WEBVTT NOTE The Carry Tax Proposal: Back from the Dead 1 00:00:00.000 --> 00:00:03.680 rates are too low and they can't prime the pump and get money going and get the velocity 2 00:00:03.680 --> 00:00:09.920 of money going fast enough that they would tax currency or either currency reserves in 3 00:00:09.920 --> 00:00:15.680 the bank or possibly even currency held by the general public in order to have another 4 00:00:15.680 --> 00:00:20.800 useful tool for monetary policy and then also to increase the velocity of money. 5 00:00:20.800 --> 00:00:26.360 So this was an idea proposed a long time ago and it was pretty much rejected back in the 6 00:00:26.360 --> 00:00:30.740 in the Keynesian era because the technology wasn't really there to do it. 7 00:00:30.740 --> 00:00:36.920 And the idea was revived by a Fed economist later, but I'll kind of go through quickly 8 00:00:36.920 --> 00:00:38.080 what it is. 9 00:00:38.080 --> 00:00:45.120 So the reason for the carry tax lex is to penalize people for hoarding and saving money. 10 00:00:45.120 --> 00:00:50.280 And you know, obviously savings is bad and the banks having reserves in the bank is bad. 11 00:00:50.280 --> 00:00:54.000 We need to get that money out in circulation and moving as quickly as possible so that 12 00:00:54.000 --> 00:00:58.040 We can all buy more big screen TVs made in China because that will save the U.S. economy 13 00:00:58.040 --> 00:00:59.040 here. 14 00:00:59.040 --> 00:01:05.520 Again, this idea was proposed a long time ago and was sort of put on the shelf because 15 00:01:05.520 --> 00:01:07.960 the technology wasn't there to do it. 16 00:01:07.960 --> 00:01:12.800 It was revived again later because now we have ATM cards with magnetic strips on them 17 00:01:12.800 --> 00:01:16.340 that store the data and know how much to hold and how much was there and how long it's been 18 00:01:16.340 --> 00:01:17.760 since you've used it. 19 00:01:17.760 --> 00:01:23.000 It's got all of the technology that you would need to implement a currency carry tax. 20 00:01:23.000 --> 00:01:26.960 So all we have to do is put magnetic strips in the currency and then we're good to go. 21 00:01:26.960 --> 00:01:30.360 So this was the idea then. 22 00:01:30.360 --> 00:01:35.400 There were two major kinds of carry taxes, again you can do it sort of the more traditional 23 00:01:35.400 --> 00:01:42.480 idea just to tax the currency that the banks are holding in the reserves. 24 00:01:42.480 --> 00:01:46.440 Again there's a concern now in the popular debate that we've, you know, through TARP 25 00:01:46.440 --> 00:01:50.560 and all these other bailouts, we've given lots of money to these financial institutions. 26 00:01:50.560 --> 00:01:55.080 We've actually given it to the bank holding companies and not as much of that as they 27 00:01:55.080 --> 00:01:59.560 had planned is actually going out into circulation and helping to revive the economy. 28 00:01:59.560 --> 00:02:04.020 So if we've got this public policy concern that we're giving them all of this taxpayer 29 00:02:04.020 --> 00:02:08.000 money and they're not lending it out because they're just building up their reserves in 30 00:02:08.000 --> 00:02:11.280 the banks, which of course, you know, lots of people in the Austrian circles are very 31 00:02:11.280 --> 00:02:16.280 concerned that reserves are too high at the banks, then this would be a good solution 32 00:02:16.280 --> 00:02:22.200 from their perspective to get that money back into circulation. 33 00:02:22.200 --> 00:02:26.320 If that money does go into circulation and then people start saving and paying down their 34 00:02:26.320 --> 00:02:34.000 debts and hoarding currency, then a currency carry tax on individual notes for people would 35 00:02:34.000 --> 00:02:35.840 be the next logical step. 36 00:02:35.840 --> 00:02:39.760 And again, this is an idea that's been proposed. 37 00:02:39.760 --> 00:02:42.480 It's usually given credit to John Maynard Keynes. 