Money borrowed by the governments from private banks.

    • Jonathan Gardner Says:

      So if I dig up gold in my backyard, which bank did I borrow from to create that gold money?

      Your understanding of money is completely wrong, because you fail to consider where the central banks get the money from. Hint: It involves paper, ink, and a printing press. Governments can, and have, and some still do, bypass the banks altogether and just print as much money as they think is appropriate.

  15. Phil Schoch Says:

    I agree with the majority of your article. I just have one question and would like for you to explain more your position on having a gold and silver backed currency if you could. You actually brought it up in one of your responses rather than your article and it intrigued me. I’m a big supporter of Ron Paul and he wants to get us back on the gold standard and often cites the Austrian School of economic theory (which I am admittedly not as familiar with as I’d like to be).

    The problem with the government printing money, which you stated above already, is that they print too much. While you have a good idea about what the government should do in regards to how much it should print, what about when it doesn’t and prints as much as it wants? The only solution to me would seem to have a limited money supply, that can’t be created, otherwise there is no check on them to print more whenever they want.

    • Jonathan Gardner Says:

      The problem with the gold and silver-backed currencies, or any commodity-backed currencies is if the economy takes off, growing at 5%, 10%, or even phenomenal 25%, then the currency can’t keep up. The shortage of cash leads to deflation, prices drop, and people become very conservative with their cash because if they hold on to it for a little longer, they can buy more stuff. The cash ends up in the hands of those who can hold on to it for the longest—the rich, while those who can’t afford to hold on to it must spend it and end up with no cash at all.

      This is what kept the economies of the 1800’s from exploding like they have in the 1900’s. Every time conditions were right for rapid, sustained growth, the commodity-backed currencies started to increase in value until they flowed into the bank accounts of the rich.

      You need a money supply that increases when the economy increases, that can increase in arbitrary amounts according to how rapid the economy grows.

      Granted the Fed was supposed to print money to even out these cycles, at least that’s what we were told. They haven’t done this, and that’s why many economists nowadays blame the Great Depression on the Fed and the Fed alone. (FDR’s policies didn’t help, but were a drop in the bucket compared to the fact that cash simply was no longer available.)

      If congress were in charge of how much money to print each year, then the people would have a say in the matter. Right now, we have to hope that the Fed does the right thing, and eat whatever mistakes they make.

      • Phil Schoch Says:

        But the rich that you are referring to are people that own businesses. They can’t hold onto their money forever and eventually have to spend it. The same for the small people, they just can’t hold it for as long. So when the rich do have to finally spend their money, wouldn’t the economy then just go back up, instead of crashing, and at a stronger pace?

        I mean we had a currency backed by gold till 1971 I think, but the economy in the U.S. was still booming. It’s not like the economy wasn’t booming before we went off gold in 1971.

      • Jonathan Gardner Says:

        Do you recall the world that Jane Austen lived in? The rich were rich, but they barely spent their money. There was no class mobility because the currency was growing in value (deflation). A good investment strategy was to simply do nothing but sit on your cash, live off your land, and keep your servants happy. Do this, and you’ll be forever wealthy, and your wealth will even expand as you can buy up your neighbor’s properties who lost their money on bad investments and ventures.

        Under a stable currency, or slight inflation, the rich have to find someplace to put their money to make it grow, otherwise it will decrease in value over time and their retirement plan will evaporate. If they stick it in a bank, then the bank has to loan it out to turn a profit. That’s why in America investors are so antsy to get rid of their cash. They know that if they hold on to their cash,or do anything but make sure they are living off of the *returns* on their investments, they will wake up one day and find themselves poor again.

        I think the core of your argument, the part that you’re hung up on, is gold itself. Gold isn’t special. It’s just another metal. It has certain properties that make it slightly more useful than other elements and commodities, namely that it doesn’t corrode over time and it is rare enough and hard enough to refine that even at high values you don’t get massive quantities on the market. Outside of that, gold is simply another “thing”.

        Once you realize that fiat pieces of paper and gold are really the same thing when it comes to money, namely, they don’t corrode and have a controlled supply, then you can start comparing apples to apples. The ideal currency expands with its utility. Gold doesn’t do that. Fiat money can.

  16. Jeremy Says:

    This is the best article that I have seen on economics. It’s very interesting and well written. I do have a question for you though.

    Would it be more reasonable to put a computer in charge of the cash flow than to put people in charge?

    Possibly another alternative would be to put congress and the fed into a better position to check and balance one another.

