For most of its history, the United States had no income tax and no IRS. In 1852 President Lincoln signed a tax law to fund the Civil War, but it was allowed to expire in 1872. Then, in 1913, the same year that the Federal Reserve was created (more on that later) Woodrow Wilson presided over a Constitutional amendment and a law that gave us our present system. From small beginnings and a very low tax, the system has expanded into a bloated bureaucracy and a tax that heavily impacts most middle class Americans. The IRS has its own armed and uniformed goon squad, and abuses are common, with the armed thugs breaking unannounced into homes and businesses, holding children and low level employees at gunpoint, seizing records, and closing businesses down, often when the victims (or the IRS itself) had simply made a mistake. And mistakes are hard to avoid with a tax code requiring about 7,500 standard-sized pages; even IRS Commissioner Douglas Shulman on 1/10/10 admitted that he had to pay a tax preparer to do his own return. And, under Clinton and Obama, the IRS has harassed people and organizations who criticize the regime.
No wonder that there have been numerous calls for reform and simplification. No wonder that many now call for a flat tax, a simplified tax with fewer deductions and the same rate for all, or a fair tax — a national sales tax. The fair tax would do away with the goons and the surveillance and control of ordinary citizens, and the stress and expense of doing tax returns every year. In addition, by taxing spending rather than earning, it would encourage savings and investment. But there may be an even better alternative. To understand it, we need to investigate money itself.
Money is a convenient means of exchange that has largely replaced direct barter. Commodity money makes use of valuable commodities, like silver or gold coins. Representative money is paper money that the issuing bank or government has promised to exchange upon demand for a fixed amount of silver or gold. And then there is fiat money. Fiat money is based on nothing except the claim by the issuing agency that it has value. Typically it is paper money (or numbers in a computer) that is not tied to anything. The Chinese, centuries ago, issued paper money, and the Romans turned their commodity money (gold coins) into fiat money by gradually reducing the amount of gold in each coin, which devalued the currency. In fact, fiat money systems almost always lead to inflation, although they can work quite well for a time. In modern times, central banks create fiat money out of thin air, and, through various incredibly complex (and deliberately confusing) methods, loan it to governments and to smaller banks. Often these smaller banks then profit from fractional reserve banking. Most people imagine that this means that a bank has, say, 100 units of depositors’ money, for which the bank pays, say, two percent interest, or two units. They might keep a reserve on hand in case of a run on the bank, say 20 units, and then loan out 80 units at, for example, four percent, grossing them 3.2 units — a net of 1.2 units. Such a system would work quite well, and would allow banks to make a reasonable profit — but that’s not how it works. In reality, banks may have, say, 100 units deposited by people with accounts — and loan out 1000 units. Needless to say, this inflates the currency, causes a great risk of bank failures, and makes obscene profits for a favored few, who can then use the money to take over more and more of the economy and gain control of the media and the political parties. In other words, it leads to the kind of crony capitalism we have in the US today.
There were attempts in early US history to establish a central bank; the idea was even favored by Alexander Hamilton. None of these banks lasted. In 1907 there was a bank panic (possibly engineered), which led to the famous meeting on Jekyll Island, Georgia, in 1910. Travelling under assumed names, Senator Nelson Aldrich (his clan and the Rockefellers intermarried), Arthur Shelton, Jr., Dr. A. Pratt Andrew, Henry P. Davidson (a J.P. Morgan and Company partner), Frank A. Vanderlip (President of National City Bank), and Paul Warburg (of Kuhn, Loeb, and Company) met at J. Pierpoint Morgan’s Jekyll Island Club. Here they planned a national bank, ostensibly to prevent future bank panics and depressions.
So in 1913 the same President Woodrow Wilson who gave us the income tax (and direct election of US senators, undermining state sovereignty) secured passage of the Federal Reserve Act. The result was a quasi-governmental monstrosity that is really a consortium of private banks. This began a long, slow devaluation of our currency, a continuing inflation that is like a hidden tax on all of us. The Federal Reserve sets interest rates and controls the money supply; anyone who believes that the people at the top do not use their foreknowledge for their own benefit and that of their cronies is not merely naïve, but childishly, pathetically naïve. It is noteworthy that the worst depression in US history came after the Federal Reserve was in place — supposedly to prevent depressions.
On 4/5/1953 FDR forced all Americans to sell their gold to the Federal Reserve at $20.67 per ounce — and then raised the price in 1934 to $35 per ounce. On 8/15/71 President Nixon decreed that dollars would no longer be redeemable on gold. The US dollar was now entirely a fiat system.
But is the concept of fiat money inherently evil? Not necessarily. If the Federal Reserve and the IRS were both abolished, the Treasury Department could issue fiat money openly and publicly, subject to strict controls. The government could then pay its expenses with this money, causing a permanent, fixed inflation (not an ever-increasing inflation) that would, in effect, be a sales tax on everyone, but without the trouble and expense of administering a sales tax. The government would never borrow, and any increase in spending would immediately be noticeable, as prices would rise. Of course, this would take away the profits of the billionaire banksters. The states, cities, and counties could finance themselves with sales taxes, as many of them do today, and I would further suggest abolishing property taxes, at least on homes, for how can people truly be said to own their own homes if they have to, in effect, pay rent to the government?
But like any other meaningful reforms, none of this can happen under our present leadership.
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