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Separating Economy and State

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Throughout history, governments have controlled and regulated economic activity and monetary affairs. It has been generally accepted that such control and regulation are among the essential functions of government. The notion has always been that without government control and regulation of the economy and money, there would be economic and monetary chaos and disorder that would cause suffering for everyone, especially the poor.

It was once that way with religion. Throughout history, government has been involved, in one way or another, with religious activity. The American people rejected all that with the enactment of the First Amendment, which expressly forbade Congress involved itself in religious activity. Later, the Fourteenth Amendment was interpreted to operate as a bar to state involvement in religion. The principle is commonly known as the separation of church and state, which is widely accepted among Americans as a bedrock principle of a free society.

We should take the principle of separating church and state and apply it to economic and monetary activity.

Employing the phrasing of the First and Fourteenth Amendments, I propose the following three amendments to the U.S. Constitution:

No law shall be enacted by either the federal government or the state governments respecting freedom of trade or economic activity or abridging the free exercise thereof.

No law shall be enacted by either the federal government or the state governments respecting the establishment, control, or regulation, of money.

Neither the federal nor the state governments shall im­pose any tax on income.

What I am proposing, in other words, is a genuine and total free-enterprise system — that is, one in which all economic and monetary enterprise is entirely free of control, regulation, and taxation by all levels of government, federal, state, and local, just as all religious enterprise is free of government control, regulation, and taxation.

Just think: No more debates over the IRS Code or the types of deductions people are permitted to take. No more rushing to the post office to meet the IRS deadline. No more need to file income-tax returns. No more IRS. People would be free to keep everything they earn no matter how much government officials want to seize part of it. Whenever the federal government or some state or local government tried to seize part of people’s income, people could sue in federal or state court seeking an injunction against the tax, just as church officials are able to do if some governmental unit imposes a tax on churches.

Naturally, some would find such a proposal to be radical. But that’s only because they have been born and raised under a different type of system and thus find it difficult to conceive of an economic and monetary system that is completely different from the one to which they are accustomed. Undoubtedly there were some who felt the same way when some people proposed the radical idea of separating church and state with the First Amendment.

Moreover, while the idea is radical compared with the economic and monetary systems in which Americans are living today, it isn’t radical compared with the economic and monetary systems in which our American ancestors lived. Don’t forget, after all, that the U.S. government under which they lived for more than 100 years was one based on no taxation on income, no occupational-licensure laws, few economic regulations (especially at the federal level), no Federal Reserve System, no paper (i.e., fiat) money, and no immigration controls.

Thus, our American ancestors would certainly not have considered such a proposal to be radical, given that it pretty much encapsulates the economic and monetary principles and philosophy to which they subscribed. They would find the economic and monetary systems under which Americans living today to be radical.

People would be free to keep everything they earned and decide for themselves what to do with it. Ideally, the first two amendments would be combined with amendments providing for a separation of charity and the state and health care and the state. (See my article in the May 2017 issue of Future of Freedom, “Separating Charity and Health Care from the State.”)

Natural harmony

There are two keys to economic prosperity and rising standards of living: increases in productivity and trade.

Increases in productivity mean that more goods and services hit the market, bringing about lower prices, thereby enabling people to improve their personal economic well-being at a lower cost.

How do people become more productive? By using tools and equipment. To take a simple example, suppose workers on a farm using hoes are able to produce 1,000 bushels of wheat a year. After five years, the farmer goes out and buys a tractor. Suddenly, the farm workers are producing 10,000 bushels of wheat a year.

That increase in wheat production obviously benefits the farmer. His revenues and profits have soared. It also benefits consumers because they now have greater quantities of lower-priced wheat to purchase in the stores. It also benefits the workers through higher pay rates. How can we be sure that the employer will use part of the proceeds to raise the pay of the workers? Through competition. Other farms and other businesses will hire away workers with the increased revenues that they are taking in from increases in productivity in their lines of work.

Where does the farmer get the money to buy the tractor? Through savings. Since he is able to keep everything he earns, he is able to set aside a certain portion of his income as savings. He uses his savings to buy the tractor. What happens if the farmer has saved only $15,000 and the tractor costs $25,000? He can go to the bank and borrow the difference, promising to repay the loan with interest. But where does the bank get the money to lend to him? From the savings of workers. Since they too are able to keep everything they earn, they save a percentage of their income and deposit it in the banks, thereby providing the bank with the funds that the farmer borrows to buy the tractor, which makes his workers more productive.

Thus, there is a natural harmony that develops in a genuine free-market society. Everyone benefits from increases in productivity.

People also benefit from trade. Whenever two people enter into a trade, they both benefit from their own individual perspective. That’s because they both are giving up something they value less to get something they value more.

Consider, for example, a farmer who has 100 apples and another farmer who has 100 oranges. They enter into a trade in which the apple farmer gives 90 apples to the orange farmer and receives in trade 10 oranges. Is that an unfair trade? Of course not. From the personal, subjective standpoint of both farmers, it was a perfectly fair trade, one in which their standards of living went up at the moment of the trade. That’s because they both gave up what they valued less and got something they valued more.

The corollary to these principles becomes obvious: To the extent that government takes people’s income from them or interferes with their freedom to trade, it is destroying or damaging the ability of people to improve their standard of living.

It is freedom of enterprise and freedom of trade that explain the tremendous rise in the standard of living of the American people throughout the 19th century. While there were tariffs on imported goods, which, of course, damaged people’s ability to improve their lives, domestically the United States became the largest free-enterprise and free-trade zone in history. People all across the United States were free to engage in trades with people in other states and free to keep everything they earned, without federal or state interference, control, or regulation.

