For
decades the American people have sought a solution to the alarming
rise in federal spending. At last they seem on the verge of getting
a balanced budget amendment to the Constitution via its Article V.
Congress would never approve a limit on federal spending, but Article
V allows the states to impose this on Congress.
For
this to occur, Article V requires two-thirds of the states (34
states) to pass a resolution for a convention for amending the
constitution. Twenty-eight states have already done so, and an
additional six are likely to join in 2017. Any amendment approved by
the convention will then have to be approved by three-fourths of the
states.
If
a balanced budget amendment—which I favor—becomes a reality, it
will be a tremendous achievement, but it will not solve all our
problems with federal spending. This is because (1) the government
is “cooking the books” on federal spending, (2) the Federal
Reserve is the engine of inflation for accommodating that spending,
and (3) there is no limit to the amount of money the Fed can create
since it is not backed by gold. Let's take these topics in order.
Cooking
the books
“Congress
plays games with the budget in so many ways it is hardly a stretch to
say that if it was held to the same accounting standards as public
corporations the entire Congress would be in jail for fraud,” says
Paul Gutterman, director of the Masters of Business Taxation Program
at the University of Minnesota. Here are some examples from my book,
The Impending Monetary Revolution, the Dollar and Gold:
An
official projection of a taxpayer gain of $14 billion at the
Export-Import Bank is actually a $2 billion loss.
The
$63 billion officially expected from FHA's single family mortgage
guarantee program is in reality a $30 billion loss.
The
Congressional Budget Office says the four largest student loan
programs will yield a saving of $135 billion in fiscal years
2015-2024. But it notes that under fair value accounting that is
practiced in the real world, those programs would likely cost $88
billion rather than save $135 billion.
David
Stockman, a former director of the Office of Management and Budget,
recently wrote:
Hundreds of billions are
being added to the public debt each year which are being erased from
the official deficit number due to the peculiarities of government
accounting. For example: during the last two years nearly $200
billion was borrowed by Uncle Sam to fund student loans, but that
didn't count in the official deficit because these outlays are
considered "investments", not “spending.”
Stockman also wrote:
The combined official
deficit for FY 2015 and 2016 was $1.025 trillion. But the public debt
rose by $1.7 trillion during that period, meaning that upwards of
$700 billion
of red ink didn't get counted in the deficit.
[emphasis
in the original.]
Professor
Gutterman says “Congress is cooking the books to minimize our
long-term budget difficulties. The bottom line is that no matter how
bad you think the budget deficit is, it is actually far worse.”
What
happens if Congress does not balance the budget? There are two
possibilities. First, the government might just shut down as
happened in the past when Congress couldn't agree on raising the
national debt ceiling. That is exactly what happened in the last
(partial) shutdown when the Republicans refused to raise the debt ceiling—until
they finally caved in to prevent further loss of public support. We
need a constitutional amendment that prevents one party from
demanding the other cut federal spending from its favored programs in
order to avoid cutting its own favored programs to reach a balanced
budget.
Second,
even if the government passes a proposed balanced budget, it may turn
out that by the end of the fiscal year—due to government's phony
accounting—the budget is not balanced after all. We need a
constitutional amendment to cover both of these possibilities.
Warren
Buffet has voiced an interesting solution. He said
to pass a law saying if there is “a deficit of more than 3% of
GDP, all sitting members of Congress are ineligible for reelection.”
Of course, this was immediately dismissed as unrealistic because
Congress would never pass a law to limit its power to spend, nor
would it propose a constitutional amendment to do so. However, an
Article V convention leaves Congress no role in proposed amendments,
so Buffet's basic idea would be workable and should be considered.
My objection to it is the trigger of “a deficit of more than 3% of
GDP,” because I wouldn't trust the government which has exhibited
such notoriously phony calculations to make an honest calculation of
something as complicated as GDP. My preference would be for a
simple balancing of outlays with receipts. Therefore, I propose
modifying Buffett's proposal to read: If the government shuts down
from failure to pass a balanced budget, or in any fiscal year in
which the budget outlays of the federal government exceed its
receipts, for which no correction is made within 60 days, all sitting
members of Congress are ineligible for reelection. And any shortfall
from the current year must be made up the following year or all
sitting members shall again be ineligible for reelection. I like
the idea that Buffet's
proposal would eliminate one party trying to gain political favor by
blaming the other for failure to make necessary budget cuts since
sitting members of both parties would be made ineligible for
reelection.
