In 1899, there was no income tax in the United States. The Federal Reserve did not yet exist. Both were created in 1913.
It took a constitutional amendment (the 16th) to allow the government to tax income. The first income tax was a 1 percent tax on income above $3,000. Congress wasn’t satisfied with that and increased taxes in 1918. Yes, they wanted more money to spend, just like today.
In 1942, the Revenue Act spread the tax burden, so it no longer applied to only the rich. Just two years later, Congress passed a law requiring employers to withhold taxes. It got worse from there until Reagan dialed things back a bit.
It appears Donald Trump wants to reverse some of our policies so we have less income tax and get more income from foreign tariffs.
I’m all in favor of lower taxes. Unfortunately, there’s no chance tariffs will be able to pay for the government’s spending and its deficit. For example, we import about $3.5 trillion worth of goods. If everything imported had a 100 percent tariff, it would only amount to $3.5 trillion in income. The deficit is $36 trillion.
The tariffs, and some firings, department closures, and cutbacks, should be able to pay for extending the prior Trump tax cuts and allow Trump to keep his promises of not taxing tips, social security and overtime. (See this interesting YouTube video for more on Trump’s tax plans.)
If you are spending more money than you are making, then you need another income stream. Tariffs might be ours. If the government cuts spending, stops giving away money it doesn’t have, and collects tariffs, we may be able to lower the deficit.
Congress can’t Control its Spending
For decades, congress has spent money like a giddy teenager with a credit card. When they run up the balance, they just get another card. They don’t worry about paying it back, they just keep borrowing.
Alas, the days of throwing people into debtor’s prison are well behind us. As a result, no one understands how much trouble you can get into by spending more than you have. Sure, maybe they repossess your car or foreclose on your house, but you just declare bankruptcy and within a few years, your wallet will be full of credit cards again.
But the U.S. can’t declare bankruptcy without causing the collapse of the dollar. We don’t get a “do over.”
Trump, the man liberals claim has tantrums and throws fits, is the one acting like an adult, trying to reduce spending, boost income, and cut our debt. It’s not a simple task.
When Money was Valuable
Back in 1899, 125 years ago, there was no fiat currency. The Barber dime, quarter, and half dollar, and the Morgan dollar all were made of 90 percent silver, not nickel and copper as the dime and quarter are today. There was also a series of gold Liberty Head coins worth $2.50, $5, $10 and $20, all made from 90 percent gold. (Yes, we had a $2.50 coin. Go back further in time and the U.S. had half-cent and three-cent coins. There was even a silver coin called the half-dime.)
125 years ago, the U.S. government’s paper money was gold and silver certificates. If you had a $10 silver certificate, you could walk into any bank, hand the teller the paper certificate, and walk out with $10 in silver. This was easy to do because the coins of the realm were made from silver.
Back then, our money was valuable not because it was backed by the “full faith and credit” of the United States government but because the very material it was made from was valuable.
To illustrate how far we have fallen, the amount of silver in a Morgan silver dollar is now worth about $25, although most Morgan dollars sell for more than that. The amount of gold in a $20 Liberty head coin is worth about $2,865. That’s some inflation.
The average hourly wage in 1899 was 22 cents. So if you worked a full 40 hours, you wouldn’t even make $10. If you do the math, 0.22 per hour for a full year, 2000 hours, is $440, or 22 of those $20 coins. The gold in those 22 coins is worth $63,030 today.
It is difficult to support a family on $63,000 today, but it wasn’t any easier to do so for $440 back in 1899.
U.S. Gold Holdings
Today, the government can “print” money, both literally at the Bureau of Printing and Engraving, and figuratively, by selling T-bills and bonds. They actually borrow money into existence. When the U. S. as on a gold standard, they couldn’t print money because the supply of gold is limited.
The U.S. reportedly holds 8,133 metric tons of gold, currently worth roughly $750 billion. Sounds like a lot, but we’d need 48 times as much gold to pay off the deficit. That $750 billion worth of gold isn’t even enough to account for all the physical dollars in circulation, bank deposits and money market funds, which are known as the M2 money supply. This is why the U.S. can’t go back to a gold standard. Too many people would bring their money to the bank and ask for gold. Before long, the government would run out of gold. Even if gold was worth $100,000 an ounce, the country wouldn’t have enough gold to back every dollar.
This, by the way, is the “math” some gold bugs use when they predict an ounce of gold will reach some ridiculous value, whether that’s $80,000 or $180,000. Don’t be fooled by these spurious claims. Just because someone says it on YouTube doesn’t mean it’s going to come true. The only way gold would reach close to those levels would be if the U.S. sees hyperinflation. If federal reserve notes with a $10,000 face value become as common as $20 bills are today, then your gold will be worth an equally ginormous amount of dollars, but those dollars will buy far less than a penny does today.
Meeting in the Middle
Perhaps this was a long way of stating the obvious: Trump cannot turn the clock back 120 years and return us to how things were before 1913. But maybe, just maybe, he can bring us back 60 years to an era where the FBI was the premiere law enforcement agency in the world, the U.S. was a respected superpower, and we were a manufacturing powerhouse and more than a quarter of the jobs in the U.S. were good, steady manufacturing jobs.
Sound money is one way to do that. So is winning the culture war. Ridding the government of socialists is another. Putting an end to fraud, corruption, and waste is also important. So is strengthening our military.
Will Trump be able to accomplish all this? I don’t think he has enough time, but in four years he can make a good start. We just need to help ensure the house and senate stay in republican hands and Trump has a like-minded successor. We need a good eight or twelve years to completely clear out the rot, deadwood, and disease that has infected our institutions.
Don’t expect this transition to be smooth or easy. As I said last Monday, disruption is coming. There will be short-term pain before we reach long-term gain. Buckle up, buttercup. Stay prepped and be ready to take care of your own, regardless of what happens.
