The State and the Nation

Outside Independence Hall when the Constitutional Convention of 1787 ended, Mrs. Powell of Philadelphia asked Benjamin Franklin, “Well, Doctor, what have we got, a republic or a monarchy?” With no hesitation whatsoever, Franklin responded, “A republic, if you can keep it.”

Most Americans agree that the founding fathers where remarkable men. Not just for their courage in bringing about a revolution, but also for the great wisdom that shines through so much of their writing. Their thoughts and experience through an incredible period of change led them to so many timeless observations, about money, government and so much else.

That these great men could write a new national constitution and guide a new country through its first years was also a tremendous start for a new country. Within a century a new nation had dramatically expanded, while preserving its unity, to become one of the most economically successful nations in the world.

How much the nation’s success stemmed from the wisdom of the constitution and the founding fathers it is hard to say, but right from the beginning Franklin knew that no blueprint, however brilliant in conception, could continue to sustain a successful nation without constant renewal and adherence to sound principles.

State expansion begins in the early 1900s

“Most bad government has grown out of too much government.”  Thomas Jefferson.

“Government big enough to supply everything you need is big enough to take everything you have… The course of history shows that as a government grows, liberty decreases.” Thomas Jefferson.

 

 

 

 

 

 

 

 

 

 

At the beginning of the 20^th century the size of the state, or government, started to expand. At first this seemed only fair. After the depression of the 1890s and the incredible private wealth concentrated in just a few hands (the so called “Robber Barons”), a new more inclusive approach seemed to most people at the time as a more equitable form of government that found widespread support. As usual, however, the devil is in the details.

As Murray Rothbard writes - more than any other single period, World War I was the critical watershed for the American business system. It was a “war collectivism,” a totally planned economy run largely by big-business interests through the instrumentality of central government, which served as the model, the precedent, and the inspiration for state corporate capitalism for the remainder of the twentieth century.

War collectivism showed that it was possible to shift from largely free-market capitalism to a new order of strong government, with extensive intervention and planning, for the purpose of providing a network of subsidies and monopolistic privileges to business interests. The economy could be cartelized under the aegis of government, and military and government contracts could be channelled to favoured corporations.

At the same time, labour could be tamed and bridled into the new system through promoting suitably cooperative trade unionism, and by bringing the willing union leaders into the planning system as junior partners. This new system could easily be cloaked as promotion of the overall national interest, of the welfare of the workers through the new representation for labour, and of the common good of all citizens.

The clear consequence of this change in the nature of the state had immediate and long lasting consequences for the size of government. The chart above shows clearly how much the state has expanded though the last century from 10% of the economy to around 40% now. The state has expanded by a factor of 4 over the last century and this originates in large part from this new system.

The Federal Reserve Act 1913

 "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." Written by Jefferson in a letter to the Secretary of the Treasury Albert Gallatin (1802).

 

In 1913, a Senator, Nelson Aldrich, closely aligned with the Rockefellers, pushed the Federal Reserve Act through Congress just before Christmas when much of Congress was on vacation. When elected, Woodrow Wilson passed the Act, but later, Wilson remorsefully replied, referring to the Federal Reserve Act 1913, "I have unwittingly ruined my country".

The FED is not a branch of the government. It is a privately owned part of the banking system. The Federal Reserve Act gives the FED the monopoly right to print the currency through the Treasury at near zero cost. The FED creates money from nothing, and loans it back to us through banks, and through the banks charges interest on our currency. The FED also buys Government debt with money printed on a printing press and once again receives interest income.

With the new collectivism and monopoly rights on currency issuance there was now considerable control of the economy and the nation as whole, both through the state and through state granted powers. No wonder that it now became desirable in certain quarters to expand the size and influence of the state. No wonder also that size of the banking and financial system has grown dramatically over the years.

The beginning of the end

“When the people find they can vote themselves money, that will herald the end of the republic.”  - Benjamin Franklin

There is one major impediment to the unbridled expansion of the state and that, of course, is gold. State manipulation of the economy and budget deficit spending are significantly restricted under the gold standard. If you have any doubt about this look no further than the chart below.  In the US the Gold standard was abolished in the early 1970’s. Do you notice that this is precisely the date at which the Federal Debt explodes c?

 

 

 

 

Where are we now?

We have already been warned by recent Treasury Secretary Robert Rubin, and the towering figure and previous Federal Reserve Chairman Paul Volcker that we are taking significant risks with our economy. It is now likely that Greenspan, himself, also now believes that the budget deficit is out of control, given statements he reputedly made recently at the French Finance Ministry. So let’s try and put this in perspective.

US government debt now seems insurmountable. According to the US National Debt Clock the Outstanding Public Debt is now just under $8 Trillion and rising by $1.62 billion per day. Plus if you add the value of baby boomer retirement liabilities into account the figure rises to $53 Trillion according to USA Today. This works out as $473,456 for each household.

What is our response to these enormous debts? Well apart from continuing to increase deficit spending with almost reckless abandon, we have also decided to cut taxes to bring down federal revenue to just 16% of gross domestic product, the lowest in 50 years. This is the financial planning of a madhouse.

Summary

Most Americans seem to passionately believe in the wisdom of our founding fathers and the constitution that they produced. Remarkably, however, they also seem unaware of the extent to which we as a nation have also perverted their principles and wisdom.

The size of the state has expanded far beyond what our founding fathers intended, with the rise of corporate and state collectivism at the beginning of the 20^th century. We surrendered control and monopoly rights over our currency to banking interests with the 1913 Federal Reserve Act. Finally we abolished the gold standard in the early 1970’s, in favour of paper money. All that has followed since was predicted by our founding fathers. Budget deficits as far as the eye can see and much else besides.

While this history won’t necessarily provide any guidance on what the markets will do in the next week, month, or even year, I believe that we need to be highly aware of our historic context for any longer term investments. We are in effect in a kind of twilight zone. It is hard to see to any immediate changes to our current system, but it is equally hard to see this system surviving in the long term, particularly when the baby boomers retire in force.

We are fortunate that we still can read the wisdom and follow the principles so clearly laid out by the founding fathers. In the current environment this is easier to say than do, but it can be done. Capt. Ian Fishback should be inspiration to us all.

 

 

 

 

 

 

Notice

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