38 00:02:42.480 --> 00:02:51.240 He actually got the idea from Silvio Gesso. Gesso was a German-Argentine, considered something 39 00:02:51.240 --> 00:02:55.660 of a crank that most people didn't really pay attention to, and he attributes the idea 40 00:02:55.660 --> 00:03:00.300 to a Swiss merchant. But for our purposes, we'll consider this a Keynesian idea because 41 00:03:00.300 --> 00:03:05.120 that's the one who sort of popularized the idea, and it's his disciples then that are 42 00:03:05.120 --> 00:03:08.300 discussing and examining this. 43 00:03:08.300 --> 00:03:13.660 On a side note, Erwin Fischer also wrote a paper on 1933 stamp scripts, which was a sort 44 00:03:13.660 --> 00:03:20.940 of similar idea, so to just peg it as a Keynesian idea is sort of unfair, though Fischer didn't 45 00:03:20.940 --> 00:03:25.400 hold the idea for long and didn't really promote it that strongly, though it was considered 46 00:03:25.400 --> 00:03:27.200 by the Congress. 47 00:03:27.200 --> 00:03:33.140 The reason this has come back into sort of the modern debate, there's a Federal Reserve 48 00:03:33.140 --> 00:03:39.660 I met a Harvard official at the Richmond Fed, Marvin Goodfriend, who in 1999 gave a talk 49 00:03:39.660 --> 00:03:44.660 at an economic seminar, sort of something like this, that was generally ignored by the mainstream 50 00:03:44.660 --> 00:03:47.460 media, probably again, something like this. 51 00:03:47.460 --> 00:03:54.860 And someone forwarded me a link to a small story that someone had written about it. 52 00:03:54.860 --> 00:03:58.140 And yeah, it was Michael Belkin, an investment analyst and friend. 53 00:03:58.140 --> 00:04:02.060 I was working in Ron Paul's office at the time, and we just thought it was outrageous. 54 00:04:02.060 --> 00:04:06.220 And he was going on about this old Keynesian idea and it's hypothetical, we don't really 55 00:04:06.220 --> 00:04:11.420 need to worry about it now, but wouldn't it be sort of academically interesting that we 56 00:04:11.420 --> 00:04:15.260 could sort of go back and revive a Keynesian idea that was abandoned for lack of adequate 57 00:04:15.260 --> 00:04:20.980 technology because of advancements that we've had since then on the magnetic strips on ATM 58 00:04:20.980 --> 00:04:26.820 cards and the new anti-counterfeiting chips and other things that they were putting in 59 00:04:26.820 --> 00:04:27.820 currency at the time. 60 00:04:27.820 --> 00:04:31.660 And this was a popular debate that in order to make sure that the currency that we've 61 00:04:31.660 --> 00:04:34.700 You've got, aren't counterfeited, they're putting in all kinds of anti-counterfeiting 62 00:04:34.700 --> 00:04:38.020 things, Euro notes have these strips and all kinds of things. 63 00:04:38.020 --> 00:04:41.180 We can use those then to implement the Keynesian idea. 64 00:04:41.180 --> 00:04:46.580 So he wrote about this, he expended on a couple of papers and I just want to kind of give 65 00:04:46.580 --> 00:04:49.700 him credit where credit's due for reviving this idea. 66 00:04:49.700 --> 00:04:55.980 Again, I was working in Paul's office and Ron Paul thought this was just absolutely 67 00:04:55.980 --> 00:05:20.100 and also testified against it. There was a subcommittee hearing in the banking committee 68 00:05:20.100 --> 00:05:24.540 on production of money, again going back to counterfeiting and things like that, and Dr. 69 00:05:24.540 --> 00:05:28.880 Paul pointed out that when he was a congressman in the 70s and 80s, there was a similar concern 70 00:05:28.880 --> 00:05:36.980 about having good currency in terms of anti-counterfeiting and things like that and continuously questioned 71 00:05:36.980 --> 00:05:40.380 them that they weren't going to put any kind of tracking or surveillance technologies into 72 00:05:40.380 --> 00:05:44.640 the currency and they always replied that they're not. 73 00:05:44.640 --> 00:05:48.420 But of course, sometimes government says and what government does aren't always the same 74 00:05:48.420 --> 00:05:52.180 thing or that that changes over time. 75 00:05:52.180 --> 00:05:57.920 Declan McCullough, who was then at Wired magazine, wrote an article and sort of popularized the 76 00:05:57.920 --> 00:06:06.780 idea and called Marvin Goodfriend and