| 100_Percent_Juice |
2008-01-21 11:12 AM |
This is talked about every election year. The money problems of the US are not new. Here is a good article from 1973...
Quote:
Record of United States
Since the United States has been ‘leading the inflation procession,’ it is of interest to see what has happened to her spending habits.
In the last forty-three years the United States government’s domestic budget has had a deficit for thirty-six of those years! Yes, 84 percent of the time it spent more than it made.
As a result, the government’s debt reached over 427 billion dollars ($427,000,000,000) in fiscal 1972. That is the highest debt in history, and it is going up all the time. Nobody seriously expects it to be paid back. Why, just the interest payments alone on that debt come to more than twenty-three billion dollars each year now!
That kind of deficit spending over a long period of time had to have a bad result. It did—constant inflation.
Why so Many Deficits?
As we have seen, deficits lead to inflation. And deficits come about when a government spends more than it makes. But why such constant spending by so many governments in our time?
One of the main reasons is WAR. Of all the items in the budgets of most governments, the largest is often military spending. In the United States, military spending costs about seventy-five to eighty billion dollars each year!
But war destroys; it does not build wealth. Even in peacetime, war equipment produces nothing of real value. Instead, it soon becomes obsolete and must be replaced, usually by even more expensive equipment. True, such spending does create jobs. But it also creates huge debts, so no real wealth has been contributed to the nation.
Instead, it is more like a blood-sucking parasite draining away strength that could be far better used for other purposes. For instance, think of the benefits that could result if the seventy-five to eighty billion dollars that the United States spends on its military were devoted to peaceful pursuits. The same could be said of the Soviet Union or any other country. It would create just as many jobs, but think of how many cities could be rebuilt, how many new homes constructed. Think of the improvement that could be made in health care, transportation, parks and recreation areas, in reducing poverty and pollution.
An Example
To understand better what war and huge military expenditures do to an economy, let us imagine two families living next door to each other. Each has a nice home and property, and just enough income to pay their bills.
Now assume that they begin to distrust each other, so that one family buys a gun for protection. The other does the same. This begins a cycle of buying bigger, more costly weapons. But since they cannot afford them, they begin borrowing money.
Finally, they actually “war” against each other, destroying each other’s property. Has that destruction improved their living standard? Hardly.
Then, after that “war,” they have to rebuild. But, still suspicious of each other, they keep up their purchases of ever more costly weapons. In order to do all that, and to live from day to day, they borrow more and more money, falling farther and farther behind in their debt repayments.
Now, then, has the standard of living of these families really improved? Not actually, for no real wealth has been added. In fact, their standard of living is affected adversely when they buy weapons and rebuild “war” damage, since they have to take money away from other purchases. Also, it may appear as though they are improving when they borrow heavily to buy all the things they want. But when the bill collectors eventually demand payment, their real condition will be exposed.
Same with Nations
On a much larger scale, this has happened to the nations of the world in our lifetime. They have bled themselves to support the god of war.
By their constant warfare, they have destroyed vast amounts of property and wealth. Additional vast amounts of wealth have been used to support ever more costly weapons and armies, even in peacetime.
In order to pay for all that, and to pay for other things that they want to do, most nations have spent more money than they made. Hence, inflation. As an observer wrote in the New York Times:
“The root causes of inflation, above all others, are big military spending and failure to pay for it with adequate tax revenues. . . .
“A substantial part of this vast treasure of dollars and supplies is lost to our domestic economy, thus stoking the fires of inflation while denying funds to meet critical human needs at home.”
In addition to governments spending more than they make, in recent times vast numbers of people have done the same. They have gone on a huge “binge” of borrowing money to get what they want. And certainly, for a while, such borrowing and spending will enable them to live better. But there is always a day of reckoning with the bill collector.
Also, this borrowing from lending institutions, such as banks, “creates” more paper money. Owing to the nature of banking, for every dollar in bank deposits, a bank can make loans of many times that amount. And since most money transactions are made in checks rather than in cash, huge amounts of paper money are in this way “created” in checking accounts.
However, all this excess spending adds a flood of paper money chasing the available goods. That, plus excess government spending, puts more fuel on the fires of inflation.
Just how far has this splurge of excess spending proceeded in the United States? The total government and private debt in the country is now over two trillion dollars ($2,000,000,000,000)! That is far more than the yearly income of the entire nation! And this debt is skyrocketing higher each year.
Spending Overseas
But there is more. Another factor makes the situation even more unstable—overseas spending.
On the international scene the United States has consistently spent more money in other countries than it has made. As a result, it has piled up tens of billions of dollars in debts overseas.
Business Week described it in this way: “Too many dollars have been created, and there is a huge, undigested balance hanging over world markets.” Some estimates of this “undigested balance” range as high as 100 billion dollars.
Why has the United States piled up such vast debts overseas? The Economic Education Bulletin of May 1972 answers:
“First, for many years the U.S. government has disbursed [spent] abroad more U.S. currency and credits than It has received from abroad. Through its vast and overly generous foreign aid program and through large military expenditures in other countries, it has placed these claims against it in the hands of foreign governments, central banks, and individuals. . . .
