Where Government Money Comes From

Follow-The-Money 2The average American of today is intellectually so far removed from his forebears that instead of regarding government with apprehension, he is more likely to regard it as a virtual parent, concerned only with protecting and helping him.” ~George Reisman

As the quote suggests, there seems to be a misconception about government and how it works with the citizenry. Specifically, when it comes to government money and “entitlements”, there are many misunderstandings. Santa Barbara Business College (Ventura, CA) business and economics instructor Richard S. Hockett, MBA, DTM explains this further, [People] are, sadly, under the impression the government is self-sufficient and magically generates revenue which it then spends lavishly on deserving members of society.”

If the government is not self-sufficient and does not magically generate revenue on its own, how then does the government get it’s money? In part, through taxes.

According to Hockett, “The truth is, government only steals – in all cases – and produces nothing! Taxes paid by gainfully employed individuals, as well as taxes on profits of companies small to large, are what fund the government. Government now spends significantly more [than what it is pulling in from taxes].”

Interestingly, prior to 1862 there was no personal income tax. The government generated revenue to pay for things such as roads through tariffs, which are a duty (tax) on imported goods. In 1862, President Abraham Lincoln instituted an income tax in order to help pay for the Civil War. In 1872, it was repealed and citizens had no income taxation until the Wilson Tariff Act of 1894 which brought it back to life and created the forerunner to the IRS, The Bureau of Internal Revenue.

Then, in 1913 the 16th Amendment was ratified by the states, which gave Congress “the power to lay and collect taxes on incomes, from whatever source derived, without appointment among the several states, and without regard to any census or enumeration.”

Those taxes instituted on companies adds to their cost of doing business, which means they have less to pay employees and have to raise the price of their products or services in order to pay for all of their operating expenses. Small businesses tend to be the ones hit hardest by the plethora of taxes and fees placed on businesses in the United States. In fact, even foreign companies are now shying away from doing business in the United States (which costs us jobs) because it now has the highest corporate tax rate in the world.

Another means of the government getting money is to take out loans, thereby putting the country into debt. This occurs when the government fails to meet it’s own budget and spends far more than it has. How can this possibly happen? Hockett states, “The allocation of tax revenue is to be made via a budget submitted by the President and approved by the Congress of These United States. Only the Congress is able to approve or disapprove a budget – the President only suggests! In the past 4 years, only two budgets have been submitted and they were both soundly revoked: 535 to 0 in both cases. Therefore, we have no budgetary control on spending versus revenue. Ultimately, this leads to bankruptcy. The downgrading of the United States credit rating is only steps in the downward spiral.”

This overspending leads to debt; the United States borrowing money from other countries in order to pay its own expenses. How long have we been in debt? Since the beginning. For the Revolutionary War, debt was incurred so expenses could be met. It took about 45 years, but there was a heavy focus by those in charge to get the debt repaid. Then, more debt was incurred to pay for the Civil War. So it continued through all of American History-each war incurred more national debt.

However, war is not the only cause of national debt. Pork, earmarks, fraud, waste and general overspending have contributed in significant ways, with very little effort made, via reductions in current spending, eliminating new spending, cutting unnecessary things from the budget, and eliminating fraud and waste. Eric Cantor’s YouCut and President Obama’s SAVE award programs identified a combined total of more than a billion dollars total in cuts that could easily be made due to eliminating redundancy and waste. Tellingly, very few of those cuts have been made.

So what is going on now with our economy and the entire economic system of the United States? Hockett answers, “The more command and control pressure placed on the economic system, moving us away from economic freedom and free choice, the worse the economy will become. We experienced this very thing under FDR, then Lyndon Banes Johnson, and again under Carter. Under President Carter, the Nation ended up in stagflation. According to the Bureau of Labor Statistics, the National unemployment figure in January 1980 was 6.3% of the 1980 workforce. The Bureau of Labor Statistics also reports: “In mid-1982, Rockford, Illinois had the highest unemployment of all Metro areas with 25%. Chicago was looking at 23% on average and in the inner city, particularly the highly depressed, gang-infested, ‘South Side’, unemployment would reach into the 30% range.”

Hockett further points out that “statistics seldom tell the whole story as they never include those who have given up looking for work or whom are underemployed. When these aspects are calculated into (which the BLS does NOT do, and should not do) the formulas (something many economists do for a “real” picture), the unemployment figures change drastically.”

Why can’t the U.S. Government just avoid debt and overspending by printing up more money? Once upon a time, we had ‘the gold standard’ which means our currency was backed, or given its value, because it was guaranteed, or secured, by gold held in reserve in Fort Know. That is no longer the case. Now the U.S. and the rest of the world just ‘accept’ a given value of world currency when there is a stable economic system.

