A Free and Dynamic Economy

By Douglas V. Gibbs
Author, Speaker, Instructor, Radio Host


excerpt from my next book, A Promise of American Liberty

As the story goes, people became tired of lugging around their gold, so they hired a goldsmith to store their gold for them.  The goldsmith would issue receipts for the gold.  These pieces of paper were “as good as gold.”  Hence, the birth of paper money.

After a while, the receipts became a standard means of exchange for purchasing goods.  The goldsmith held the same amount of gold as the total of the values on the receipts that had been issued to the public, and if anyone, at anytime, wished to turn a receipt in for their gold, they could.  It was such a secure and convenient way of doing business, in fact, nobody ever thought about turning their receipts in for their gold.

The goldsmith realized that nobody was going to turn in their receipts.  Therefore, armed with that knowledge, the goldsmith took action to make a profit by issuing additional receipts on the gold he held.  He accomplished his plan by issuing the additional receipts in the form of loans, not only doubling the receipts circulating through the community on the amount of gold he held, but it created a scenario where he had the opportunity to earn interest when the loans were paid back.

The loaning of money worked out so well, the goldsmith continued to issue loan receipts, until his reserve of gold equaled about 10% of the value of the receipts he had issued.

What if, one may ask, all of the people decided they wanted to turn in their receipts for their share of the gold?  If all of the holders of all of the receipts decided to return to the goldsmith and demand their gold, how many of the depositors do you think would be able to get their gold?

In modern society, the goldsmith is now a bank, and the holders of the receipts all returning at once demanding their gold, or cash, is called a bank-run.  In the face of a bank-run, a large number of people would be going home without their gold, or in the case of today’s society, without their cash.

In the U.S. Constitution, Article I, Section 8 authorizes Congress the power to “coin money”.  Currency, back then, was coined using precious metals so that if the coin was melted, it would still be worth the same in terms of value.  Paper money was something the Framers of the Constitution were not fond of, therefore, printing paper money was not originally authorized by the U.S. Constitution.

During the American Revolution, the government under the Articles of Confederation issued paper money.  However, unlike the goldsmith’s receipts, there was no gold, or value, in the system to back the currency.  As a result, when the veterans of the Revolutionary War were paid the paper money as compensation for their service, none of their creditors were willing to accept the fiat currency.

Unable to pay their creditors because the paper money was worthless, the Revolutionary War Veterans protested.  They protested government offices, and blocked the steps of courthouses so that their creditors could not file lawsuits against them.  At one point, they even attempted to seize the munitions at the Springfield, Massachusetts ammunition depot.  The reluctant leader was Daniel Shays, and under his leadership the six-month rebellion led to the protesters taking over the Court of Common Pleas in Northampton with the intention of preventing the trial and imprisonment of debt-ridden individuals.

The government under the Articles of Confederation had no authority to raise an army to insure domestic tranquility, nor could they tax to fund putting together an army.  The States could not be consulted to activate their militias to resolve the problem because the protesters were the members of the State militias.  The merchants in Boston wound up putting together a mercenary force, which was used to quell the rebellion, and restore order.

Shays Rebellion revealed to the political leaders of the time period that the government under the Articles of Confederation was too weak, and needed to be strengthened for the purpose of protecting the union, insuring domestic tranquility, establishing a central justice system, and providing for the common defense.  So, the politicians met in Annapolis, Maryland in August of 1786, where they decided to meet again, but this time in Philadelphia, in May of 1787, to either fix the Articles of Confederation, or write a brand new constitution.

Money is created when value such as gold backs the money, or value is added to the system and then is established by loans.  If the amount of currency exceeds the amount of value in the system, it takes more currency to purchase the same item as before, which is a condition called inflation.  Deflation is when overall prices go down, carrying with it a whole host of new concerns.

To illustrate inflation, let’s examine educational diplomas and degrees.

Most people in American Society have either a high school diploma, or a G.E.D. equivalent.  Most employers require a diploma, or an equivalent, to be obtained by prospective employees before the employer is willing to hire the individual.  Sometimes, in entry-level jobs, one may be able to obtain employment without a particular skill level, and before one has been able to achieve receiving a high school diploma, or an equivalent.

If a person desires to advance in the marketplace as an employee, normally more education is required, which often results in a certificate or degree.  Among those instruments of achievement is a Bachelor’s Degree.  During the last few generations, obtaining a Bachelor’s Degree was an accomplishment few achieved, so the jobs available for people who had a Bachelor’s Degree were numerous when compared to the number of degrees held by graduates.  These jobs typically paid well when compared to non-skilled jobs, or labor-intensive employment that did not require a degree in the first place in order to obtain employment.

As society discovered that having a Bachelor’s Degree meant a greater opportunity to make more money, and as government realized subsidizing college education would garner some politicians more votes, the number of people achieving a Bachelor’s Degree has increased substantially.  As a result, more people in society have earned a Bachelor’s Degree than ever before.  The number of employment opportunities for those with a Bachelor’s Degree, however, have not increased at the same rate as the number of degrees issued.  As a result, the value of the degree has decreased.  Now, to achieve a high level of employment, in many cases, a Master’s Degree is required.

