When I think about the different ways that governments obtain money through seizure and taxation, I think of it like the old Disney cartoon Robin Hood where the Sheriff basically walks into the house with a bunch of children in it and takes the one gold coin the child received for his birthday. That's what tax collecting was like for thousands of years. People always hated the tax collector. It was generally the tax collectors who were more rich within the village. Maybe a little due to the fact they were paid so much by the governments to collect their money, but also because some stole money from people and kept it for themselves. The Bible even talks about Zacchaeus, the tax collector, who wanted to find Jesus and promised to give back 4 times the amount that he unlawfully took from the citizens and to be forgiven.
Basically, the point is, taxation was always a very personal and unpopular affair for the people involved. Revolutions are generally started through over-taxation whenever you look throughout history.
http://en.wikipedia.org/wiki/History_of_tax_resistance
Governments needed a better way to collect taxes and also raise extra revenue for more spending that wouldn't incite riots and revolutions.
One very successful way was the development of the Tally Stick in England that revolutionized the way taxes were paid and accounted for. Also with the Talley Sticks, the government didn't want to wait until people paid for their taxes the two times a year they collected (at Easter and Michaelmas), so they sold the Talley Sticks at a discount (since interest was not allowed per the Church law). Since they sold the Talley Sticks at a discount, the government raised funds immediately to spend, for the right to the total money at time of collection. These Talley Sticks had value since it was a claim on the taxes owed and traded in a similar fashion as government bonds do today. The Tally Stick system worked so well due to the fact it was backed by the gold coins that the taxpayers owed for taxes, and it allowed the government to spend in excess of actual current tax receipts as well as ease the pressure for the government to debase it's coins/currency to fund more spending. It was a win-win for both sides and it lasted for 726 years until the Bank of England ended their use.
http://www.arraydev.com/commerce/jibc/9811-11.htm
http://www.bus.lsu.edu/accounting/faculty/lcrumbley/tally%20stick%20article.pdf
http://www.garynorth.com/public/6916.cfm
The main way that governments get more funds historically is through the debasement of coins and inflation of paper currency. Most people don't even realize it's going on. If the government takes a gold coin from taxes, melts it down, adds some base metals to it and re-distributes it, nobody is the wiser. Think if you went and bought an 18k gold necklace. Could you tell the difference between an 18k and the 14k necklace a store gave you when you paid for an 18k gold one unless someone told you at the store or it was listed? Same thing back in the day, so they created ways to determine it's purity.
Real World Application...Skip if you want...
In the current day, even though we have paper currency, the coins we have are also debased at the same time. Quarters from 1932-1964 are made of 90% silver and are worth about $5.75/each...for now. War Nickels that are from 1942-1945 are worth closer to $1.75 each because of the silver content. This is the same as Pennies from 1982 or earlier are made of mostly copper (worth about $.025) vs. the pennies today made of mostly zinc and worth a lot less. This is similar to a 1 oz American Eagle Gold coin having a face value of $50 if you were to buy something with it at the store (it's legal tender), but it's actual metal value is around $1,685 today.
This is what debasement looks like currently for coins, but really, who uses coins any more to pay for anything or keep them? Most people use one of four things, cash, checks, debit cards, or credit cards. Only cash is an actual tangible item, although intrinsically a dollar is only worth the piece of paper it's printed on. Kind of like a coupon. A coupon could be $10 off if you purchase an item at JC Penney, or Macy's...but if you wanted to trade that coupon w/ JC Penney for $10 cash, they say no, it's not worth but 1/20 of $.01. A dollar is the same thing, only it's every person saying, I'll accept that $1 bill for $1 worth of xxx. That $1 will NEVER be worth more than $1 and whatever that could purchase. 10 years ago, $1 could purchase a gallon of gas. Today, $1 could buy you 1/3 a gallon (or less). 10 years ago, $1 could buy you 3 cheeseburgers from McDonald's, now it could buy 1. That's inflation. So unlike a coin which contains metals that are needed and traded in production of goods (intrinsic value) and could eventually go up in value, a dollar is a dollar, no matter what that can buy, because the paper itself is really not worth anything.
Checks are like the warehouse receipts that the goldsmiths would give to people depositing coins in their vault. The checks entitle you to withdraw or pay for items with money stored in the bank's vault. With checks though, there's always float time between when the check is written, given to the store, deposited at their bank, and funds transferred from your bank to the store's bank. In a lot of ways, writing a check is similar to writing a letter to your bank and telling them to transfer your money to another bank. If you don't have the money in your account, the check will bounce back to you and the bank will charge you a $25 NSF fee. If you want to prevent that from happening, you can pay a little fee and get over-draft protection where the bank will then give you money (a temporary loan) to cover the check until you put more money into the bank. Again, the check itself isn't worth anything but the paper, just like a $1 bill. It just tells the store that you promise to pay.
So where does that leave debit and credit cards? With a debit card, you're really trading computer code that's linked to your checking account. Technically, the bank is really the intermediary in the transaction as they are the ones that pay the merchant the money (plus a 1% fee) when you buy something. If they go to take the funds out of your checking account and it's not there, boom, finance charge of $35 over-drafting, plus the amount of the item you purchased. Where does the bank get the money then? They either take it from somebody else as a short term loan, or they give you a "loan" where they print the money out of nothing, and charge you $35 for the overdraft fee. They probably just pay it by creating it out of thin air. The money doesn't have to exist because of fractional reserve banking. As long as somebody has 10% of the amount you purchased the item for, they are good. Maybe someone that works in a bank could discuss this and explain that situation and where the money really comes from. Credit cards are a loan from the bank. It's a open credit line (up to your limit) the same as if you had a home equity loan. If you pay with a credit card, the bank is creating that money out of thin air through fractional reserve banking (plus charging a 1.5-3% fee to the merchant to take your card payment). All of these things are inflationary in nature because there's nothing real backing that paper, debit card payment, or credit card payment. Just the promise to work and pay it later.
So why do governments even need to debase the coins or inflate paper currency? Mainly due to financing wars, and more recently, to finance social programs (medicare, social security, education, etc). Historically, the only time a government would need to borrow money or inflate/debase the currency on a large scale was to fund a war. Just like the Romans who had a world-wide empire to fund soldiers everywhere, the U.S. today operates on-going wars and funds soldiers across the globe to be the world's police. As I write this, the government is looking to institute a no fly zone over Syria and either start a war with them, or provoke Iran to do something. Why? Who knows. But one thing is certain, it will cost a lot of money. Money we don't have and will have to sell Treasury Bonds to borrow the money to fund any activity.
Next I will discuss the current banking set up, and how it relates to the government financing of debt.
No comments:
Post a Comment