    I think that the points made about congress and the fed being vulnerable to corruption have some pretty good merit. Also, without legislative term caps in place, the corruption spreads much more fluidly. A congressman that has been in office for 16 years is much more likely to influence his peers (or the newly elected) and be influenced by the people that helped him stay in office.. Whereas, a congressman that just got elected because of his abilities, and has to be out soon, is more likely to stay the course of their beliefs and moral standards.

    Although, there are some very good arguments against term caps, I personally believe that they should exist. Interestingly enough, corruption will be there either way but I just feel that the legislative branch would be much more inclined to act on behalf and for the benefit of the people if they couldn’t put down roots in our legislative system.

    • Jonathan Gardner Says:

      Who would program the computer?

      I am surprisingly not interested in term limits. I have my own reasons, but I do not think term limits will give you what you want. I will write an article today detailing my thoughts and feelings, and what should really be done to fix the problems in our professional political class.

  17. Brian C Says:

    This article and discussion is very interesting. I am very pleased I stumbled across it. I do have one question though. What happens when you introduce the foreign market? Money really is based on the trust that the piece of paper you hand me for a good or service can be used to by me to get another good or service. What happens if the money our government prints doesnt get that trust from other governments?

    • Jonathan Gardner Says:

      You have to look at individuals and how they think of the money. Money is valuable to an individual because money is valuable the people around that individual. If there isn’t a lot of that kind of money floating around, then it is scarce and less valuable. If the money can’t be easily subdivided or aggregated, or if the market where the money can be used is limited, then it is less valuable. Those two things have little to do with trust and a lot to do with how much money is floating around.

      Foreign currency can and does work just as well as local currency. There’s really no difference. You can go to many foreign countries and see a thriving marketplace which uses foreign currency not their own. A good example is the American dollar in many places, although it is hardly limited to that.

      Governments may try to squash demand for foreign currency (because they certainly can’t stop supply!) They do this in a number of ways, from prohibition to limits on how much you can move across the border, and other ingenious but not unique ways.

      The “trust” you are talking about is really only one part of the equation. It’s evidenced by people’s perceived valuation of the money, and how much they are able to get their hands on, collectively. In the case of how foreign countries (governments and/or the people) value the money, that contributes to imports and exports. In a government like North Korea, where foreign trade is all but non-existent, then it really doesn’t matter what other countries think of their currency. In a place like South Korea, where foreign trade is just as much a part of life as Kimchi, then it is a very important factor.

  18. mike Says:

    how could you not mention the federal reserve when describing money creation. the federal reserve is central to the onetary system of the united stated and is not metioned in this article at all. FAIL

    • Jonathan Gardner Says:

      This article was about governments in general, and not the US government in particular. Also, I did mention the printing of money and the borrowing of money, which is all that the FED facilitates for our government.

    • William Jones Says:

      I concur with Mr. Gardner. The FED is mentioned earlier, and this topic is not USA based though the USA is a good example to use when illustrating a lot of the points.

  19. sara halwendo Says:

    Thank god there is briliant people in this world.

  20. Jack Says:

    And for that matter, FDRs WWII spending was an even more drastic implementation of Keynesian economics by socializing and subdizing many wartime industries, all of which helped to bring us back from the Great Depression.

    • Jonathan Gardner Says:

      Economists agree that Keynesian economics doesn’t work. Even John Maynard Keynes came to realize this. There are only a handful of economists left in the world who seriously consider Keynesianism and maintain their integrity. It’s so easy to refute that the only reason you haven’t come to refute it yourself is because you refuse to admit that maybe, just maybe, it’s better to let the people choose for themselves.

      • Jack Says:

        Then explain to me why it worked under FDR. Justify how you could possibly say that FDRs unrestrained spending and downright socialist implementations didn’t get us out of the Great Depression.

      • Jonathan Gardner Says:

        It didn’t work under FDR. The economy recovered despite FDR. While America was languishing in the Great Depression, Europe (which many countries still practiced capitalism at the time) pulled out of their minor recession.

        If you take the growth we were experiencing before the Great Depression, and extrapolate it out over time, you’d see that we have suffered tremendous economic harm due to the socialist policies of the government. We are still paying the consequences. Our country is bankrupt because of FDR’s policies and the policies of the socialists that have followed.

      • William Jones Says:

        Here is a good article for explaing it even better

        http://www.newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx?RelNum=5409

        Also, after WWII the USA was the only country with industry. The rest of the industrialized world was devastated, which put the US industries in a prime position to sell with little to no competition.

  21. tensor Says:

    If you take the growth we were experiencing before the Great Depression, and extrapolate it out over time,

    The Great Depression started after a decade of Republican rule at the federal level, and with the most free-market president we’ve ever had, and persisted until they all were well out of office. They deserve whatever blame you’re trying to cast here.

