By contrast, Iran has no known military bases in Canada or Mexico, nor has it imposed sanctions against the United States, as the United States and other countries have done to Iran. Yet, Iran is considered a threat to peace and stability because the International Atomic Energy Agency issued a report last November saying it very definitely might or might not be building a nuclear device.
If the United States ends up at war with Iran, there arises the question of what it will cost and how to pay for it. Using recent history as a guide, the total financial cost of the Iraq invasion, including veterans' support, is expected to reach $4 trillion. Yet in 2002, Bush economic advisor Lawrence Lindsey was fired for saying the Iraq war could cost as much as $200 billion, which was 3–4 times the Department of Defense estimate. Even if someone knew how much an Iran war would cost, no one would believe him. But it's clear we do have an idea of how we would pay for it: more debt.
On Friday, August 5, 2011, S&P downgraded US debt from AAA to AA+, citing a failure of government to stabilize its "medium-term debt dynamics." The previous Tuesday, Congress had voted to raise the debt ceiling by $2 trillion. S&P's downgrade, as Gary North viewed it, was their way of saying, "Yes, the loud noise you heard on Tuesday really was what it sounded like." It was a crack in the ice, a signal for smart skaters to head for shore.
Those pushing for more war and more debt are not smart skaters. How did we go from our core political principle of "live and let live" to the hegemonic "live the way we say, or we'll bomb you back to the stone age!"? How did we reach the point where smart economists tell us the size of the government debt is irrelevant as long as we keep the tax slaves rowing faster and faster? Actually, it began right from the start.
Funding a "Just War" UnjustlyUnlike the various US invasions in the Middle East and Asia of the past several decades, there is strong conviction among many Americans about the legitimacy of the country's founding war. A legitimate war, or what Murray Rothbard called a just war, "exists when a people tries to ward off the threat of coercive domination by another people, or to overthrow an already-existing domination." Like all wars, a just war is laced with dangers beyond the inferno of the battles, especially if war funding relies to a significant degree on the printing press. The American Revolution is a case in point.
On June 22, 1775, the colonial delegates who were assembled in Philadelphia, under the inspiration of Gouverneur Morris, decided to print $2 million in "bills of credit" called Continentals. The plan was to begin redeeming them in 1779, not with hard coin, but by levying taxes in the Continentals themselves, which would then be retired. So appealing was the idea of printing money that by 1779 a total of $227 million had been issued. The bills were everywhere, and everywhere despised. In a letter to John Jay, president of the Continental Congress, George Washington complained that "a wagon load of money will scarcely purchase a wagon load of provisions." By December 1779 the Continental had fallen to 42:1 against specie, and by spring of 1781 the currency was virtually worthless.
Individual states were also printing money to finance the war, and the British too adopted the printing press as a war strategy, printing Continentals and using Tories known as "shovers" to shove the imitations into circulation and thus accelerate the currency's depreciation.
Inflationists in Congress viewed depreciation as a clever way to impose the necessary taxes to pay for the war, though Gouverneur Morris thought it was too bad Washington's soldiers would suffer the most from this tactic. As the value of the currency rapidly approached zero, the Continental army turned to direct theft ("impressment") to acquire their provisions when merchants balked at trading goods for something worthless.
The Continental was allowed to die without redeeming it, but in 1779 Congress began emitting "loan certificates" that were also used as money. A big chunk of this money hung around after the war as a peacetime public debt. Robert Morris, the leader of the nationalist faction, pushed for its redemption at par in specie as a means of stuffing the pockets of associates who had purchased the certificates at highly depreciated prices.
Redemption was also a way of rallying support for taxing power in Congress. Under the Articles of Confederation and perpetual Union, which was ratified on March 1, 1781, the United States of America was considered a "league of friendship" rather than a central government, with each state retaining "its sovereignty, freedom, and independence." Although the articles recognized the obligation of Congress to pay all debts incurred before ratification, they did not give Congress authority to coerce such payments from the states.