Fleeing poverty

While many university professors teach that this period of time, which is known as the Industrial Revolution, was enormously damaging for the poor, nothing could be further from the truth. In fact, our American ancestors, wittingly or not, came up with the solution to the age-old problem of poverty. People had remained mired in poverty throughout the ages precisely because governments had controlled and regulated economic activity and taxed people’s income. The Americans showed that when government is prohibited from doing those things, economic prosperity and standards of living soar, especially for the poor, many of whom actually become wealthy.

Where the university professors go wrong is in comparing economic conditions in the 19th century with economic conditions today. The accurate comparison is with economic conditions that preceded the 19th century, when life for most people was miserable and short. The Industrial Revolution gave the poor a chance to survive and, even better, to prosper. Certainly, circumstances were difficult, since poverty had been the normal condition for mankind throughout history. When people have next to nothing and are barely surviving, there is very little savings that are being accumulated and being put into productive capital. What happened in 19th-century America was that people were gradually, generation after generation, saving money that was being converted into capital, which made workers more productive and consumers better off and raised the overall standard of living of the American people. To a large extent, 20th-century Americans, who unfortunately abandoned the free-enterprise economic system of their predecessors, nonetheless benefited from the enormous base of productive capital that 19th-century Americans brought into existence.

In fact, the best proof of how beneficial an income-tax–free society and a free-enterprise system are to the poor was seen when thousands of penniless immigrants, many of whom couldn’t speak a word of English, began flooding American shores. They were fleeing societies in which governments strove to take care of people with welfare, and economic and monetary regulations, which were funded by massive amounts of taxation. The resulting poverty of such a system motivated countless poor people to flee to America, where people were free to keep everything they earned and where government didn’t take care of people, either with welfare (including Social Security, Medicare, and Medicaid) or economic control and regulation.

Inflation

A separation of money and state would mean no governmental involvement whatsoever in monetary affairs. The Nobel Prize-winning economist Friedrich Hayek termed this idea the “denationalization of money.” It is a monetary system in which the free market — i.e., producers, consumers, investors, and traders — determines the nature and value of money.

One of the benefits of a free-market monetary system would be that government would no longer be able to tax people secretly through inflation. That’s how governments throughout history have taken people’s income and other assets whenever they were reluctant to antagonize them by raising taxes on their assets.

Many university professors and many in the mainstream media define inflation as rising prices. They have it wrong. Inflation occurs when the government, which controls the supply of money, increases — i.e., inflates — the money supply by artificially expanding money and credit. The decreased value of the money — owing to increasing or inflating its supply — is reflected by the rising prices of the things that money buys. The rising prices reflect that people cannot buy as much with the same amount of money as they were able to before the government started inflating the money supply.

Thus, the root of the problem is not rising prices, which are simply a sign of what the government is doing to people, but rather the fact that government is inflating the money supply, usually to finance ever-increasing governmental expenditures. One of the most extreme examples of how government inflated the money supply occurred in Weimar Germany, when people were using wheelbarrows to cart large quantities of paper money into stores just to buy a loaf of bread.

Inflation was the real purpose of the Federal Reserve, an agency that came into existence in the early part of the 20th century. While its ostensible purpose was to bring “stability” to America’s monetary system, it did the exact opposite. Becoming the engine for taking people’s income and assets through inflation of the money supply, the Fed is the root of the chaos and crisis that has characterized America’s monetary system for the past hundred years.

The philosophy behind a separation of money and state was reflected in America’s original monetary system, which was entirely different from the monetary system under which today’s Americans have been born and raised. When the Constitution called the federal government into existence, the government was not empowered to issue paper money. The Constitution also barred the states from emitting “bills of credit,” which was what paper money was called at that time.

For more than a hundred years, America’s official money consisted of gold coins, silver coins, and other coins made out of metals. While both the federal government and the state governments were permitted to borrow money through the issuance of bills and bonds, everyone understood that those were just promises to pay money (e.g., gold coins), not money itself.

While the gold standard wasn’t a free-market monetary system, it did remove the ability of government officials to do what government officials had done throughout history — take people’s money and assets from them surreptitiously through inflation while, at the same time, blaming “rapacious” profiteers and “price gougers” for raising their prices. Since the official money consisted of gold coins and silver coins, it was difficult for government to inflate the money supply, which they are easily able to do with a printing press when paper money is the official money.

One of the reasons government interference in money is so destructive is that it distorts the price system, which is the intricate way that people calculate in a free market. When government is inflating (or contracting) the money supply, it is warping and distorting the system by which people make their calculations.

That’s precisely what brought on the Great Depression. While many schoolteachers, university professors, and media commentators teach people that “free enterprise” brought about the Great Depression, nothing could be further from the truth. Instead, the cause was the chaotic monetary policies that the Fed had initiated after it was created in 1913. Moreover, while the Great Depression could have been a temporary economic crisis, the change in the monetary system was made permanent.

One of the fascinating aspects of the Great Depression is that it provided the government with the excuse for abandoning the gold-coin/silver-coin monetary system established by the Constitution and adopting the paper-money standard that we all know today. Yet the Constitution provides only three methods for amending the Constitution. Nonetheless, the Supreme Court essentially held that a crisis provides the government with the authority to amend the Constitution, even though the Constitution doesn’t say that.

Separating economy and money from the state would be the key to achieving an era of constantly rising economic prosperity and standards of living. But that isn’t the main reason for supporting this idea. The main reason for favoring it is economic liberty: freedom entails the right to engage in any economic activity so long as it is peaceful. The right to freely engage in economic activity, to trade with others, and to accumulate the fruits of one’s earnings and decide what to do with them, without any governmental interference, is as much a part of freedom as whether or not to attend church or fund church activities.

This article was originally published in the July 2017 edition of Future of Freedom.

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    Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.