    Europe (which many countries still practiced capitalism at the time) pulled out of their minor recession.

    Britain defaulted on its war debt to the United States in 1931. Russia, Italy, and Germany were totalitarian states with command economies from the 1920s and 1933. France built the Maginot Line because the economic output there could not compete with that of Germany’s. If you’re trying to defend responsible governmental spending policies in free economies, you could hardly have picked a worse example than Europe in the 1930s.

    • Jonathan Gardner Says:

      Rewind. Rewind.

      The Great Depression started in 1929, immediately after Herbert Hoover took office.

      Herbert Hoover, as you recall, promised to continue the policies of Coolidge. When he demonstrated that the instead embraced big government, and imposed the income tax, and did some other obviously anti-capitalistic reforms, the stock market crashed. Why did it crash? Simply because the companies were no longer valuable now that the laws in America had changed. Hoover lasted only one term.

      President Roosevelt campaigned in 1932 on bringing back President Coolidge’s policies. He, of course, did the exact opposite. So the markets did not recover when he was elected. Things got considerably worse under him.

      The Great Depression lasted until America obliterated the rest of the world. With the only functioning factories left in the world being in America, we would have been profitable even in Josef Stalin had run our economy.

      Europe did not suffer the depth or length of the Great Depression. They did suffer an economic downturn, but it was temporary compared to what happened in the US.

      There has been plenty of ink spilled on this topic. The lie that President Roosevelt saved us from the Great Depression is gradually being exposed.

  22. Infamous messenger Says:

    I like the idea of going back to the gold and silver standard but once the U.S. does go back we will have less money in the economy right but still valuable. What problems will be imposed on us from other countries who dont like the idea and what would the Rothschild do to change it back? Now puting term caps on government officials should be a big issue. For example someone who is in any kind of office short term will say good things before getting elected but as soon as he does he goes and does things that benifit himself because as soon as he leaves office its not his problem anymore. Like with Bush and his administration their to blame for the reccesion thats going on but now that obama is president everyone points their finger on him, Im not pro obama, but it gives polititions yhe oppertunity to screw up the system even worse. Now im not expecting a godly answer but what is your opinion on that matter

    • Jonathan Gardner Says:

      I think what you are asking is whether term limits are good, because if politicians only serve 1 or 2 terms, then they don’t care about getting re-elected.

      I don’t think term limits will change things much one way or the other. What keeps an honest politician honest is his personal moral conviction, not arbitrary rules. The only reason the schmucks keep going back to DC is because we vote them to go there. If we were wise, we would never re-elect people without enough personal moral conviction to do the right thing, and elect those with that conviction as long as they are reasonable on the issues we care about. That’s not the way we think today, so we get what we vote for.

      • William Jones Says:

        We have what, about a 40% turnout, that means that to be elected all you need is Just over 20% of the people to support you. So, we get what a minority of the people want. More and more that equates to what is in the best interests of corporations and the upper class. They buy the politicians, now with unlimited campaign donations, and get what they want.
        Term limits will help alleviate some of that. Politicians will not be as beholden to their campaign benefactors when they will not be running for another term.
        Term limits will not eliminate this problem, but it will help dampen it.Term limits along with running for office with clean money would be a good start.

      • Jonathan Gardner Says:

        You’re making some rather positive statements without a whole lot of evidence. I’d question whether it would actually change how people buy elections.

        How do you plan on making sure money is clean? Who gets to decide what money is clean and what is dirty? Are you going to write a law that if I want to give $5 to my favorite candidate, I’m not allowed to do it? That doesn’t sound fair.

        There is a way that you could make elections unbuyable. You allocate 1 representative per 30,000 citizens, and you have 10,000 races that need to be bought. Since the candidate will likely know almost everyone who is going to vote, I doubt money would be much of an influence in house races. Nor would they know how to buy 10,000 different races, each with their own issues and ideas.

        Leave the senate to the corruption it was destined to have. The house is for democracy; the senate, aristocracy; the presidency, autocracy; and the supreme court, oligarchy. In fact, just let the legislatures of the states decide who should be their senators, and make the corruption obvious. If they want credibility, let them show us why we should lend them any by their actions. I’m sick of senators hiding behind the veil of legitimacy that democracy gives them.

  23. Lanne Says:

    I’m interested in writing a dystopic story about a future in which government pretty much runs everything (maybe not so ‘future’), but without having a background in economics, I’m not sure how it would work.

