6. When the State Monopolizes Money

CHAPTER SIX

WHEN THE STATE MONOPOLIZES MONEY

“Show me the tax money.” So they brought Him a denarius. And He said to them, “Whose image and inscription is this?” They said to Him, “Caesar’s.” And He said to them, “Render therefore to Caesar the things that are Caesar’s, and to God the things that are God’s.” (Matthew 22:19–21)

By the days of Jesus, rulers had learned the wonders of issuing money. No longer was money the product of silversmiths or goldsmiths. No longer did private individuals have the legal right to issue ingots or other easily recognized units made with precious metal. The State had made money a monopoly.

There were many reasons for this. Let’s begin with the key fact in this famous confrontation between Jesus and the Pharisees: the face and the inscription. The coin was a Roman silver denarius. It was specifically a tax coin, a coin for paying tribute to Rome.

Now why would the questioners ask him about the lawfulness of a Roman tax? To tempt Him. Either He would say that it was unlawful to pay the tax, and incur the wrath of the Roman authorities in Jerusalem, or He would say to pay it, and incur the wrath of the multitudes that followed Him. So, He turned the tables on them—figuratively, this time. He had already turned the tables on them in the temple (Matthew 21:12).

What kind of coin did they bring Him? A tribute coin. So, they possessed a tribute coin? Of course. This meant that because of the realities of Roman power, they had already made their own decision to use coins, that were tax coins, as currency. They were the beneficiaries of a widely respected coinage system which had been imposed by a foreign ruler. If they profited from the system, why shouldn’t they pay taxes to support the system?

We can learn a lot by a study of Roman coinage. The Roman Empire was a religious organization—all ancient societies were. (So are all modern societies, but most of them disguise this fact.) Increasingly, the emperors were regarded as gods, especially in the eastern half of the Roman Empire. The coins were used as political devices. In an illiterate world, the pictures on the coins announced religious messages, which in turn were political messages.

Tiberius Caesar’s picture was on the denarius that they handed to Jesus. Tiberius issued only three types of denarii during his reign, and by far the most widely circulated had his face on one side, adorned with a laurel wreath, a sign of his divinity. The inscription read, “Emperor Tiberius august Son of the august God,” referring to Caesar Augustus, the father who had adopted him.

On the back of the coin, his mother appears, seated on a throne of the gods, in her right hand she holds an Olympian scepter, and in her left hand is an olive branch, a symbol of peace. Professor Ethelbert Stauffer, a theologian and a numismatist, commented concerning the coin: “It is a symbol of power. For it is the instrument of Roman imperial policy.”

Roman coins from Augustus on, announced divine emperors, saviors of the world. Yet by the year 300, the coins were worthless, price controls had been imposed, and the empire was an economic catastrophe. The more the coins promised deliverance, the worse they became. The silver was taken out of them, and cheap copper was substituted. Professor Stauffer’s book, Christ and the Caesars (1955), tells the story of the collapse of the pagan Roman Empire through a study of its progressively debased coinage. As the Empire collapsed, so did its coinage.

A Sign of Sovereignty

Political rulers learned very early just how powerful coins could be in serving as symbols of political and religious authority. They could serve as unification devices, just as flags serve modern men. The users were reminded constantly of the source of the coins (the State) and the person who made the State possible (the political-religious leader).

It is not surprising that the first coins ever issued were issued in order to strengthen the State. While Greek coins in the ancient world were in part used to expand commerce, historians are now generally agreed that political motives were equally as important as economic motives. The right to issue coinage was a sign of a city-state’s political and legal independence. In other words, the State’s officials saw coins as an effective means of strengthening citizens’ loyalty to the existing government.

But the symbolic importance of coins was only the beginning. The State could use coins as a means of collecting taxes. If the State issued precious metal coins, it could collect coins as taxes. This made it easier to keep tax records, and politicians always like to simplify tax collecting! The State could buy goods and services, including the services of armies, if it had coins.

Where could the State get the precious metals? From mines, or from successful warfare, or from taxing businessmen who were involved in trade. Once the State sanctioned money, this would have led to an increase in demand for certified money. After all, the State collected its taxes with its own money. This would have created demand for money just in itself.

Eventually, the politicians learned about the short-term benefits of debasing the currency. They learned quite early, in fact. When the State took in gold and silver, it then issued coins that were pure. But as time went on, and people became accustomed to the coins, the old debasement trick became too tempting for politicians to resist.

People don’t like to pay taxes. They never have. Politicians love to spend money. They always have. So, politicians long ago figured out a way to increase spending without increasing direct tax collections. If they just took out some of that molten gold or silver, and poured in some cheaper metal, they could produce more coins with the extra gold or silver. You have heard all this before. (Take a “silver” coin—ha, ha—out of your pocket. You have in your hand tangible proof that politicians haven’t changed over the last two thousand years or so.)

The government then spends these extra coins into circulation. It makes little difference in the long run whether it’s the government or a private silversmith who does this. The result is more coins in circulation. Prices will eventually go up. The trick is to spend the debased money before everyone else catches on and hikes selling prices.