When currency is printed faster than the value inserted into the market, the value of the money decreases, and it takes more dollars to purchase an item than it did before.  This is called inflation.

The ratio between money in the system, and value in the system, normally remains fairly stabilized when the economic system is based on democratic and dynamic economic principles.  Today, we call that kind of a system “capitalism,” or a “free market.”

A democratic and dynamic economic system is based on individual decisions by the participants in the market, such as businessmen, merchants, and consumers, and provides a dynamic model that allows persons to rise and drop within the system based on their work ethic and economic decisions within the market.  In a free market system, the ups and downs of commerce and financial values rise and drop mildly like a road traveling through a hilly countryside, with slight uphills and slight downhills that rise and drop based on the behavior of the market as a result of manufacturing and consumer trends.

When government attempts to regulate markets, the hills and valleys of economic activity become more exaggerated, with steeper rises and drops, like you would see on a thrilling rollercoaster ride.  The boom-bust cycles put into place large economic bubbles of prosperity, and severe recessions and depressions.  Government managed markets tend to be more erratic in nature as a result of politicians and economists attempting to artificially manipulate the system so that the rises and falls coincide with certain events so as to make their political movement or party look more favorable. 

The way to solve the exaggeration of economic cycles is to return money to a value based system where there is a standard behind the value of the money (such as gold, or silver), and allowing currency to only be issued when value is added to the system.  To accomplish this government and central banking systems would need to have less influence on the economy, and allow the natural tendencies of a free market rise and fall based solely on supply-side economics, or a production driven system.

Supporters of a production driven economic system, or Market System, like the Austrian Economic Model as presented by Ludwig Von Mises, tends to support less government intrusion, while the Keynesian Economic Model teaches an increased governmental presence in the economy (command economy, managed economy), so that the government can print fiat money in order to “prime the pump” of consumerism.  The Keynesian Model follows the theory presented by John Maynard Keynes placing consumerism as the driving force of an economy, while people like Von Mises and Milton Friedman argue that production and less government interference drives economic growth.

The System of American Liberty was developed based on the lessons of the trials and tribulations of the colonists who attempted to use consumer driven models, communitarian models, and free market models.  The American System was also heavily influenced by the writings of economic minds of the era such as Adam Smith.

In a free market system, wealth can be created.  In a managed market where government control is increased in order to manipulate the market, the belief is that wealth is finite – hence, the saying, “The rich get richer, and the poor get poorer.”  In a free market system, it is believed the pie simply gets larger so that more of the pie may be obtained by those around it.

One of the most basic principles of free market economics is supply and demand.  The concept not only influences production and consumerism, but can also impact, or be impacted by, other economic issues such as taxation.

Cutting taxes reduces the penalty for working and producing, which encourages more working and producing.  Cut the cost of doing business and you get more business, which in the long run increases revenue.  Tax cuts are not a cut in revenue as some politicians may claim.  That said, the primary problem is not whether or not the federal government has enough revenue, the concern is about how much the federal government spends.  In a report compiled by this writer in 2007, 85% of federal spending was found to be unconstitutional, and/or repetitious.

The current income tax system in the United States uses tax rates that are increased or decreased based on the size of one’s income.  Progressive taxation is a communist strategy and is listed in Karl Marx’s Ten Planks of Communism.  Marx believed in heavy taxation so as to establish a system of a redistribution of wealth, which is a policy designed to tax the wealthy into poverty, and eventually eliminate the upper and middle classes.

Samuel Adams recognized the existence of redistribution of wealth tactics even during the Revolutionary era.  His name for the utopian strategy was “schemes of leveling.”  He said, regarding the policy, “The Utopian schemes of leveling, and a community of goods (what we now call Socialism), are as visionary and impracticable as those which vest all property in the Crown. [These ideas] are arbitrary, despotic, and, in our government, unconstitutional.”

To manage the market utopians require a central bank.  The first central bank in the United States, The Bank of the United States, was established by the country’s first treasury secretary, Alexander Hamilton.  The Second Bank of the United States followed shortly after the expiration of the charter of the first central bank.  In 1833, President Andrew Jackson declared war on the Second Bank of the United States, stating that we did not need it, and that the Constitution supports the issuance of hard money, not paper money.  One of his campaign promises had been that he would end the existence of the central bank.  He used his executive power to remove all federal funds from the bank, which, in the end, did spell doom for the institution.  The Bank charter was due to expire in 1836.  The President of the Bank of the United States, Nicholas Biddle, made rechartering the bank a primary issue during the election of 1832.  President Jackson moved federal deposits from the institution, distributing the funds to several dozen private banks throughout the country in 1833.  Biddle retaliated by contracting Bank credit, inducing a major financial downturn.  The reaction by Biddle soured public opinion towards the bank and set financial and business centers against what they considered to be a form of mercantilism.  Between 1834 and 1836, knowing that Jackson would likely succeed in stopping the bank’s recharter, Biddle arranged the bank’s conversion to a private State chartered corporation in Pennsylvania.  In 1839 Biddle resigned from his post as bank president.  In 1841 the bank failed and was closed forever.  Shortly afterward, Biddle was arrested and charged with fraud, but was acquitted.  He spent the rest of his life (He died in 1844) battling related civil suits.