“Second, the United States has indulged in marked and prolonged inflating . . . for more than three decades. This development . . . has resulted in such a marked increase in prices [for U.S. products] that many U.S. processors no longer could compete in world markets.”
Of course, there are times when such overseas spending comes nearly into balance with income. But the overall trend for the United States over the past few decades in its foreign spending has been similar to the trend within its borders. It has consistently spent more money than it has made.
As a result of all this domestic and foreign excess spending, huge debts have piled up, both within the country, and outside it. How are these debts to be paid? One hope was that someday the trend would reverse, that income would constantly become greater than spending. That would gradually reduce the debt. But this has not happened; in fact, the reverse has. Hence, just how were these debts to be paid off?
At one time the answer was—GOLD.
Gold—the Role It Has Played
For thousands of years, when people purchased goods they had to have something of equal value to pay for them. For much of that time they paid for goods by trading other goods.
Later, one commodity was found to be more valuable, more desired than the others—gold. Gold had unique properties. It could be kept indefinitely without deteriorating. It could be made into beautiful jewelry, coins or other items.
Hence, gold eventually became the best “money,” always acceptable. When paper currency came into being, it was often backed by this real money—gold. As long as the paper could be turned in for gold, people trusted the paper money.
The United States was at one time on the ‘gold standard.’ Its people could turn in their paper money any time and get gold. But since the paper money was much easier to do business with, people preferred to use that. They felt confident using it, since it was “as good as gold.”
Then the Great Depression began in 1929. The United States government started to build up huge deficits, spending more than it was making. So, in 1933, the government ruled that its citizens could no longer get gold for their paper currency. Also, all Americans were ordered to surrender gold coins and gold bullion (bars or ingots) in return for paper money. The government thus protected its gold stock from being wiped out by people who were afraid of their paper money and wanted gold.
Yet, the law did require the government to have one dollar in actual gold for every four dollars of paper currency it had in domestic circulation. This acted as a restraint, preventing the government from printing more paper currency than could be backed by 25 percent gold.
Last Restraint Removed
But in 1968 that, too, changed. The government passed a law getting rid of the 25-percent-gold requirement as a backing for its currency. One result of this was noted by the American Institute for Economic Research. It said:
“Removal of the gold reserve requirement for Federal Reserve notes early in 1968 removed the last vestige of restraint on further inflating and severed the remaining link between U.S. currency and gold.
“Since then the exchange value of the dollar has been controlled by the fiat [decrees] of U.S. money managers no longer subject to the discipline of gold.”
With this restraint gone, it was observed that the government “continued to succumb to the continual political pressure for more and more inflating.”
In addition, all the silver was taken out of coins. Hence, the entire money system in the United States was divorced from backing by anything of real value.
What all of this meant was that the government’s currency had to be accepted on trust. But the Economic Education Bulletin noted:
“The present money-credit system of the United States is founded on a broken promise.
“We refer to the promise once found on the Federal Reserve Notes that now have been withdrawn from circulation, the promise to ‘pay to the bearer on demand x dollars,’ a ‘dollar’ being defined by law as one thirty-fifth of an ounce of pure gold.
“A broken promise is not a suitable foundation for a durable money-credit system.”
Where the paper money had once pledged on its face that the United States “will pay to the bearer on demand” the dollar value in real money (gold or silver), now it says: “This note is legal tender for all debts, public and private.” The paper certificate that had for centuries only represented the real money (gold, or even silver) was now declared to be money. But which would people trust in a crisis—a piece of paper, or gold?
Foreigners also Told “NO”
While Americans could no longer get gold for their dollars, foreigners could. Gold was still the required money for payment of debts between governments in their international dealings. That was the arrangement that the Western nations had agreed to long ago.
But with constant inflation in the United States, foreigners became more distrustful of their U.S. dollars. So, many began turning them in for gold. Steadily, gold drained out of the U.S. Treasury. Here is what happened (in billions of dollars, round numbers):
Year U.S. Gold Stock
1950 $22,820,000,000
1960 17,804,000,000
1970 11,072,000,000
By 1971 the gold situation had deteriorated badly. Foreigners then held over fifty-five billion paper dollars, but the United States held gold valued at only about ten billion dollars. And the foreign dollar holders were showing signs of panic, of making a “run” on the little gold left in the U.S. Treasury.
In August of 1971, the United States took drastic action. It closed the ‘gold window,’ suspending gold payments for its debts overseas. The promise it had made to redeem paper dollars for gold in overseas transactions was repudiated. Other nations were shocked.
What did it mean? Some observers pointed out that for all practical purposes it meant that the United States had declared bankruptcy in its international dealings. This is another reason why the world’s money markets have become more unstable in the last few years. It is also why the price of gold on the European “free” markets has jumped from $35 an ounce to over $100 an ounce at one time.
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