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Advancing Austrian Economics, Liberty, and Peace

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Making Economic Sense
by Murray Rothbard
(Contents by Publication Date)


Chapter 51
Government--Business "Partnerships"

The "partnership of government and business" is a new term for an old, old condition. We often fail to realize that the point of much of Big Government is precisely to set up such "partnerships," for the benefit of both government and business, or rather, of certain business firms and groups that happen to be in political favor.

We all know, for example, that "mercantilism," the economic system of Western Europe from the sixteenth through the eighteenth centuries, was a system of Big Government, of high taxes, large bureaucracy, and massive controls of trade and industry. But what we tend to ignore is that the point of many of these controls was to tax and restrict consumers and most merchants and manufacturers in order to grant monopolies, cartels, and subsides to favored groups.

The king of England, for example, might confer upon John Jones a monopoly of the production of sale of all playing cards, or of salt, in the kingdom. This would mean that anyone else trying to produce cards or salt in competition with Jones would be an outlaw, that is, in effect, would be shot in order to preserve Jones's monopoly.

Jones either received this grant of monopoly because he was a particular favorite or, say, a cousin, of the king, or because he paid for a certain number of years for the monopoly grant by giving the king what was in effect the discounted sum of expected future returns from that privilege. Kings in that early modern period, as in the case of all governments in any and all times, were chronically short of money, and the sale of monopoly privilege was a favorite form of raising funds.

A common form of sale of privilege, especially hated by the public, was "tax farming." Here, the king would, in effect, "privatize" the collection of taxes by selling, "farming out," the right to collect taxes in the kingdom for a given number of years. Think about it: how would we like it if, for example, the federal government abandoned the IRS, and sold, or farmed out, the right to collect income taxes for a certain number of years to, say, IBM or General Dynamics? Do we want taxes to be collected with the efficiency of private enterprise?

Considering that IBM or General Dynamics would have paid handsomely in advance for the privilege, these firms would have the economic incentive to be ruthless in collecting taxes. Can you imagine how much we would hate these corporations? We then have an idea of how much the general public hated the tax farmers, who did not even enjoy the mystique of sovereignty or kingship in the minds of the masses.

In our enthusiasms for privatization, by the way, we should stop and think whether we would want certain government functions to be privatized, and conducted efficiently. Would it really have been better, for example, if the Nazis had farmed out Auschwitz or Belsen to Krupp or I.G. Farben?

The United States began as a far freer country than any in Europe; for we began in rebellion against the controls, monopoly privileges, and taxes of mercantilist Britain. Unfortunately, we started catching up to Europe during the Civil War. During that terrible fratricidal conflict, the Lincoln administration, seeing that the Democratic party in Congress was decimated by the secession of the Southern states, seized the opportunity to push the program of statism and Big Government that the Republican Party, and its predecessor, the Whigs, had long cherished.

For we must realize that the Democratic party, throughout the nineteenth century, was the party of laissez-faire, the party of separation of the government, and especially the federal government, from the economy and from virtually everything else. The Whig-Republican party was the party of the "American System," of the partnership of government and business. 

Under cover of the Civil War, then, the Lincoln Administration pushed through the following radical economic changes: a high protective tariff on imports; high federal excise taxes on liquor and tobacco (which they regarded as "sin taxes"); massive subsidies to newly established transcontinental railroads, in money per mile of construction and in enormous grants of land all this fueled by a system of naked corruption; federal income tax; the abolition of the gold standard and the issue of irredeemable fiat money ("greenbacks") to pay for the war effort; and a quasi-nationalization of the previous relatively free banking system, in the form of the National Banking System established in acts of 1863 and 1864.

In this way, the system of minimal government, free trade, no excise taxes, a gold standard, and more or less free banking of the 1840s and 1850s was replaced by its opposite. And these changes were largely permanent. The tariffs and excise taxes remained; the orgy of subsidies to uneconomic and overbuilt transcontinental railroads was ended only with their collapse in the Panic of 1873, but the effects lingered on in the secular decline of the railroads during the 20th century. It took a Supreme Court decision to declare the income tax unconstitutional (later reversed by the 16th Amendment); it took fourteen years after the end of the war to return to the gold standard.

And we were never able to shed the National Banking System, in which a few "national banks" chartered by the federal government were the only banks permitted to issue notes. All the private, state-charted banks, had to keep deposited with the national banks permitting them to pyramid inflationary credit on top of those national banks. The national banks kept their reserves in government bonds, which they inflated on top of.

The chief architect of this system was Jay Cooke, long-time financial patron of the corrupt career of Republican Ohio politician Salmon P. Chase. When Chase became Secretary of the Treasury under Lincoln, he promptly appointed his patron Cooke monopoly underwriter of all government bonds issued during the war. Cook, who became a multi-millionaire investment banker from this monopoly grant and became dubbed "the Tycoon," added greatly to his boodle by lobbying for the National Banking Act, which provided a built-in market for his bonds, since the national banks could inflate credit by multiple amounts on top of the bonds.

The National Banking Act, by design, was a halfway house to central banking, and by the time of the Progressive Era after the turn of the twentieth century, the failings of the system enabled the establishment to push through the Federal Reserve System as part of the general system of neo-mercantilism, cartelization, and partnership of government and industry, imposed in that period. The Progressive Era, from 1900 through World War I, reimposed the income tax, federal, state, and local government regulations and cartels, central banking, and finally a totally collectivist "partnership" economy during the war. The stage was set for the statist system we know all too well.

The Bush administration carried on the old Republican tradition: still raising taxes, inflating, pushing a system of fiat paper money, expanding controls over and through the Federal Reserve System, and maneuvering to extend inflationary and regulatory controls still further over international currencies and goods.

The northeastern Republican establishment is still cartelizing, controlling, regulating, handing out contracts to business favorites, and bailing out beloved crooks and losers. It is still playing the old "partnership" game--and still, of course, at our expense.

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