Economic Error #19: If the Government Prints Money, There Will Be No Need for an Income Tax.

Gary North

Ellen Brown believes in something for nothing. Usually, we call this socialism. But Ellen Brown does not like to think of herself as a socialist, so she simply spouts the standard socialist line, expecting her readers to believe it. Do you believe it?

Banks that are government agencies would have a number of practical advantages that could actually make them more efficient in the marketplace than their private counterparts. A government banking agency could advance loans without keeping "reserves." Like in the tally system or the LETS system, it would just be advancing "credit." A truly national bank would not need to worry about going bankrupt, and it would not need an FDIC to insure its deposits. It could issue loans impartially to anyone who satisfy its requirements, in the same way that the government issues driver's licenses to anyone who qualifies now. Interest-free lending might not materialize any time soon, but loans could be issued at an interest rate that was modest and fixed, returning reliability and predictability to borrowing. The Federal Reserve would no longer have to tamper with interest rates to control money supply indirectly, because it would have direct control of the national currency at its source. A system of truly national banks would return to the people their most valuable asset, the right to create their own money. Like the monarchs of medieval England, we the people of a sovereign nation would not be dependent on loans from a cartel of private financiers. We would not need to pay income taxes, and we might not need to pay taxes at all. . .. [Web of Debt, p. 416.]

With these words, she ends Chapter 42. She begins Chapter 43 with these words: "In the happy ending to our economic fairytale, the drought of debt to a private banking monopoly is destroyed with the water of a freely-flowing public money supply. Among other salubrious results, we the people never have to pay income taxes again" (p. 417).

Let us examine what she is saying. She is saying that the government can issue credit, which he refuses to call credit, and so she places quotation marks around the word. What is credit? Credit transfers wealth to a borrower, who has promised to repay the loan later on. Wealth moves from someone to someone else. The whole idea of credit is to be able to buy something that you otherwise could not have afforded to purchase.

In a profit-seeking banking system, a depositor puts money in the bank. He agrees to let the bank lend the money to a borrower. He cannot use the money, because the borrower is using the money. I am speaking here of the banking system with 100% reserves, which Ellen Brown favors, and which I also favor. The difference is, I think the system should be based on gold. She thinks the system should be based on pieces of paper with dead politicians' pictures on them.

Because the depositor does not bid for goods and services, the borrower bids for goods and services. Wealth is transferred from the depositor to the borrower for a specified period of time. This is a wealth-transfer system. It is voluntary. The depositor believes that he will get his money back at some point, and the borrower puts in writing that he will repay this money at a specified period of time.

If a depositor does not make a deposit into the bank, then where would the government get the money to lend? If it prints the money, which is what she thinks it should do, it simply spends the money by handing it over to a borrower. The borrower then spends the money to purchase goods and services. Wealth is transferred to the borrower who has just spent the money. Somebody has turned over resources to the borrower.

But the borrower did not get his money from someone else, who agreed not to purchase goods and services. So, because there was no depositor, there has been no reduction in demand for goods and services. The new demand for goods and services, which comes about because the borrower is now spending money, raises prices. Because the money is newly printed money, when it enters into the economy, it either raises prices or else it keeps some prices from falling, which would otherwise have fallen.

We do not get something for nothing. If there is no depositor who has restricted his consumption, then the newly created money in the hands of the borrower increases demand for goods and services. If he is the highest bidder, the goods are transferred to him. Either he got something for nothing, or the bank that lent him the money will get something for nothing when he repays the loan.

Socialism is a philosophy of something for nothing. Ellen Brown believes in this philosophy. She promotes this philosophy in her book. What is astounding is this: some conservatives who say they are opposed to socialism, and who say they do not believe in something for nothing from the government, also say that they think Ellen Brown's book and her ideas are first-rate. What does this tell us? It tells us that the conservative movement has people in it who cannot follow the logic of an economic argument. They say they oppose something, but they are intellectually incapable of recognizing it. They come out in favor of that thing, all in the name of opposing it.

Am I exaggerating? Is she really saying this? She says it loud and clear. In the first paragraph in Chapter 44, she writes this:

If the Federal Reserve were made what most people think it now is--an arm of the federal government--and if it had been vested with the exclusive authority to create the national money supply in all its forms, the government would have access to enough money to spend on anything it needed or wanted (p. 425).

Does this sound vaguely familiar? Does it sound like something that John Maynard Keynes might have written? If so, there is a reason for this. Ellen Brown understands this reason.

New Greenbacks in the sum of $390 billion would have been enough to eliminate income taxes, but according to Keynes, the government could have issued quite a bit more than that without dangerously inflating prices. He said that if the funds were used to put the unemployed to work making new goods and services, new currency could safely be added up to the point of full employment without creating price inflation. The gross domestic product (GDP) would just increase by the value of the newly-made goods and services, keeping supply and demand in balance (p. 427).

Ludwig von Mises called Keynes's economics stones into bread. It is clear that Ellen Brown is a crude Keynesian. She comes in the name of John Maynard Keynes to lead conservatives into the promised land of paper-money socialism.

Pieces of paper do not create wealth. Pieces of paper with dead politicians' pictures on the do not create wealth. Pieces of paper with dead politicians' pictures on them, plus the words "legal tender," do not create wealth. Paper money transfers wealth, but it does not create wealth.

Ellen Brown believes that paper money creates wealth. She believes it creates so much wealth, with such great predictability, that nobody will have to pay any income taxes, and maybe, just maybe, nobody will have to pay any taxes at all.

In Ellen Brown's mental universe, the government is the producer of wealth, because it has the right to produce pieces of paper with dead politicians' pictures on them, plus the words "legal tender." This is not stones into bread; this is paper money into bread. Stones might be valuable to do something with. Paper money is good for setting fires. I think I would rather have the stones. I would surely rather have the stones if they contained flecks of yellow metal, and I do not mean iron pyrite. My guess is that you would, too.

For a detailed critique of Ellen Brown's economics, go here:

http://www.garynorth.com/public/department141.cfm