There is a new problem, however. The people may trust the State more than they trust private silversmiths. They think that the State is honest. In the old days, they thought the State was divine. Thus, when the State starts producing debased money, it threatens people’s confidence in law and order. In the ancient world, it made people doubt the honesty of the gods.

We are back to God’s laws regarding honest weights and measures. If God is the Judge, then His lawful representatives in the civil government should not cheat. To cheat here is to call into question the reliability and the integrity of God.

The State may be able to get away with the debasement process longer, since people trust the State. But coins are coins, and if more of them are coming into circulation, people are building up a supply in reserve. Why not spend some of the extra ones? As they are spent, prices begin to climb, compared to last year’s prices, which were produced by an economy with fewer coins in circulation.

Ultimately, it doesn’t matter who produces the coins. People will respond to the new conditions of the supply and demand for money. If there is a greater supply of money, the price (exchange value) of the money will drop. Holders of cash will be hurt.

A New Form of Debasement

The trouble with money metals from the politicians’ point of view is the very measurable character of metal. If a user can measure it and weigh it, he can tell if someone has added a cheaper metal to the precious metal. The coin’s weight will change. It also starts to change color as more and more base metals are added. Then everyone finds out about the corruption. People lose faith in the issuer of the coins.

But paper money overcomes this inherent weakness. One piece of paper looks like any other piece of paper. They all weigh the same. How can the user determine which piece of paper is the phony? He can’t.

How does the State get people to accept pieces of paper as money? By making them convertible on demand for silver or gold. Then the State just starts issuing more paper notes than it has gold in reserve. Most people don’t catch on. They accept the State’s paper as if it were honest money. After all, these are our leaders. They wouldn’t cheat us.

Yes they will … if they think they can get away with it. They can, too. They already have: in the United States in 1933 (gold) and 1967 (silver).

As more and more pieces of paper come into circulation, the price of goods starts to rise. This includes the price of gold or silver. Now, if a piece of paper called “one dollar” entitles the bearer to collect an ounce of silver, but the printing of paper money raises the price of silver to “two dollars,” it pays the person who owns the piece of paper to go the treasury and get an ounce of silver with his paper dollar.

Guess what he then does with the ounce of silver? He takes it to a free market silver dealer and sells it for two dollars. Then he takes two dollars to the treasury and gets two ounces of silver. Then he sells it to the public for four dollars. Then he …

You get the picture. The treasury will run out of silver. In fact, it will run out a long time before the free market price hits two dollars an ounce. It will run out by the time it hits a dollar and ten cents, probably.

So, the politicians either have to stop printing more paper money, or else they have to “shut the window” on people who want to exchange dollars for silver.

This is what they did in the United States in 1967. The following year, the price of silver doubled.

Why didn’t they stop printing paper dollars? (Actually, the Federal Reserve System bought U.S. Treasury debt with newly created money—checks—and the government spent the new money into circulation by writing checks.) Don’t be silly. If they had stopped creating money, they would have had to raise taxes (unpopular) or cut back government spending (even more unpopular). So, they printed money instead. So, prices of goods and services have risen by more than 6.5 to 1, 1967 through 2010.

Will the Public Revolt?

Not very often. The public decides that fiat money is money, not pieces of shiny metal. If fiat money is acceptable by the store down the street, then who cares? Who cares if prices go up, year after year? What’s “a little” price inflation? We’re all doing better, aren’t we?

The trouble is we are all thinking short term. We forget what happens to the value of our money when its purchasing power erodes year after year (that is, prices keep going up). What happens if you retire and are forced to live on a fixed money income? You lose your wealth, year after year.

Look at the explanation on the next page. Pick a year. See what happens to your money at various rates of price inflation.

“Inflation can’t hurt anyone too badly” is a delusion of fully employed younger workers. It can hurt everyone who isn’t staying ahead of it with pay increases, and I mean after-tax pay increases.

Higher Tax Brackets

That’s another reason why governments like inflation. Governments since the era of World War I have convinced voters to violate the Biblical principle of the tithe, and impose higher rates of taxation on people with higher incomes. This is done in the name of a higher morality. It is done in the name of justice.

At first, only rich people are supposed to be taxed at these higher rates. That’s what the politicians promise. Cross their hearts and hope to die. In 1913, the year the income tax was passed in the United States, the tax rates began at 1 percent and went as high as 7 percent. The 1 percent rate was applied to all income over $20,000 a year, and the 7 percent tax was on all income over $500,000 a year. This was in an era in which the average family earned about $1,000 a year. Almost nobody got taxes for about four years.

Then, in 1917, the bottom bracket was dropped from $20,000 a year to $2,000. The politicians swept a lot more people into the net. And look at what they did to the top brackets: 1913, 7 percent; 1916, 15 percent; 1917, 67 percent; 1918, 77 percent. In short, they changed the rules. They always do.

Here was their plan: lower the level of taxable income, and increase the rate of taxation in every bracket. Next, inflate the money supply, so that everyone is pushed into higher and higher taxable brackets. The higher your money income, the larger the percentage of your income gets collected by the State.