To the nationalists, the lack of taxing power and other alleged deficiencies made the Confederation government "the laughing stock of the Atlantic world," as historian Leonard L. Richards notes in his masterpiece, Shays's Rebellion: The American Revolution's Final Battle. Throughout the 1780s, they tried fruitlessly to get enough of them together to replace the Articles of Confederation. In modern parlance, what they needed was a "new Pearl Harbor," a major crisis that could be propagandized for political ends. In 1786, Shays's Rebellion provided the break they needed.
Shays's RegulatorsAs the official story is told, indigent farmers in western Massachusetts were unable to pay their taxes, so the courts were sending them to jail and seizing their farms. To avoid the penalties for defaulting on their debts, the story continues, Daniel Shays and a few other "wretched officers" from the Revolution led backcountry rabble to shut down the courts.
Massachusetts Governor James Bowdoin called out the militia to put a stop to the uprising. When most of the militiamen sided with the rebels, he turned to wealthy Bostonians to fund a temporary army. Led by General Benjamin Lincoln, the army prevented the insurgents from seizing the federal arsenal at Springfield in late January 1787, then crushed the rebellion permanently a week later in a surprise attack at Petersham. Although the top rebel leaders fled to other states, most of the others eventually returned to their farms. Bowdoin agreed to pardon the rebels if they signed an oath of allegiance to the state, which the vast majority did.
As Richards argues compellingly, the standard story of Shays's Rebellion as an uprising of debtor farmers doesn't wash. Richards had discovered by accident that the Massachusetts archives had microfilmed the signatures of the 4,000 men who signed the state's oath of allegiance. Since many of the insurgents also included their occupations and hometowns, he was able to gather more information about them with the help of town archivists and historians. For example,
At the time of the rebellion Daniel Shays owed money to at least ten
men. Of those ten, three were rebel leaders. For every rebel who went to
court as a debtor, another went as a creditor.
Colrain, the most rebellious town, had 12 families involved in debt
suits during 1785 and 1786. Yet only four of these families provided men
to the town's total of 156 rebels. Their leader, James White, who led
the assault against the Springfield arsenal, was convicted of high
treason. He was also one of Colrain's creditors.
In 1786 creditors in Connecticut took over 20 percent of the state's
taxpayers to court. Yet there was no comparable revolt in Connecticut.
Like other states, Massachusetts had issued notes to help fund the Revolutionary War. Immediately upon issue, they depreciated to about 1/4 par, and later declined to about 1/40 of their face value. Many soldiers were paid in these notes, then later unloaded them to speculators at high discounts. Speculators bought roughly 80 percent of the notes, of which half were owned by just 35 men. Every one of these 35 had served in the state house during the 1780s or had a close relative who did.
The legislature voted to consolidate its war notes at face value and praised the speculators as "worthy patriots" who had come to the state's aid in its time of need. But these men did not buy the notes directly from the government; they bought them for a song from farmers and soldiers, who were now being taxed to redeem them at full value. The speculators, most of whom had stayed home during the war, were seeking to benefit at the expense of veterans.
Poll and property taxes were to account for 90 percent of all taxes. The poll tax placed a fine on every male 16 years or older. Thus, a regressive tax ensured a wealth transfer from farm families with grown sons to the pockets of Boston speculators.
Nationalist versions of the insurgency spread throughout the states and upset many elites, including George Washington, who was enjoying a peaceful retirement at Mount Vernon. According to Washington's trusted friend and former artillery commander General Henry Knox, who was planning to build a four-story summer home on one of his Maine properties, the insurgents wanted to seize the property of the rich and redistribute it to the poor and desperate. David Humphreys, one of Washington's former aides living in New Haven, told him the uprising was due to a "licentious spirit among the people," whom he characterized as "levelers" determined "to annihilate all debts public & private."
The "rebels," for their part, saw themselves from the very beginning as Regulators whose purpose was "the suppressing of tyrannical government in the Massachusetts State." The Shays Regulators drew on the success story of Vermont in the 1770s in which Bennington farmers, in a dispute with New York land speculators, had stopped courts from sitting and terrorized surveyors sent on behalf of the speculators.