In 1913 a centralized national bank returned to the United States in the form of the Federal Reserve.  The Federal Reserve Act surrendered control of the American monetary system to the international banking cartel and guaranteed the eventual abandonment of the gold standard.  The Federal Reserve's debt-based money guaranteed the enslavement of every American under a crushing debt burden. The Federal Reserve enabled the  international banking cartel to confiscate wealth through artificially created boom-bust cycles.

The Federal Reserve is not a government entity.  It is owned and operated by independent international bankers.  The result is that the U.S. Government, and the bankers in charge of the federal reserve, can manipulate the economy simply by the amount of money they decide to pump into the system, and by how much they raise or drop interest rates.

The United States monetizes its debt when it converts debt to credit or cash.  The bank puts the debt on its balance sheet. It literally creates the credit out of thin air.

The Federal Reserve monetizes the U.S. debt when it buys U.S. Treasury bills, bonds, and notes (bills of credit).  

Government spending, in relation to the National Debt, has a direct impact on the economic cycles we experience.  The more the government borrows, the more fiat money is pumped into the system.  The result is increased inflation, and a stalled economy.  Cutting spending results in less money being borrowed, which then returns value to the dollar, and in turn reduces the level of inflation.

The damage created by the new Federal Reserve expanded the size of the lower economic class.  As a result, the welfare system was created to compensate for the damage caused by the Federal Reserve and the direct income tax.

A combination of the creation of the Federal Reserve, and the advent of direct taxation (16th Amendment, also in 1913) has led to a steady increase of federal spending, and a growing political appetite for a soaring national debt.  A number of financial crises, including the Great Depression, have occurred as a result.  Ongoing debt problems in Europe has illustrated what may be in America’s future should we continue down this path of debt.

Historically, America’s strong growth and high living standards were the result of the country’s system of limited government.  The ongoing expansion of the size of the federal government, and the coinciding surge in federal spending, has been undoing its prosperity, thus, reducing the competitive advantage the United States has been enjoying when compared to her global competitors.  The result has been increases in taxation, and a less robust economy which offers fewer opportunities.

Deficit spending has exploded.  Keynesian economists, faced with the dawn of the Great Recession at the end of the first decade of the new millennium, decided that consumer spending needed to be encouraged with a government fueled stimulus package.  The Economic Stimulus Act of 2008 was signed into law on February 13, 2008 by President George W. Bush with the support of both Democratic and Republican members of both Houses of Congress.  The total cost of this bill was projected at $152 billion for 2008.  Federal Reserve Chairman Ben Bernanke testified before Congress that quick action was needed to stimulate the economy through targeted government spending and tax incentives.  The impact of the stimulus package was minimal, and the recession increased momentum despite the demand-side strategy.

During the first year of the first term of the administration of President Barack Obama, a 2009 stimulus package of more than $800 billion was put into place.  It, also, failed to halt the march of the recession.

The federal spending spree, rather than encouraging economic growth, suppressed private-sector activities.  The resulting lowered economic confidence reduced investment activity and further stagnated consumption demand. 

For businesses, every economic obstacle represents an increased cost of doing business.  Higher interest rates push up interest costs.  Increased taxes, insurance prices, and regulatory costs also represent an increase in the cost of doing business.  Private sector businesses respond by making adjustments to ensure they may maintain a particular profit margin.  Cost reduction tactics may include an increase in price, a reduction in quality, a reduction in quantity per unit, or a reduction of costs associated with employees.  Those reductions, in regards to a company’s workforce, may include layoffs, a reduction in hours, a reduction in raises or bonuses, or a reduction in the costs associated with benefits.  During a recession cost increases occur in programs sensitive to economic cycles, such as unemployment insurance.

A steady increase in federal spending may influence the rising costs of doing business in various ways.  In order to service the debt, the government uses confiscated capital (taxation), thus, extracting resources from current and future taxpayers.  However, the resources consumed by government are not used to produce goods in the private marketplace.  Therefore, government projects may actually take away opportunities in the private sector.  For example, personnel needed to build a government project will no longer be available to build other projects in the private sector of the economy.  Therefore, while public works projects may create government-connected jobs, such projects also take away resources from potential private activities.

A deadweight loss can be created by government spending and taxation, which may actually hinder the economy.  The larger a government grows, the more severe the deadweight losses.  As the government expands further, it engages in less productive activities.  Private sector activity and average income both fall as the government expands.  Only tax cuts, a reduction in regulations, and major federal spending cuts will boost our economy and allow it to begin its journey back towards its free market foundation.

Alexander Hamilton supported the idea of perpetual debt, claiming that it ensures that a country maintains a favorable credit rating, that a national debt serves as a protective measure against States seceding since they bear a share of that debt, and he believed that government spending was good for the economy.  He also supported the idea of having in place a national bank to manage that debt (hence, the reason he lobbied for the Bank of the United States). 

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