In the previous installment of the Death by Taxes series, we learned about Beardsley Ruml’s contribution in establishing the withholding tax. This most influential of unknown people in American history deserves a closer look. He had some important things to say about why we pay federal income taxes that may surprise you.

What Ruml Taught Lerner

In 1945, New York Federal Reserve Chairman, Beardsley Ruml addressed the American Business Association with his famous “Taxes for Revenue are Obsolete” speech, which was later published in the January 1946 issue of American Affairs. An eye-opening read worthy of the time. Because President Roosevelt had ended the gold standard in 1933, Ruml asserted that taxes were no longer the device to finance the government. Taking his queue from Ruml, post-Keynesian economist Abba P. Lerner harmonized those ideas into what is known today as functional finance. Functional finance is an economic theory based on the premise that governments should finance themselves to meet certain goals, as in preventing business cycles, controlling inflation, reaching full employment and so on. These are the stated goals of the Federal Reserve today. Functional Finance Theory also finds itself strongly joined to chartalism, which erroneously claims that money is an instrument of the state and not a device that free markets devised from barter, something Carl Menger demonstrated through his “On the Origins of Money”. Therefore, they continue, it is within the purview of the state to intervene in the economy with doses of monetary stimulus and regulation through credit expansion, interest rate manipulation and currency creation.

Although Ruml never stated in his speech how the government was to finance itself, it is generally understood that he was referring to the Fed’s printing press. Lerner explained this concept in more depth with his functional finance theory. He described that balancing revenue and spending wasn’t important, prosperity was important. This is the new frontier of “deficits don’t matter”. Functional finance theory goes on to describe that the level of government spending should not be limited by revenue constraints. Through the mechanism of a central bank, governments should find a clear road to finance all manner of spending. Rather, tax revenue should be levied in accordance to their desired economic impact on both the population and inflation.

What Taxes Are Really For

Beardsley Ruml goes on in the speech to describe what he believed taxes are actually supposed to be used for. Namely:

1. To stabilize the purchasing power of the dollar (inflation);
2. To express public policy in the distribution of wealth and of income;
3. To subsidize or penalize various industries and economic groups;
4. To isolate and assess directly the costs of national benefits, such as highways and social security.

These four purposes for a federal tax program, as stated by Ruml, are actually a means to an end. Federal taxes serve a more social than economic purpose. They describe what type of policy the federal government should implement. As Ruml goes on, he describes tax policy as an instrument that governments can impose to meet certain desired outcomes in society.

For the sake of not turning this article into a book, I’d like to concentrate on his first point. By taxing incomes of wage earners, the government, according to Ruml, can determine how much currency is allowed to circulate in the economy. As a kind of engine governor, taxes can be increased or decreased in accordance to how much inflation the government wants in the economy. But this sounds nonsensical to the average person. Because, by taking wages away from people through taxation, the state then spends those same dollars into the economy. The state becomes the spender rather than the wage earner. Nevertheless, the same dollars are being circulated. How is this curtailing inflation?

To add even more confusion he says,

“The dollars the government spends become purchasing power in the hands of the people who have received them. The dollars the government takes by taxes cannot be spent by the people, and, therefore, these dollars can no longer be used to acquire the things which are available for sale. Taxation is therefore, an instrument of the first importance in the administration of any fiscal and monetary policy.”

This paragraph needs to be dissected in order to understand the nuance of what Ruml is conveying.

“The dollars the government spends become purchasing power in the hands of the people who have received them.” That is, the government floats a bond for more revenue. The Fed, through a preferred member bank, purchases the bond and infuses the Treasury with more money. This money is spent in the economy through the federal employees, subsidized businesses, entitlement program recipients and contractors (the people) who have received it.

“The dollars the government takes by taxes cannot be spent by the people…” Again, the taxes collected from the wage earners’ paychecks (the private sector) are then returned to the Federal Reserve to service the debt that the government incurred by borrowing the money in the above transaction.

In other words, we have been led to believe that governments tax their citizens to finance their operations. This is why the previous paragraph seemed so confusing. In reality, as Ruml stated, federal taxes do not fund the government anymore. They only pay the interest on the debt the government has incurred by financing itself through the Federal Reserve System. Money that was created out of thin air. Budgetary chicanery.

Human Collateral

Something very important happened to the United States in 1933. That is the year the federal government went bankrupt. This is why FDR ended the gold standard with Executive Order 6102 and put the country on a fiat standard. No longer could Americans expect to convert their paper money into gold specie.

Something else happened. The Federal Reserve began to bailout the federal government. The Fed has been doing it ever since. This is also known as monetizing the debt. Paper money is merely a certificate of debt. It indicates that the issuer of the paper is liable for the amount of money printed on the note. The bearer of the note can redeem the paper for whatever is backing the note as collateral. As in all debts, a loan is made when substantial collateral is put up against the debt in the event of a default. Since 1933 gold no longer is the collateral that backs the notes. So what does now? You. Your children, your grandchildren, their children and so on. More precisely, your taxable labor. Your ability to be economically productive backs the Federal Reserve notes in circulation and the loans that are denominated in Federal Reserve notes as part of the monstrosity known as the Federal Reserve System. The federal government, in 1933, Franklin Delano Roosevelt, the Savior of the nation, put up every American, present and future, as collateral to the international bankers that make up the Federal Reserve System to bail out Wall Street from the calamity that the Federal Reserve Bank brought about in the 1920s. Understand this, every person around the world that is under the western central banking system are in essence, chattel slaves for the international banking elite. The governments are the vehicles the elites use to keep the population that way.

Conclusion

Beardsley Ruml the social technocrat, Federal Reserve Bank Chairman, Keynesian, and elitist. He devised the scheme that allows the federal government to take the first fruits of your wages through the withholding. He later explained that taxes, although no longer needed to finance the state, are necessary to bring about social change and most importantly, to feed the machine that attempts to hold the people down in their stations. He is a prime example of how the elite perceive the world. A world brought about by a system of top-down economic planning that is only a facsimile of a free market. The separation of business and state is only a fiction that the propagandists in the media and academia propagate to the masses. The reality is, at the end of WWII, fascism won.

Below is a list of reading material that may help the curious reader understand more deeply the workings of this criminal enterprise:

The Economics of Control: Principles of Welfare Economics. by Abba P. Lerner

The Myth of Functional Finance: Mises vs Lerner. by D.W. MacKenzie

The Origins of Money. by Carl Menger

Wall Street and FDR. by Antony C. Sutton

Tragedy and Hope. by Carroll Quigley

 

[Image credit: Dees Illustrations ]