Widespread confusion concerning money and credit affords the illusion that certain burdens of government spending, such as the costs of fighting a war, can be postponed more or less indefinitely, at least, until peace again prevails.
If a man’s automobile is stolen, there is no reason for him to think that the impact of his loss may be postponed, that it may be several months or even years before he actually misses his car. Or, possibly he sells his car, but then finds himself holding a worthless check while car and "buyer" have disappeared. Right away, he understands that he has lost a car. Or, instead of by check, he finds that he has been paid in counterfeit bills. His car is gone for nothing, and he knows it at once.
It’s possible that the thief or check passer or counterfeiter may have the use of the car for some time before he is apprehended and obliged to pay. But, surely, that crooked way of postponing costs can have no widespread appeal. Nor can a durable society be founded on the principle of stealing from one another; all too soon there would be nothing to steal.
Now, suppose the government appropriates the car in the interest of national defense — simply takes it from the rightful owner. Will the man reason with himself that he won’t miss the car until after the war? No one really labors under such an illusion, and well do politicians know it.
Instead of simply confiscating the man’s car, the national government pays him for it — or gives him its bond or other promise to pay. There begins the illusion. Whereas, in fact, one car has been withdrawn from the market supply of goods and services available to customers, no potential buyer is aware that he then and there has lost that much purchasing power. Shortly, buyers may note that cars are becoming somewhat more expensive; indeed that goods and services generally are rising in price. But how many housewives and other shoppers will ever come to the full realization that the cars and other goods and services that the government withdraws from the market have been replaced by nothing except "national defense" and "general welfare"? Instead of cars and things, customers have "money" — of the type that only a national government with a fractional-reserve central banking system can create.
The great illusion is that all of this extra money is worth as much as the missing car, and that it actually will be enough to pay for a car once the war or other national emergency is over. Under that illusion, a person can easily persuade himself that the cost of the war has been postponed and that the taxpayers of a future generation eventually may pay off the national debt.
Both Guns and Butter
The sad truth is that real wars are not waged with weapons and other resources to be produced or withdrawn from the market at some indefinite future date. The full cost of ammunition occurs, and the burden has to be borne, as economic resources are channeled to that purpose and before a shot can be fired. Every scarce commodity or service committed to war at that very moment diminishes the buying power of private citizens by a corresponding amount. If they have extra money in their pockets, it will be matched either by higher taxes or by higher prices — or some of both.
It’s true that people may have both guns and butter if they will save enough for tools and working capital and work long and hard enough to produce all that is needed of both. And the patriotism stimulated by war may bring forth such extra effort and productivity. But it will never be true that men can shoot guns or eat butter now that are going to be produced by a future generation. That is strictly an illusion, stemming from a person’s faith that the money and credit created by government out of thin air is worth as much as the goods and services the government withdraws from the market. Upon such misplaced faith rests the sorry case for inflation.
If we will think in terms of goods and services, it is easy enough to see that the cost of things used now must be borne by us now and not later. The illusion that we can spend now and pay later, or that we can pass our costs on to future generations, begins when we try to think in terms of money and credit and its manipulation.1
Our debts cannot be escaped by us or be passed along to future generations. What we leave to our children, by our reckless spending, is a ruined economy!
¹ It should be clear, of course, that this discussion does not pertain to private buying and selling on credit. Businessmen and their customers cannot create money and credit out of thin air. An individual may only borrow what someone else is willing and able to lend, and quickly reaches the limit of his credit if he cannot or will not meet his obligations. The point of concern, in this article as in the world of reality, is the tampering with money and credit that is perpetrated by the government and blamed upon the victims.
A House Divided
Living within our income as a government is no more complicated than it is for an individual to refrain from buying groceries and pretty clothes he cannot pay for. In many quarters this is an accepted objective of national tax policy. The trouble lies in the means of attaining this end. The difficulty of making both ends meet in governmental fiscal matters may be due partially to our setup which separates responsibility for budgets of expenditure from responsibility for budgets of income. Any family would likewise have difficulty balancing its budget if one member had full power over spending and another over income, and if each took the attitude that the other side of the account was something for the other person to worry about.
F. A. HARPER, The Crisis of the Free Market