The “graduated” income tax (also called the “progressive” income tax) was recommended by Karl Marx, the founder of Communism, in his 1848 book, The Communist Manifesto. He understood that such a tax system would help to destroy private property. He forgot to mention that it would place a major temptation in front of politicians to inflate the currency, increase everyone’s money income, and push everyone into higher tax brackets.

The lure of greater tax revenues from a graduated income tax makes inflating the currency look too productive. It makes the immorality of changing weights and measures look like a good idea. It makes the destruction of people’s economic futures too popular. The government begins to inflate, and almost never in history has the process stopped until the value of the currency falls to zero. It may take a hundred years, but at the end, the people lose what they had needed: a reliable, generally predictable monetary system.

Inflation is an invisible tax. Instead of taxing people directly, the politicians fool people. They increase government spending but they don’t collect enough tax revenues to pay for it. So, they print up the money to make up the difference and spend it into circulation. The victims (people on fixed money incomes who face rising prices) seldom know who it is who ruined them. They blame “speculators” and “price gougers,” not the politicians.

But eventually everyone learns who did it to them. They read a book like this one. They get angry. Inflation of the currency is a good way to create a revolution. The politicians figure this out way too late.

Two Kinds of Counterfeiters

The private counterfeiter prints up currency and spends it into circulation. The government counterfeiter prints up money and spends it into circulation.

Private counterfeiting raises prices if enough counterfeiters do it fast enough and long enough. Government counterfeiting raises prices if the government does it fast enough or long enough.

The private counterfeiter doesn’t agree to deliver a specified weight and fineness of gold or silver to the person who “cashes in” his paper note. The government counterfeiter does promise to cash in gold or silver for paper, but eventually he breaks his promise.

The public doesn’t trust private counterfeit money. The public does trust government counterfeit money, at least for a long time, until people’s trust is totally betrayed (mass inflation).

What is the difference in principle between private counterfeiting and government counterfeiting? None.

What is the difference economically? Only the beneficiaries: private counterfeiters who buy up goods and services, or politicians who buy up goods, services, and votes.

What is the difference politically? Private counterfeiters betray people’s trust in criminals. Government counterfeiters betray people’s trust in the government.

If government counterfeiters and private counterfeiters both issue paper and call it money, then on what legal basis can the government prosecute counterfeiters. The only thing I can think of is that it’s a violation of the government’s trademark laws.

Conclusion

From about 600 to 500 B.C., governments began issuing gold, silver, gold-silver, and copper coins. This became an aspect of the authority of civil government. Cities (which were city-states) claimed a political monopoly over money. So did the Roman Empire several centuries later.

The coinage system was both a religious and a political phenomenon. It was also economic. As people began to use the coins of a particular government because of the familiarity of the coins, a temptation was placed in front of the government: to debase the currency. The government could buy extra goods and services for itself—initially, before prices started to rise—by spending new (debased) money into circulation. All it had to do was mix dross metals in with the precious metals. In short, coins made it easier for corrupt governments to steal from trusting citizens.

Eventually, people caught on, and people started asking higher prices. After all, the economy is a giant auction, and if people are given more money by the State, they can afford to bid prices higher than before they got access to the new money.

Rising prices eventually destroy people’s confidence in the money system. This loss of confidence eventually reflects in their loss of confidence in the State. It is the State’s responsibility to protect the integrity of the money, because the State is supposed to enforce honest weights and measures.

But who can enforce honest weights and measures regarding money if the enforcers—politicians and rulers—are profiting from the cheating? That is the problem that no society has ever been able to solve. Government money eventually becomes corrupt money.

It boils down to this: It is cheaper to print a piece of paper with some dead politician’s picture on it than it is to mine gold two miles beneath the earth. Being cheaper, it becomes too great a temptation for politicians to resist in a crisis, or even in peaceful times. They are unrestricted by the geology of gold mining. All they need is paper and ink.

When the voters have larceny in their hearts (“something for nothing” from the government), they eventually get stuck with nothing for something: they sell their goods and services to the government, and get depreciating paper money in return. When they try to spend it, they find out they have been robbed by the robbers they elected. God will not be mocked.

Summary

All this happens because people accept it when the State grants itself a monopoly over money. The politicians violate Biblical principles, but nobody protests. The State’s money system is eventually destroyed. So are those who have become dependent on it.

The State step by step violates these principles:

1. The State at most is supposed to certify the honesty of money: weight and fineness.

2. The State then violates the principle of economic freedom: allowing people to buy and sell on their own terms: it makes private coins illegal.

3. The State claims for itself an economic monopoly that it cannot be trusted to possess.

4. The State in the ancient world used the coinage to propagandize the public (false religion).

5. The State misuses the trust of the people.

6. The State becomes an official debaser of the metal coinage: adding cheap metal (“dross”) to the precious metal.

7. These new, “dross” coins add to the number of monetary units in use.

8. People then bid up the price of goods and services, since they have more money to spend.

9. Price inflation begins to erode people’s faith in the money.

10. The modern State uses paper money to hide, and then speed up, the debasement process.

11. The State has imposed an invisible tax: inflation.

12. Economically and morally, there is no difference between private counterfeiting and public counterfeiting.