Marvin, bless his heart, was so happy that somebody 77 00:06:06.780 --> 00:06:11.860 from the real media was calling and interested in his ideas, not knowing what the reaction 78 00:06:11.860 --> 00:06:13.180 was going to be when he went on. 79 00:06:13.180 --> 00:06:17.700 So he was all enthusiastic and started explaining about all of this because he goes to these 80 00:06:17.700 --> 00:06:23.140 This is Boring Academic Converses and nobody in the mainstream or real media was very interested 81 00:06:23.140 --> 00:06:24.140 in it. 82 00:06:24.140 --> 00:06:28.180 He was so happy to get a call from Declan and went on and on and on, gave him an electronic 83 00:06:28.180 --> 00:06:31.740 copy of the paper and everything. 84 00:06:31.740 --> 00:06:37.460 It was a very high ranked popular story on the Wired News website and it kind of went 85 00:06:37.460 --> 00:06:41.300 out from there and most people realized that he's talking about the government putting 86 00:06:41.300 --> 00:06:47.460 tracking surveillance technology in your currency notes and it was about as popularly received 87 00:06:47.460 --> 00:06:52.220 as you would imagine that with the technology crowd. George Solzhen who was here was quoted 88 00:06:52.220 --> 00:06:58.860 by that article here and that article was seen by Lew Rockwell. Thanks Lew and Mises 89 00:06:58.860 --> 00:07:07.540 for hosting all of this. And Lew also has a great piece on the Mises site commenting 90 00:07:07.540 --> 00:07:11.140 on the Wired magazine article and he went on at greater length but I wanted to pull 91 00:07:11.140 --> 00:07:16.860 up a selection of that there. Again, the main points of this are in order to implement 92 00:07:16.860 --> 00:07:25.860 You would have a tracking device in the currency, so you know how you put your ATM machine and there's information that's transferred between the financial institution from the card. 93 00:07:25.860 --> 00:07:41.860 If you do that with currency notes, if I take the money out of the bank and I buy something from J.H. and then he puts the money in his bank, we've now got a tracking device where we know that there's a contractual relationship that went on between me and him. 94 00:07:41.860 --> 00:08:11.860 and this is sort of the currency equivalent or could be the currency equivalent of the anti-money laundering laws that we've got now on checking accounts and all of the Bank Secrecy Act and financial crimes enforcement activities so I guess from their perspective there's a hole in their surveillance on the actual currency and this is the obvious way to fill that hole which again has been widely recognized on our side but wanted to make sure I brought that to their attention. 95 00:08:11.860 --> 00:08:18.160 So, Marvin Goodfront brought this idea up and rather than it just dying with sort of 96 00:08:18.160 --> 00:08:23.660 a devastating libertarian critique, the idea was picked up and revived and examined and 97 00:08:23.660 --> 00:08:26.700 studied and proposed upon by several other people. 98 00:08:26.700 --> 00:08:31.220 I've took a selection of them here and in order to try to stay within my time, I'm 99 00:08:31.220 --> 00:08:33.540 going to kind of just run through quickly. 100 00:08:33.540 --> 00:08:37.860 What I'd like to point out as I show some of the places where you can go for more information 101 00:08:37.860 --> 00:08:40.900 is to look at where they're publishing and where they work. 102 00:08:40.900 --> 00:08:46.420 This will give you an idea of where the idea has sort of taken root. 103 00:08:46.420 --> 00:08:50.620 So we've got the Cleveland Fed, and this is probably the best single short examination 104 00:08:50.620 --> 00:08:54.940 of some of the literature in the background and the idea itself. 105 00:08:54.940 --> 00:08:57.540 We've got some other papers here. 106 00:08:57.540 --> 00:09:05.940 We've got the Dallas Fed, some more academic journals, and also the Brookings Institution. 107 00:09:05.940 --> 00:09:11.780 So if you look at where the current environment is, we've got, you know, a Democratic President, 108 00:09:11.780 --> 00:09:18.140 a Democratic Congress, Republicans charitably are in disarray, and there's a rebirth in 109 00:09:18.140 --> 00:09:20.020 old Keynesian ideas. 