The root of the problem the world is facing right now isn't really governments… or banks. The real problem is simply a very bad idea – the idea that the State ought to sit in the center of society. Let me explain…
The last 100 years (since 1914) saw not only the end of the classic gold standard, but also the fantastic ascendancy of the nation-state.
These two trends are inherently and dangerously related.
Until World War I, the central government of the United States, for example, played a small role in the lives of its citizens. Its powers were strictly limited, as were its revenues. It was specifically barred from taxing citizens directly. It was a humble government that interacted with the individual states in the union, but didn't interact much with individual citizens.
The first signs of change came after the Civil War. "Progressive" ideas began to emerge. Most of these ideas came from Germany, from philosophers like Karl Marx and Friedrich Engels. The core of these ideas was that the State itself was superior to its citizens. Therefore, the argument went, society ought to be organized to better accomplish the goals of the State.
Today, most Americans have no idea that the foundations of our modern State are based – nearly verbatim – on the demands of Karl Marx's Communist Manifesto.
In 1848, Marx threatened to organize a worker's revolution unless European governments:
1. Abolished property rights and applied all rents towards public purposes.
[Modern corollary: Don't pay your property taxes, lose your house. So who really owns your house?]
2. Levied a heavy, progressive income tax to equalize wages.
[Modern corollary: Combined federal and state marginal income and payroll taxes approach (or surpass) 50% in many U.S. states.]
3. Abolished all rights of inheritance.
[Modern corollary: The estate tax.]
4. Confiscated the property of all emigrants.
[Modern corollary: The 2008 "Hero's Act," which forces people leaving the U.S. to pay the equivalent of their estate taxes on the global assets before they turn in their passports.]
5. Centralized access to credit in the hands of the State by means of a national bank and an exclusive monopoly.
[Modern corollary: Fannie Mae and Freddie Mac, which make more than 90% of all of the mortgages in the U.S. and have dominated the market for mortgages for decades.]
6. Centralized the means of communication and transport in the hands of the State.
[Modern corollary: AT&T was a legal monopoly for decades. Amtrak is a ward of the states. The government owns all the roads. And the State controls all air traffic.]
7. Provided free education for all children in public schools.
[Note the emphasis on public schools. Paying for education isn't enough. What counts is indoctrinating the kids in glorifying the State.]
8. Produced a common agricultural policy to maximize the productivity of the land.
[Modern corollary: Massive ethanol and agricultural subsidies.]
Most people in democracies like these ideas for one simple reason: They hold the allure of getting something for nothing. They are the siren song of living at the expense of your neighbor.
These ideas became extremely popular over the last 100 years, all around the world. As a result, as democracy spread, so did these ideas. Politicians of each party and persuasion throughout the Western world quickly adopted them as their own (and never mentioned Marx).
As these ideas took hold, one big problem developed… How do you pay for them?
Progressive politicians believed they had the answer. They just took Marx's big innovation: A progressive income tax. Let the rich pay!
It's a popular idea – but it never works because decisions to add more benefits don't take into account the expense of paying for them. It doesn't take long for the budget to get out of control. Or said another way, everyone can't live at the expensive of his neighbor. His neighbor can't afford it… and he moves.
More serious, the flaw in communism is obvious. Communism doesn't account for the fact that people expect to control the fruits of their labor. People don't like their assets being stolen and their wages being heavily taxed by a government that regulates their businesses and sends their children off to war. Incrementally, people stop working. Wealthy people flee… or hide their incomes.
Tax revenues fail to meet projections. Deficits grow. Deficit spending soars. And debts mount.
That's where paper money comes in. Paper money isn't only good for financing a war. It's also perfect for closing the gap between what an economy ought to produce and its paltry real production when it has been beaten into submission by communist ideas. I like to explain it this way…
The central truth of economics is scarcity. There can never be enough of anything to satisfy everyone. The central truth of politics is patronage: promising to give everything to everyone. Paper money is the bridge between economics and politic s.
The unpaid debts of an entire generation of people in Western countries are coming due. The so-called "baby boomers" grew up in a world dominated by Marxism and Keynesian economics. These are bad ideas. They are destined to collapse.