My
book includes an alternative amendment proposed
by George Price:
Section 1.
Within two months after the close of any fiscal year in which the
federal Government has borrowed more money than it has repaid, one
10th of the full membership of the House of Representatives and one
10th of the full membership of the Senate shall be chosen by lot and
expelled from office. The vacated offices shall be expeditiously
filled by election or appointment, in the manner prescribed elsewhere
in this Constitution.
Section 2. Those expelled shall not be elected or appointed to any office, or otherwise employed, in any branch of the federal Government for a period of three years for expelled Representatives and seven years for expelled Senators.
Observe
that the destructive tendency of using government spending to “buy”
elections will now be reversed. Profligate spending to win elections
will now be replaced by frugality to avoid being thrown out of
office. Moreover, having experienced the destruction of the dollar
from excessive spending, the voters may well place more value on
thrift than of the illusory promises of spending by political
candidates.
This
amendment proposal might seem drastic and perhaps unfair. You might
think it would be better to confine the expulsion of office to the
tenth of the office holders who voted for the most spending.
However, this would be less effective than having them drawn by lot.
For one thing, it would mean that the bottom nine-tenths of senators
and representatives would feel they were safe to spend even more so
long as they did not reach the top ten percent level; total spending
could actually increase. For another, having the expulsion drawn by
lot would mean no member of those legislative bodies would be safe
from the process. Those enjoying the best reputations or having won
their elections by the biggest margins would still be vulnerable.
Facing their own possibility of losing office—even if they were far
from the top tenth in advocating spending—they would likely put
pressure on their extravagant colleagues to be more frugal by denying
them party endorsement and campaign funds if they advocated too much
spending.
Price
writes,
“On the very rare occasions when a deficit is actually justified,
the expelled legislators should consider their sacrifice a patriotic
duty.” He adds, “Once in operation, if it proved to be not
strong enough, we could make it two 10ths.”
The
Federal Reserve, Engine of Inflation
Congress
prepares a budget which the president then approves, and the Fed
accommodates the government financing needs by manipulating credit in
the banking system.
Most
people, even those who believe in free markets and gold-backed money,
think a central bank is essential in the modern world to control the
money supply and manage the economy in various ways. But Paul
Volcker, a former chairman of the Federal Reserve, has stated:
With
a few exceptions...central banking is almost entirely a phenomenon of
the twentieth century. And there were market economies long before
the twentieth century. Indeed, to some extent, central
banks were looked upon and created as a means of financing the
government,
which I do not think people have in mind when they think about
central banking today....If you say a central bank is essential to a
market economy, I have to ask you about Hong Kong, which has no
central bank at all in the absolute epitome of a free market economy.
Yet it does quite well in terms of economic growth and stability.
[emphasis added]
Richard
Salsman, a former banker and author of a book on central banking,
writes:
Central
banks are bankers to unlimited governments, governments that spend
more than they have been willing or able to levy in taxes on the
populace.... Constitutionally limited and creditworthy governments
do not need central banks. They are able to finance their
operations in a free market with ready access to the private credit
system. [emphasis added]
In
my book, The Impending Monetary Revolution, the Dollar and Gold,
I have further discussion on central banking and quotes from several
other books by experts that have similar messages. But you get the
message: central banks are tools for unlimited governments; if you
don't want unlimited government, then you don't need or want a
central bank.
Kevin
Hassett, a former senior economist at the Federal Reserve, recently
wrote:
“If
you look at the activities that the Federal Reserve engages in these
days and compare them with the things it has the authority to do, the
difference is mind-boggling. For example, the Fed currently does not
rely on congressional approval for its funding. Instead, it holds a
large portfolio of bonds and funds itself from the interest they
earn, returning the residual to the U.S. treasury.
But
the Fed acquires the bonds with a kind of sleight-of-hand. It
approaches a bank that has a reserve account at the Fed and
purchases, say, a million dollars of bonds. It then pays for the
bonds simply by crediting the bank's reserve account with a million
dollars. Nobody has to print any money for this. The Fed simply
turns the knob on a reserve account in exchange for a financial
asset. The Fed's use of this device has expanded greatly in recent
years ...The Fed could, in theory, add to its funding in this way
indefinitely.