110 00:09:20.020 --> 00:09:25.780 So if we look at who is in power now and where they are going for their ideas, this is actually 111 00:09:25.780 --> 00:09:30.500 a much more serious concern than it's been previously. 112 00:09:30.500 --> 00:09:34.140 We do have a lack of fiscal discipline, you know, we've got Ben Bernanke hitting the Federal 113 00:09:34.140 --> 00:09:49.140 The Federal Reserve was just enamored by all of the Great Depression ideas and trying to dust off all of the old things that the Federal Reserve did then or would have considered then and sort of reinventing new capabilities based on that experience and looking at those issues. 114 00:09:49.140 --> 00:10:03.140 The president has been very dismissive of people proposing ideas or critiquing his ideas that don't share that FDR Keynesian paradigm for analysis, and he's been very explicit about this. 115 00:10:03.140 --> 00:10:08.780 The carry tax fits within that paradigm of analysis, so it's something that we should be concerned about. 116 00:10:08.780 --> 00:10:19.220 Again, going back to sort of why I'm concerned and looking at where we are now, we've got TARP and all the other financial bailouts out there and I'm sure other people have totaled up, I haven't gotten the last count, but you know, 117 00:10:19.220 --> 00:10:28.180 we're now in the trillions of dollars that they're using for taxpayer money to get into the financial system and save the economy and get this all going again. 118 00:10:28.180 --> 00:10:34.100 and it's not having the effect that they want it and from their perspective and Tim Geithner 119 00:10:34.100 --> 00:10:38.100 and the others, it can't be that the idea was bad or that the plan was bad, it's always 120 00:10:38.100 --> 00:10:41.940 just the implementation because now they've got their people doing the right thing. 121 00:10:41.940 --> 00:10:46.820 So the problem then isn't that the government gave the banks lots of money to lend out to 122 00:10:46.820 --> 00:10:50.440 the country, the reason that the economy is not taking off is that the banks aren't lending 123 00:10:50.440 --> 00:10:51.440 the money. 124 00:10:51.440 --> 00:10:54.860 I mean, you've got to understand how they're thinking but I have to imagine that's what's 125 00:10:54.860 --> 00:11:01.860 The Theory of Money and Credit The Theory of Money and Credit 126 00:11:24.860 --> 00:11:29.860 The idea that it's percolating. So it's good that our side is sort of brought up to date and aware of this. 127 00:11:29.860 --> 00:11:34.860 Before I get into this, I guess to emphasize the two types of carry taxes. 128 00:11:34.860 --> 00:11:38.860 There's the tax just on the reserves held by commercial banks. 129 00:11:38.860 --> 00:11:44.860 And I'm using banks broadly for financial institutions, including thrifts, credit unions and others. 130 00:11:44.860 --> 00:11:53.860 The other and much more serious concern would be the implementation of a carry tax on currency held by the general public. 131 00:11:53.860 --> 00:12:09.860 If they're concerned about hoarding or people not spending money enough or the velocity of money is not high enough or whatever their concern is, the technology is now there and the political environment is there now to impose a carry tax on currency notes. 132 00:12:09.860 --> 00:12:17.180 There are magnetic devices that they've used originally for ATM machines, but the technology 133 00:12:17.180 --> 00:12:24.020 has been used for anti-counterfeiting capabilities in the euro note and some other currency notes 134 00:12:24.020 --> 00:12:28.780 in order to, you know, again, protect the integrity of those notes. 135 00:12:28.780 --> 00:12:34.780 But there's no reason why that couldn't be amended very quickly and easily to include, 136 00:12:34.780 --> 00:12:39.660 you know, Hitachi made a silicon chip and others that could be used for the tracking 137 00:12:39.660 --> 00:12:43.980 Banking Device Necessary to Impose the Carry Tax on the Currency Notes Themselves. 