Tuesday, March 27, 2012

"Did a Tax-Budget Battle Almost Kill the US in 1812?"

Bloomberg via at CNBC's NetNet:
The myth that the United States government is—or soon will be—desperately short of tax revenues got a new airing over the weekend, in the form of a history lesson from Simon Johnson and James Kwak.
Johnson and Kwak, writing in a Bloomberg Op-Ed, argue that the failure of the federal government to raise taxes before and during the War of 1812 left us economically and financially weak.

Both dominant political parties were opposed to raising taxes to pay for the war against Britain. In New England, which had strong pro-British affinities as well as most of the capital and industrial capacity of the nation, the leading Federalists opposed the war altogether. The Jeffersonian Democratic-Republicans, who favored the war, opposed raising taxes to fund the war.

“Treasury Secretary Albert Gallatin borrowed the money, but he wanted to raise taxes to cover the interest on the new debt. He worried that, otherwise, bond investors would be unwilling to lend large amounts of money to a young country. But the war hawks were ideologically and politically opposed to taxes — particularly the excise (internal trade) taxes that Gallatin favored,” Johnson and Kwak write.

Another difficulty with borrowing the money was that the Federalist-led New England banks did not want to finance the war by purchasing government bonds, either.

“What the British had, more than anything else, was money. By contrast, without a stable source of tax revenue, the U.S. struggled to attract lenders willing to bet on the country’s unproven armed forces,” Johnson and Kwak write.

And this is why the United States lost its independence to Great Britain and has been a colony ever since.
Oh. Wait. That’s not what happened at all.

What happened, in fact, is that the United States government encouraged what economist Murray Rothbard describes in his book “The Mystery of Banking” as “an enormous expansion in the number of banks and in bank notes and deposits to purchase the growing war debt.”

In 1811, there were just 117 banks in the United States. By 1815, the number had risen to 246. The aggregate of bank notes and deposits rose from $42.2 million in 1811 to $79 million four years later, an increase of 87.2 percent. This expansion occurred even while the amount of gold and silver backing the notes shrunk. ...MUCH MORE