Source: Library and Archives Canada
HMS SHannon leading the captured American frigate USS Chesapeake into Halifax, Nova Scotia (1813)
By John Carney
Excerpt:
The myth that the United States government is—or soon will be—desperately short of tax revenues got a new airing over the weekend, in the form of a history lesson from Simon Johnson and James Kwak.
Johnson and Kwak, writing in a Bloomberg Op-Ed, argue that the failure of the federal government to raise taxes before and during the War of 1812 left us economically and financially weak…
Today, of course, we live with a financial system that makes the War of 1812 banking innovations pale in comparison. The entire system runs on floating rate, non-redeemable, fiat currency created with keystrokes. Banks can create new money, only constrained by regulatory reserve requirements (which they can meet by borrowing from other banks or the Federal Reserve).
If the United States could find lenders willing to fund our government even as the White House, the Capitol and the Treasury burned at the hands of the British—we’re hardly likely to run out of creditors in modern circumstances. As we’ve seen during the past four years, the Fed balance sheet can expand as far as it needs.
The real constraint on government spending is not the size of the debt, it’s the size of government spending relative to the economy. If the government is using up too many of our resources, the private sector may find itself starved of real assets. If the government pays for those real assets by taking money from the private sector through tax policy, the economy slumps. If it pays for them with new money, inflation results.
Full article: Did a Tax-Budget Battle Almost Kill the US in 1812? – CNBC.