[The
Fed] was originally was supposed to cover its own costs by fees from
the banks it regulates, but the functions and “costs” have
escalated enormously in the years since. Back in the day, it was
never envisioned that the Federal Reserve might accrue a large
balance sheet, because the U.S. was on the gold standard when the
Fed was created. With money and gold connected, spinning
knobs to acquire bonds was simply not an option.[emphasis added]...As with many
activities, the Fed simply started doing novel things that Congress
never authorized it to do, and since nobody objected, it kept doing
them...The fed is an institution that has broken free of its mooring.
Its structure is unconstitutional.... It has expanded its role in
the economy immensely, often without any legal authority to do so.”
Hassett
also notes that “parts of the Federal Reserve's design that are
established by legislation have questionable legality”; that the
supposed “political independence” of the Fed is “an empty
concept”; and that the Dodd-Frank regulatory reforms “gave the
Federal Reserve an extraordinary amount of discretion to craft new
banking regulations.”
First
of all, notice in Hassett's first paragraph above that the Fed funds
itself; it is not dependent on Congress for funding. This means it
will be unaffected by a balanced budget amendment; the budget
pertains to Congressional appropriations. Second, the one thing that
formerly limited the Fed's ability to create money in the banking
system by buying bonds was connection between money and gold—and
that the Fed could “add to its funding in this way [by buying bonds
with only credit entries] indefinitely.”
We
need a constitutional amendment to end the Federal Reserve.
The
Gold Standard
The
gold standard and free banking flourished in the the 19th
century, particularly the latter part, and up to 1914, when World War
I broke out and the Federal Reserve system began. Before that war
every country had its own unit of account, such as the pound in
England, the dollar in the United States, and the franc in France.
Since these and other currencies throughout the world were defined as
specific weights of gold, they were all interchangeable at a fixed
rate. Money under the classical gold standard was truly global. The
world effectively used one kind of money, and that money was gold.
After
the first World War broke out, Canada, New Zealand and other
countries with free banking systems, adopted government controls of
the money supply to help finance their war efforts. After the war,
the League of Nations recommended that nations without a central bank
get one.
During
the gold-standard years, there was no U.S. central bank, no “monetary
policy,” no legal tender laws, no federal deposit insurance, and no
limit on the minting of coins by private banks. Yet it was a time of
price stability and great economic advancement. Michael Bardo, an
economics professor at Rutgers University, who is also associated
with the National Bureau of Economic Research, has written:
The
period from 1880 to 1914, known as the heyday of the gold standard,
was a remarkable period in world economic history....In several
respects, the economic performance in the United States and the
United Kingdom was superior under
the classical gold standard to that of the subsequent period of
managed fiduciary media. In particular, both the price
level and real economic activity were more stable in the pre-World
War I gold standard period than in the subsequent six-and-one-half
decades. [emphasis added].
Professor
Lawrence H. White, a specialist in the theory and history of money,
writes that, based on a large body of evidence,
“the aggregated performance of an economy on a gold standard is
likely to be better under free market banking than under central
banking.”
Salzman
writes that under free banking, “Sound lending practices were
commonplace. There was no reckless hunt for marginally creditworthy
borrowers. Free banks financed the most productive enterprises and
rewarded the most prudent savers....Free banking systems fueled no
reckless inflations, credit expansions, or panics.”
Kurt
Schuler, an economist in the Office of International Affairs at the
U.S. Treasury Department, says:
“Free banking was widespread, much more common than people
supposed, and generally worked quite well. The economic logic that
underlies free banking is timeless, and the same forces that made
free banking a stable and efficient system in the 19th
century would equally well apply today.”
The
great economist Ludwig von Mises wrote:
The gold standard was an
international standard. It safeguarded the stability of foreign
exchange rates. It was a corollary of free trade and the division of
labor...The gold standard put a check on governmental plans for easy
money. It was impossible to indulge in credit expansion and yet cling
to the gold parity permanently fixed into law. Governments had to
choose between the gold standard and their—in the long run
disastrous—policy of credit expansion. The gold standard did not
collapse. The governments destroyed it.
We
need amendment(s) to restore the gold standard and free banking and
eliminate our central bank, the Fed.
For
more on the issues of this posting as well as other constitutional
amendments we propose, see our book The Impending Monetary
Revolution, the Dollar and Gold, Second Edition.
Be sure to get the Second
Edition because it
contains six additional chapters not included in the previous
edition. Amazon.com does not sell the Second Edition. It and the
“other sellers” it lists—except for “amlibpub3,” which is
us—sell only the first edition. Buy direct from the publisher,
American Liberty Publishers (www.amlibpub.com),
and get your book autographed. No shipping charge in U.S.
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