On March 19, 1787, Knox wrote Washington hinting that he would be given the president's chair at the Philadelphia convention in May. Knox stressed that Washington would not be presiding over some middling conference of tinkerers amending a defective document but instead would be leading a prestigious body of men as they created a more "energetic and judicious system."
Nationalists at the Constitutional Convention that spring wanted a stronger central government — an elective monarchy, in Alexander Hamilton's view. Though they didn't get the results they pushed for, the nationalists and their intellectual heirs of today have shown that their lust for a more "energetic" government will not be thwarted by words on paper.
Hamilton's Funding ProposalsAs Rothbard notes, there were two ways to fund the debt: One way that was compatible with the decentralized nature of the union under the Articles of Confederation was to apportion the congressional debt among the states and let them raise taxes to pay their share. The other way was crucial to "the cherished principles of national aggrandizement": give Congress the power to tax so it can do the funding. Article I, section 8, clause 1 secured this power.
In January 1790, the 34-year-old Hamilton, as Treasury secretary, presented his plan to Congress for retiring the Revolutionary War debt. The $54 million federal debt would be funded at par and the federal government would assume responsibility for the states' $25 million war debts. The plan called for converting federal debt into bonds that would mature after an assigned period of time, paying 4 percent interest on long-term bonds and 6 percent interest on those of shorter duration. The new government would pay the principal on the debt from a sinking fund established through the post office. Revenue for the fund would come from an import tariff and an excise tax on what Hamilton labeled "pernicious luxuries" that included whiskey. His plan was not to pay off the debt, but to recycle it. When bonds came due he would have new bonds issued to replace them. As long as interest payments on the debt could be paid, the government's credit was assured.
Among those opposing his plan was Hamilton's former Federalist Papers ally, James Madison, who argued that repaying the debt at par to current bearers was stiffing war veterans and farmers for the benefit of wealthy "stockjobbers." He favored a plan of discrimination, wherein the government would pay the original bearers the face value of the certificates and the current bearers the highest market value plus interest.
Aside from the near impossibility of finding the original bearers, Hamilton opposed discrimination on the grounds that it amounted to a "breach of contract" if the government did not pay to the bearer on demand the full value of their certificates. How else would the government "justify and preserve their confidence"? The buyer of a depreciated security, Hamilton argued,
is not even chargeable with having taken an undue advantage. He paid what the commodity was worth in the market, and took the risks of reimbursement upon himself. He of course gave a fair equivalent, and ought to reap the benefit of his hazard; a hazard which was far from inconsiderable, and which, perhaps, turned on little less than a revolution in government.In funding wealthy speculators in this manner, Hamilton was well aware this would concentrate investment capital in relatively few hands and would encourage them to make further investments in the federal government. This was a critical part of his agenda: to strengthen the union at the expense of the individual states.
Senator William Maclay, one of Hamilton's most vocal critics, brought the public into the debate with a scathing article he wrote for a Philadelphia newspaper in February 1790. Assumption, he argued, was a means of reducing state governments to insignificance and of establishing a "pompous Court," by which he meant an arrogant and powerful central government. "The people will be meddling with serious matters unless you amuse them with trifles," he said caustically. A pompous Court in partnership with a pliant press would keep the people amused as it goes about its task of having the citizenry subsidize New York's moneyed class. The Treasury will grow in influence, and thus
shall the capital of the United States [New York] in a few years equal London or Paris in population, extent, expense and dissipation, while for the aggrandizement of one spot, and one set of men, the national debt shall tower aloft to hundreds of millions.As the debate raged throughout the spring and early summer, Hamilton, sensing defeat, turned to Secretary of State Thomas Jefferson for help. Jefferson invited Madison and Hamilton over for supper and together they cut a deal. In exchange for the needed votes, Hamilton would agree to relocate the nation's capital from New York to Philadelphia for 10 years, then finally to a place on the Potomac, where it would be next door to Virginia, more accessible to the South generally, and removed from Hamilton's power base. The arrangement was consummated when the Residence Act narrowly passed both houses in early July, and the funding bill became law on August 4 by a slim margin.
