Annual US public spending has been in deficit for decades. As a result, total US debt continues to increase year after year with no end in sight. The end may not be in sight but the debt cannot continue to grow forever. We just don’t know when markets will shed the dollar, although the process may already be underway. In this brief essay, I will not point out all the disastrous consequences except that they are disastrous and will happen. Rather, I will point out how we got to this sorry state of affairs when it appears that other nations, such as China and Russia, have done a much better job of controlling public spending.
Gold Standard Takes the Blame
The main, and most obvious, reason that American spending has been in chronic deficit is that it abandoned the gold standard and appears to have no intention of reinstating it. Such is not the case with China and Russia. True, neither country is on the gold standard now, but both have been quietly accumulating gold for many years. Nor has either announced their respective total gold holdings or when and under what circumstances either would be prompted to tie their currencies to gold. Nevertheless, it is clear that both nations have a greater respect for gold than the US and appear to be preparing for its return at least for settling international trade accounts.
For millennia gold, and occasionally silver, were considered to be true money. Nations did go off the gold standard in time of war, but most quickly returned to a gold standard after the end of exceptionally high military spending. All nations, except the US, went off the gold standard in World War I, but eventually returned. The British returned to a gold standard in the 1920’s, but the monetary authorities made a glaring mistake. The British had increased the money supply by approximately double during the war, which made it almost impossible to return at the pre-war pound-to-gold ratio, but they did it anyway. This caused a severe recession in Great Britain as it required a drop in prices of 50 percent.
Labor contracts could not be honored and strikes ensued. Gold flowed out of the country, which Fed Chairman Benjamin Strong tried to ameliorate by inflating the dollar surreptitiously. This was but one factor that caused the US stock market crash and led to a sharp recession. Instead of ceasing monetary intervention and allowing business and prices to adjust, as was the policy of President Harding after WWI, first Hoover and then Roosevelt tried to cartelize the economy via price controls. The Great Depression followed. The gold standard took the blame for this debacle instead of Hoover/Roosevelt. In fact, it is a very common myth that Roosevelt’s New Deal saved America. Such is economic ignorance perpetuated.
Corrupting the People through Welfare
Secondly, in a gradual process, government became responsible for the people’s welfare, displacing the family and local friendly societies. The first large program was Social Security, truly the camel’s nose under the tent. Roosevelt sold the program to the citizens and to Congress using different rationales. To the public he claimed that the program was no different than a private annuity. The government took the people’s forced contributions, deposited them into earmarked accounts, and then distributed them plus interest to taxpayers upon reaching a certain age. Of course, the US Constitution enumerates no power to Congress to run a forced annuity program. So Congress and Roosevelt sold the program as merely a spending program, one of many. Social Security was never intended to replace the individual as primarily responsible for his own retirement income. It was sold as a supplement. Yet today 22 million Americans retire with no income stream except Social Security. This represents almost 40 percent of retirees. Obviously, the concept of moral hazard is unknown to government.
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