Without getting into a detailed and lengthy explanation, there are a number of factors that can affect or alter that accepted value of currency. They include Gross Domestic Product (GDP) and Consumer Price Index (CPI).

When the value of currency decreases, it affects how much you can do with the same amount of money. This means, for example, that $20 will no longer be able to get you what it once could. When the value decreases, it causes people to have to do more in order to increase their own personal revenue or they have to make cuts in spending in order to maintain the same standard of living. The bills that could be paid with working a 40 hour week at a rate of $15 per hour, suddenly cannot. This is why our debt, the country following a budget and the value of our currency matters so much. It affects all of us and if the people we elect don’t do their job right, all of us pay the price. The money the government spends so wildly and recklessly is not its own, but ours.

Special thanks to Richard S. Hockett, MBA, DTM for his time and assistance with this article. In addition to teaching at Santa Barbara Business College in Ventura, California, Mr. Hockett also runs his own business, SunRidge Photo, which provides business coaching in marketing, business development and visual arts. For more information, please see his business page on Facebook

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Categories: Economics, Entitlements, federal debt, Federal Deficit, Federal Reserve, Finance, Financial Decline of America, Fiscal Responsibility, Taxes

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7 replies

  1. My father paid $750 for a new Chevrolet in 1937; his gas cost him 20 cents per gallon. The difference between his Chevy and a current model’s cost is largely what inflation (created by the Fed) has stolen from the purchasing power of our dollar. Theft, indeed!

  2. The history is accurate.

    There is no “if”, it was repealed. This can be verified via a number of credible sources. What you are referring to is a ruling in 1895, which is a number of years after the taxation instituted by Abe Lincoln was repealed.

    The 16th amendment ratification controversy has been tossed out of every court and is that: “a controversy” as there is opinion both ways on whether it was properly ratified or not. As it stands, it is recognized as part of our Constitution and part of our financial history, specifically when it comes to taxation. This, is of course, the purpose of mentioning it in the article-to explain our taxation history.

    As to the rest, I am not sure how your ‘running out of currency’ statement applies to anything in the article, but yes, we do have plenty of commodities that could be used as currency.

  3. If I might ask, I was taught that Abraham (OBAMA) Lincoln funded the War of agression with a Loan from the British Bankers. And the Federal Reserve Act was the LOAN the bankers installed with the help of Woodrow Wilson and the members of CONgress and SINate. The Federal Reserve Act has been called the ” Contract With America” for a deffinate reason. The Constitution allows for Unlimited Contracting, and that is How the Bankers gained a Permenate Hold on America, and They Can’t be PRIED off it, because they hold a Semi Legit Contract, but the people who pay for the contractual effects, have never even heard of the contract they are paying for.

    So back to my question, Did Lincoln take Money from the Bankers to Fund the War? and How can the People Nullify a contract that they have not Willingly been involved in, except for the part where they use the Debt Instrument from the Federal Reserve bank. I guess I answered the last part of my question already.

  4. Pretty good article Daniella! Thank you! I do have to say, however, that I find it somewhat discouraging that an article such as this is necessary. Unfortunately, it is very necessary, as there seems to be a pervasive belief that the federal government is our “sugar daddy” and the source of endless free supply. As actor Robert Blake once put it during a Tonight Show appearance, “The big government teat in the sky that everyone want’s a part of.” And it is a belief, an attitude or mindset, that surely shows just how far our republic has declined over the past 240+ years.

    While I do understand the need to provide a certain degree of assistance to certain individuals (as it is the morally right thing to do, and is a Biblical concept), I also believe that the practice has become to corrupted and so bastardized that it now does more harm than good, and not just to the recipients, but to the entire country. And one of the (many) reasons for this is out of control, unchecked government greed, and it is this same government greed that has led to our current budget crisis ( and just about every budget crisis over the past century). At some point, political office became a career rather than a privilege, and we’ve been going downhill ever since.

    Thanks again for a great article Daniella.

  5. This is, in fact, 100% wrong, and demonstrates the perennial wingnut fallacy of equating a sovereign, currency-issuing government to a household or an individual.

    i, The government creates money by spending.

    ii, The government destroys money by taxing or borrowing.

    iii, The government doesn’t need to tax in order to spend, nor does it need to balance the books, nor can it ever run out of money. There are consequences of spending without taxation, but these are not those faced by households or businesses and, in some circumstances, are non-existent or minimal.

    iv, The government deficit is, as an accounting identity, equal to the trade deficit plus the net increase in private financial assets. If you try to run a balanced budget in a country with a trade deficit, you will run down net private financial assets – the savings of households and businesses. This will, of course, affect the real economy as demand drops. In order for private financial assets to grow, the government must run a deficit.


  6. ” ‘…in 1913 the 16th Amendment was ratified by the states,’ and that was a really good thing.” ….said no one ever.

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