Why Not Pay Cash?
MAY 01, 1959 by OSCAR W. COOLEY
Mr. Cooley is Associate Professor of Economics at
Often said—but never too often—is that the government has naught to spend but what it gets from the people, either directly and forthrightly in taxes or service charges, or indirectly and deviously by manufacturing new money, the value of which is taken out of the money in our pockets.
When the government taxes a dollar from me, I have a dollar less to spend for groceries and the government has a dollar more for missiles. The wealth of the nation has not been increased a farthing.
When the government gets a dollar by printing or otherwise creating it out of nothing, the people’s stock of dollars is not reduced but the government’s stock is increased. When the government spends this new dollar for missiles, it is plain that now, as in the case when the government gets a dollar by taxation, real wealth—steel, fuel, and the like—is taken out of the stock of civilian goods and put into the stock of military goods. The people’s wealth has been reduced, but this time the people have not had to give up their dollar. They still have it. It seems they can have their cake and blow it up at
But obviously they cannot. The real wealth represented by the missile is gone just as truly when it is paid for with created money as when it is paid for with tax money.
Some say this is not true when there are unemployed resources, that is, labor, land, and capital. They say that then the government spending of the newly created dollar sets to work otherwise unproductive resources so that the nation’s total product is increased. This ignores the fact that the nation’s entrepreneurs are continually bidding for the resources, and that if certain resources are at any moment unemployed it is because their owners are holding them for a higher price.
When the government enters the resource market with its abundant, newly created money, it outbids the private entrepreneurs, bidding up the prices of resources. The entrepreneurs, unable to afford the higher prices,”lay off”resources, and there is no net increase of employment. In fact, there may be a decrease. It is easy to see and count the resources that the government puts to work, but those that private entrepreneurs lay off are not so apparent.
If government creation of money by “borrowing” from the banks nets the economy nothing, why does Congress insist on spending more money than it taxes from the people? Taxing at least is straightforward and direct and brutal, while this other process is deceptive and devious. Anyone can understand taxing, but not one person in a thousand sees through the sleight-of-hand known as deficit financing.
Taxation Without Representation
Deficit financing and the inflation it engenders is essentially taxation without representation, a fiscal process by which the federal government filches from its people without their authorization, even without their knowledge.
When the government spends more than it currently collects in taxes or voluntary payments, as ours has done almost every year for a quarter of a century, the growing federal debt gives rise to the fiction that the burden has been postponed—passed on to future generations. Even if this were true, how could we in this prosperous era justify shifting our burden to our children? We have no cause to assume that they will be better off than we are—that they will be able to pay not only their own bills but part of ours.
But it is not true. He who thinks a part of the cost of government is being postponed by deficit financing is hoodwinking himself. If one-fourth of the real wealth produced this year is to be consumed by the government, then only three-fourths will be left for consumers, and the pain of giving up that one-fourth will not be alleviated one whit by paying for it with bonds rather than with cash.
Even in wartime, deficit financing makes no sense. When a nation goes to war—assuming that the war is supported by the people—this involves transferring the necessary part of its resources, including manpower, from the production of civilian goods and services to the production of war goods and the fighting of the war. Hence, the consumers must pull in their belts and consume less in order that Mars may consume more.¹
Illusions of Postponed Costs
Neither the consumers nor Mars can “borrow” goods and services from future generations; they must get along on what is on hand or produced currently. We did not fight the war of 1941-45 with guns made in the 1950′s. We fought the war on a currently balanced budget of goods, but we emerged from the war with a money budget unbalanced to the extent of $275,000,000,000. This debt, which imposed on the American people an interest charge of more than $7,000,000,000 a year in perpetuity, did not kill a single Jap or German. The interest, which in effect is paid by the group of Americans known as taxpayers to the group known as bondholders, neither adds to nor subtracts from the nation’s wealth. But the debt, having been largely converted into money, has generated inflation to rock the economy in a thousand ways.
If the money needed to pay for the war had been collected from the people currently, this would have reduced their disposable income and its upward pressure on price levels. Hence, neither price ceilings nor rationing would have been required. All the cost of policing the price control edicts, all the evils fostered by “black marketing,” would have been avoided.
Some believe that it would have been impossible to collect enough taxes from the people to pay cash for World War II. One of these is Professor William H. Anderson, author of Taxation and the American Economy (Prentice-Hall, 1951). However, he admits that the United States paid by taxation only about 41 per cent of its cost of fighting the war, while Canada and Great Britain managed to pay 50 per cent of their war expense by this method; and he adds, on page 533, “We did not approach either our psychological or taxable capacity under war conditions.” Others hold that had wartime income taxes been only 10 to 15 per cent higher than they were, there would have been no postwar inflation.2
Because the People Object
In the months following the Japanese attack on
The deficit financing by government implied that the people had to be cajoled into bearing the burden of the battle, had to be assured that a part of that burden was being shifted to the future.
And, indeed, a similar implication may be seen in the continuing peacetime deficits. Congress feels that the Treasury must “borrow” money to pay farm subsidies, veterans’ benefits, doles to house builders, foreign aid, and the like, because the people are not willing to supply cash for these purposes. And this time, Congress may be right!
Does Congress Know Best?
Assuming that the people are unwilling to pay, are their representatives warranted in stealing from them? Having found a way to raise money by sleight-of-hand—to rob the people in their sleep, so to speak—our legislators apparently are using this method to finance operations they fear the people would not be willing to support openly and directly. Through
What are the motives of the congressmen? Evidently, they think it their duty to control the economy. They have so indicated in such enactments as the Employment Act of 1946. Only they, it seems, have the wisdom and capacity to manage the nation, which entails spending the nation’s wealth. When the people demur, Congress spends anyway and writes it on the cuff. Government deficits are financing a burgeoning socialism.
The people’s protests are feeble. Whatever the meaning of the 1958 elections, they certainly were not a rebuff to the spenders. The popular, but mistaken, notion is that a part of the cost of government pap is being shifted to the shoulders of future Americans. The modern desire to get something for nothing—to reap without sowing—is moving the people to countenance successive government deficits during a period when, if ever, they are able to pay cash. Our generation refuses to pay its own bills. We are approaching the nadir of irresponsibility.
William McChesney Martin, Chairman of the Board of Governors of the Federal Reserve System, reports that foreigners are asking: “Since Americans clearly can afford these expenditures (of government) why don’t they pay for them? That is, why don’t they pay in taxes… instead of giving IOU’s or simply printing more paper dollars?” As Mr. Martin so well put it, that is indeed “something to think about."
¹For a more complete exposition of the economics of war, see Human Action by Ludwig von Mises (New Haven: Yale University Press, 1949), chapter XXXIV.
2See article by W. J. Fellner, American Economic Review, March 1947.