138 00:12:43.980 --> 00:12:50.940 The way it would work, again, you've got a currency note, you withdraw it from the bank 139 00:12:50.940 --> 00:12:56.260 and it marks where it was taken out, when it was taken out, to whom, how much, everything 140 00:12:56.260 --> 00:13:03.060 else and the longer you hold the currency in circulation, the more the tax would accrue 141 00:13:03.060 --> 00:13:06.860 and the less value you would have to the money that you're hoarding. 142 00:13:06.860 --> 00:13:11.740 So I guess if you hold it long enough, the currency would actually expire. 143 00:13:11.740 --> 00:13:16.420 So let's say it's a 1% a month tax, I'm making up an arbitrary number depending on what their 144 00:13:16.420 --> 00:13:24.740 concerns are, it's just preposterous and again, devastating to the idea of trying to increase 145 00:13:24.740 --> 00:13:27.660 savings and investment in the economy. 146 00:13:27.660 --> 00:13:32.580 But again, if your concern is the velocity of money and money not traveling fast enough 147 00:13:32.580 --> 00:13:37.380 and People Hoarding Money, yeah, if there's a carry-tax on money, I'd probably spend it 148 00:13:37.380 --> 00:13:42.940 as quickly as I could too, because you've got all of the incentives now not to save and 149 00:13:42.940 --> 00:13:52.980 invest. Anyway, it's just so ridiculous to me, it's hard to describe. Again, the flip 150 00:13:52.980 --> 00:13:56.540 side of this is that you've got a lot of people that are very concerned about financial terrorism, 151 00:13:56.540 --> 00:14:00.500 the war on drugs and the money that they're getting from laundering the money and everything 152 00:14:00.500 --> 00:14:10.140 And despite their legitimate concerns about the drug war, terrorism, or whatever else, 153 00:14:10.140 --> 00:14:15.380 we don't have a very good record on using financial intelligence to prevent terrorist 154 00:14:15.380 --> 00:14:17.100 attacks. 155 00:14:17.100 --> 00:14:21.680 We did have 9-11, despite the fact that we've had the Bank Secrecy on the books since 1970. 156 00:14:21.680 --> 00:14:28.160 We've been getting lots of financial intelligence for 30 years before 9-11. 157 00:14:28.160 --> 00:14:33.400 So to the extent that it's not working, getting the financial intelligence that they want 158 00:14:33.400 --> 00:14:39.660 to prevent terrorism, we've outlawed money laundering, you know, for 15, 20, 30 years. 159 00:14:39.660 --> 00:14:42.580 We still have drugs on the streets, I live in DC on Capitol Hill, you don't have to go 160 00:14:42.580 --> 00:14:48.340 very far from the Capitol building to find neighborhoods where this is all very common. 161 00:14:48.340 --> 00:14:53.840 And rather than just admit that this approach doesn't work, most of the people that believe 162 00:14:53.840 --> 00:14:58.520 in this approach, just believe that they're not going far enough, that we've hampered 163 00:14:58.520 --> 00:15:01.600 them too much, we've put too many restrictions on them, we haven't given them all of the 164 00:15:01.600 --> 00:15:05.160 tools that they need to make this work. 165 00:15:05.160 --> 00:15:09.280 Given the fact that the drug trade and other people that are trying to avoid the financial 166 00:15:09.280 --> 00:15:14.440 surveillance given on checking accounts and other financial instruments in the formal 167 00:15:14.440 --> 00:15:20.960 financial sector, that they're using cash and trying to avoid that surveillance, this 168 00:15:20.960 --> 00:15:26.000 This then would become a likely alternative to sort of fill that hole in their financial 169 00:15:26.000 --> 00:15:28.640 surveillance on the rest of us. 170 00:15:28.640 --> 00:15:31.920 You know, it's drug dealers that are using cash, it's, you know, others, and this is 171 00:15:31.920 --> 00:15:36.160 just a way for us to go after the bad guys, however they're defined. 172 00:15:36.160 --> 00:15:41.560 So just be concerned. 173 00:15:41.560 --> 00:15:45.360 Marvin Goodfron, when he presented this in 1999, again, it was very academic. 