Still, the issue did not die. On December 16, a date immortalized by the Boston Tea Party in 1773, Virginia's General Assembly issued a formal protest. Unlike many heavily indebted northern states, Virginia had already imposed taxes to redeem a large part of its debt and had expected the balance to be extinguished in the near future. Hamilton's plan of assumption would benefit the more profligate states while imposing heavy taxes on Virginians for which the Assembly had no way of providing relief. Furthermore, since no clause of the Constitution gave Congress the authority to assume the debts of the states, and given that obedience to the law of the land was held as a "hallowed maxim," Virginia could not "acquiesce in a measure" that was clearly unconstitutional. As the perpetuation of debt in England has threatened everything that relates to English liberty, the Assembly noted, the same can be expected in the United States if assumption is not repealed.
The eight Massachusetts men in the House had been badly split on many issues regarding the new government, but on assumption they were united, because the debt would be funded by means other than direct taxes. According to Governor John Hancock, the consolidated debt of Massachusetts was $5,276,955, of which $5,055,451 ended up in Hamilton's program. Institutions claimed $347,097 of this amount, while the remaining part belonged to 1,480 individual citizens. Included in this group were speculators living in or near Boston who would be awarded almost 80 percent of the monetary total.
State leaders in Massachusetts had tried to pay off the state's war debts by 1790, and for this they had imposed an onerous tax scheme borne mostly by farmers in the west. Hamilton's plan removed this burden. Since many of them were subsistence farmers, rarely buying anything from the outside world, the new taxes amounted to almost no tax at all. The federal debt thus had little effect on their everyday lives. The taxes that drove them to shut down the courts in 1786 were gone.
ConclusionHamilton's funding proposals were step one in a fiscal policy that later included a rudimentary central bank and a proposal to protect favored American industries from foreign competition. By hijacking the legal system, Hamilton did indeed manufacture a "revolution in government," one that overturned the revolution of 1776. Though ostensibly constrained by the new constitution, he reinterpreted key clauses in such a way that the government could do almost anything, as long as it was declared to be in "the public interest."
Somehow, ordinary Americans found themselves to be the public whose interests required subordination to the decrees of the government.
The Whiskey Rebellion of 1794, in which Hamilton joined President Washington and 13,000 conscripts and officers from the creditor aristocracy of the eastern seaboard to crush penny-ante tax protestors in western Pennsylvania, dramatized this point.
So did the War to Prevent Southern Independence and every war or crisis since. So did the Sixteenth Amendment, the Seventeenth Amendment, the Federal Reserve Act, the Current Tax Payment Act of 1943 (withholding), the Patriot Act, the National Defense Authorization Act — I leave it to the reader to fill in the rest.
Today, with Hamilton's "implied powers" interpretation of the Constitution deeply ingrained in public rhetoric, a major political figure like Nancy Pelosi can respond contemptuously to a question about ObamaCare's constitutionality without fearing congressional censure.
As the US national debt continues its ascent to the heavens with the blessings of leading economists, the massive tower of IOUs sways to and fro at the mercy of political currents. Will Asians continue to buy the debt? Will the Fed be pressured to monetize more of it? Will the Fed say, "Enough!" and let interest rates soar? Will the government, with its dedication to endless war and cheap money, take over the task of obliterating the dollar so it can fulfill the grandiose dreams of the political class?
Fortunately, the ideas of Austrian masters such as Mises and Rothbard are permeating American politics, and not just in the presidential race. No longer can the Federal Reserve print without detection and foundational analysis, as witnessed by the success of such books as Meltdown and The Politically Incorrect Guide to the Great Depression and the New Deal, as well as the countless blogosphere commentaries and speeches bringing light to the Fed's perfidy.
In 1971, after severing the dollar's last tie to gold, President Nixon announced, appropriately, "I am now a Keynesian in economics." With the ice cracking under Keynesians and their promise of a free lunch, there could soon be a leader who can rightly proclaim that Austrian economics has saved the day.