    My main question is: is it conceivable that a country could generate enough revenue from selling it’s natural resources or manufactured products to other countries – without having a tax base – to pay for everyone’s every need? I know it sounds far fetched, I’m just trying to understand whether an economy could survive without taxation and without a healthy capitalism base.

    Thanks for your insight.

    • Jonathan Gardner Says:

      Yes, it is very possible, and it has happened several times in history.

      The problem for these governments comes when they collapse. Once they are no longer to obtain by whatever means the resources to distribute to their people, the entire system falls into chaos.

      A good example is the late Roman Empire. The government and powerful families were so successful at bringing wealth into Rome that the lower-classes became dependent on it. You can see how they started paying more and more to their soldiers, until it became a profession. When the pay dried up, all hell broke loose.

      Communist countries attempted something similar, although none in this age have been successful. I imagine that the enormous wealth you’d need to power a society like ours is simply impossible to buy at any price. It can only come from the surplus wealth generated by millions of people looking out for themselves.

  24. elena Says:

    This page is so darn true. I have no comments.

  25. Emma Says:

    What do you think about sovereign debt default as a legitimate economic strategy for countries?

    • Jonathan Gardner Says:

      This is a great way to get nations out of the currency and borrowing business.

      If nations plan on defaulting on their sovereign debt, then why would people loan them money? I mean, why would you loan $1,000 to a kid who says, “I may never pay you back.”

      The interest rate on sovereign loans are set by the marketplace, which includes factors such as the likelihood they will repay and the inflation that the currency will experience before they repay.

      If I were king of a country, this is how I would do it.

      Step 1: Invent my own currency.

      Step 2: Use this currency to buy things.

      Step 3: Try not to make too much currency, or too little, by matching new currency to the economic growth.

      You may need a step 4 in there, collect taxes denominated only in the currency you issue, so as to make it a rule that at least some of your people trade in that currency.

      Notice that under this scenario, borrowing is completely unnecessary. Only when you have a pressing need for more currency than the market can bear do you need to borrow. The only case I can think of is when your country is in mortal warfare, a war for its very survival.

  26. Reed Costa Says:

    On the Fed’s website, it says that the agency’s goal is “2% inflation over time”. What are your thoughts about that?

    Thanks, by the way, for making these complicated issues easier to understand. Rarely does anyone in government explain what they do and why.

    • Jonathan Gardner Says:

      I am sure they have this goal as their publicly stated goal, but they have not succeeded in meeting it. I know for a fact that inflation rates do not match what I see in the stores. So whatever numbers they publish don’t even represent what’s really going on.

      Putting the power to print money is an awesome power. It’s a power that is nigh unto statehood. Meaning, if I controlled a currency, I would have all that I need to control the people who use that currency.

      Let’s keep the power to print the money into the hands of the people through their legislature. If we see inflation, we can petition congress to stop printing so much money. If we see deflation, we can petition congress to print more. Where do we petition the Fed? We don’t even know where they are handing out the money they do print.

  27. mardela Says:

    If the fed doesn’t conform to these rules you listed, can a State follow them and have a positive affect on that States economy?

    (a) Limits taxes to the absolute minimum, preferrably zero.

    (b) Limits borrowing to nothing by balancing the budget each year, and thus limiting spending to almost zero.

    (c) Issues currency to keep the value of money flat.(Fed only)

    (d) Imposes reasonable fines as punishment and not as a means to revenue.

    (e) Limits participation in the free market and thus income.

    Thanks,

    • Jonathan Gardner Says:

      Yes, and they already do, and we have already seen the positive effects. Fiscally conservative states have much stronger economies than liberal ones. A good comparison is California vs. Texas.

      There are states talking about issuing their own currency. Just because congress is permitted to issue currency doesn’t mean no one else can.

  28. Bead Stallcup Says:

    Thank you for spreading the truth!!! With only one or two possible exceptions, Switzerland and Singapore perhaps, governments around the world are nothing more than big parasites sponging off working people in the private sectors and disrupting what would otherwise be good working economies. Politicians and bureaucrats are the living manifestation of that rotten parasite which eats out and despoils the things which are beneficial to an economy. Money only serves a useful purpose when it facilitates the buying and selling of goods in a value-for-value exchange in a free and open market. Politicians, since they have no legitimate source of income, should be kept out of all market places and private transactions just like any sneak thief or pickpocket. Kept out of all private business except to enforce certain legal contracts between private individuals and business. Government operations should be kept to a bare minimum. The problem is, once politicians get their hands on so much unearned loot and get a taste for easy plunder, they routinely became “hooked”, like dope attics and simply refuse to stop stealing and squandering private resources and wealth. Thanks again for spreading the truth about governments and their illegitimate sources on income.

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