174 00:15:45.360 --> 00:15:50.520 The economic conditions then were very different than they are now, and he was very clear that 175 00:15:50.520 --> 00:16:00.520 This idea should only even be considered from his perspective under very specific, limited and at that point very hypothetical economic conditions. 176 00:16:00.520 --> 00:16:03.520 Unfortunately, economic conditions have changed. 177 00:16:03.520 --> 00:16:13.520 He only considered this at a time when the economy stagnant, which it wasn't in 99, but might be a more apt description now, 178 00:16:13.520 --> 00:16:19.520 in an environment of stable or falling prices and when nominal short-term rates are at or near zero. 179 00:16:19.520 --> 00:16:26.320 Their main concern is that they lose the monetary policy tools of changing interest rates as 180 00:16:26.320 --> 00:16:29.360 you approach nominal zero interest rates. 181 00:16:29.360 --> 00:16:35.360 So this is a way for them to get around that zero bound restriction. 182 00:16:35.360 --> 00:16:39.400 And again, the technology now is there to implement it where it had not been when any 183 00:16:39.400 --> 00:16:42.120 of these conditions might have existed before. 184 00:16:42.120 --> 00:16:46.740 So how many people in this room, show of hands, think that this is a bad idea and you would 185 00:16:46.740 --> 00:16:57.300 So none of you are concerned that we've given the banks all of this money and that they've 186 00:16:57.300 --> 00:17:02.700 built up their reserves in the bank. None of you are concerned that drug dealers and 187 00:17:02.700 --> 00:17:08.540 terrorists are getting away with using currency to blow up our buildings and to contaminate 188 00:17:08.540 --> 00:17:15.540 our kids with heroin or something else. What's wrong with all of you people? 189 00:17:15.540 --> 00:17:19.300 So even if you're, you know, I'll go out on a limb and assume that, you know, some 190 00:17:19.300 --> 00:17:23.540 of the people in this room might be some of those crazy Austrian economic, you know, sympathizers 191 00:17:23.540 --> 00:17:27.820 and assume that you've got all of these crazy ideas about, you know, concern about over 192 00:17:27.820 --> 00:17:34.220 leverage in the financial system or government's control on our lives. 193 00:17:34.220 --> 00:17:38.020 Instead of being concerned, I'll kind of spend it, you might actually want to be hopeful 194 00:17:38.020 --> 00:17:41.240 about it and look at it as half full. 195 00:17:41.240 --> 00:17:46.320 If they do implement this, is the desirability of Federal Reserve notes going to go up or 196 00:17:46.320 --> 00:17:47.320 down? 197 00:17:47.320 --> 00:17:48.320 I mean, all changes are at the margin. 198 00:17:48.320 --> 00:17:53.040 So, assuming everything else is the same, we've actually reduced the desirability of 199 00:17:53.040 --> 00:18:00.880 Federal Reserve notes, and that, I think, is not necessarily entirely bad. 200 00:18:00.880 --> 00:18:05.960 We've also got an implementation in practice of an old Keynesian idea that would have been 201 00:18:05.960 --> 00:18:09.600 revived and probably not very well received. 202 00:18:09.600 --> 00:18:14.060 So, it's good to have a kind of a healthy skepticism towards, you know, Keynesian ideas 203 00:18:14.060 --> 00:18:20.100 and just accepting the FDR, Keynesian paradigm without question. 204 00:18:20.100 --> 00:18:23.240 And for that matter, I have to have a healthy skepticism towards government and the Federal 205 00:18:23.240 --> 00:18:27.140 Reserve and central banking generally. 206 00:18:27.140 --> 00:18:32.920 And it would also, I think, increase the conditions for alternatives to what we've got now. 207 00:18:32.920 --> 00:18:39.000 So, if there's anyone in the room that's sympathetic to, you know, 100% reserve or 208 00:18:39.000 --> 00:18:43.160 at least concern about the over leverage that we've got or sympathetic to the idea of gold 209 00:18:43.160 --> 00:18:47.040 as money or other alternatives to Federal Reserve notes as money. This would certainly 210 00:18:47.040 --> 00:18:51.840 put us farther down that path. So again, half glass full or half empty depending on how you 211 00:18:51.840 --> 00:18:52.840 look at it. Thank you.