Guest Editorial
The shabby secret of the welfare statists of both political parties

By Craig Cantoni | March 3, 2010

craig cantoniLong before he traded his principles for fame and power by becoming Chairman of the Federal Reserve, Alan Greenspan was a devotee of Ayn Rand. In 1966, he wrote an essay for her periodical, The Obectivist Newsletter, in which he revealed the shabby secret of the welfare statists of both political parties. To wit:

... the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures [and wars] on a large scale.
This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.

Of course, Greenspan knew that the Federal Reserve was the vehicle for turning government bonds into money. He also knew that without a gold standard, there would be no spending restraint on Congress, because the Federal Reserve could produce revenue for the government by printing fiat money. But in spite of knowing the shabby secret, he would later accept the post of Fed Chairman and proceed to print money and enable the statists.

In 1944, or 20 years before Greenspan wrote the above for Ayn Rand’s newsletter, the President of the Federal Reserve Bank of New York, Beardsley Ruml, wrote something similar in American Affairs:

[The] principal purpose of federal taxes is to attain more equality of wealth and of income than would result from economic forces working alone. The taxes which are effective for this purpose are the progressive individual income tax, the progressive estate tax, and the gift tax. What these taxes should be depends on public policy with respect to the distribution of wealth and of income. These taxes should be defended and attacked in terms of their effect on the character of American life, not as revenue measures.

Ruml knew that Americans would rebel if taxes were increased to fund both the welfare state and the constitutional workings of the federal government. As such, he saw the Federal Reserve as the means to generate revenue outside of taxes, in a complicated system that is hidden from public view and beyond the understanding and curiosity of the average citizen. Of course, when money is created out of thin air, the result is a hidden tax on citizens, because their savings and wages lose purchasing power. The process makes a mockery out of the constitutional provision that Congress has the sole power to levy taxes. Granted, this is of little consequence to citizens who have no savings, who are on welfare, or who get more back in tax credits and government services than they pay in taxes. This group is fast becoming the majority in America.

Incidentally, Ruml was the former Macy’s executive who developed the idea of the federal withholding tax – that is, the taking of a portion of pay before the pay even gets into the hands of the wage earner. With every paycheck, the tax is a reminder that the government, not the wage earner, has the first claim on the fruit of one’s labor.

In 1919, or six years after the Federal Reserve was established, the renowned economist (and Fabian) John Maynard Keynes wrote this:

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens ... Lenin was right. There is no surer means of overturning the existing basis of society than to debauch the currency.

Given Keynes’ ideology and economic theory, one has to wonder if he was secretly hoping that Lenin would be proved correct.

Unfortunately, Lenin is being proved correct. So is Greenspan. Nearly 60 percent of the federal budget is now consumed by social spending, the federal deficit has become a grotesque monster that will devour the standard of living of future generations, and the purchasing power of the dollar has plummeted faster than an Olympic luger ever since the dollar was disconnected from the gold standard.

Still, most Americans don’t know the shabby secret – namely, that the Federal Reserve allows the statists of both parties to give stuff to people without having to pay for it through taxes alone. As a result, too many Americans believe that government spending can be restrained by electing different politicians, when the fact is that it will never be restrained as long as the Federal Reserve is allowed to print money.