fis200_week1_reading3 (1)

But even as lowering taxes became the subject of

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But even as lowering taxes became the subject of presidential debate and Treasury Secretary Mellon’s personal crusade, the economics profession proved unable to incorporate taxation in its framework of analysis. Part of the problem was a long political tradition in which northeastern big business backed low domestic taxes and high protec- tive tariffs, as offered by the Republican Party, while the Democratic party, with its support in the South and among the working class, had long backed low tariffs and high domestic taxes. Neither party was for lower taxes across the board. When faced once again in the 1930s with falling prices and rising unemployment, but this time with tax rates and tariffs shooting higher worldwide, economists confidently waited for a recovery that never came. Until the introduction of the income tax in 1913, the U.S. gov- ernment’s taxation policy was restricted almost entirely to tariffs, where it could do relatively little harm. From 1789 to 1913, most of Money in America 59
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the economic and financial crises were primarily monetary in nature, due to either leaving, threatening to leave, temporarily deviating from, or inexpertly returning to the gold standard—as in 1812–1816, 1819, 1828, 1835, 1860–1865, 1865–1879, and 1893–1896—or liq- uidity shortage crises, as happened in 1810, 1825, 1838, 1857, and 1907. Some, such as the Panic of 1873, had both elements. Given this history, it is not surprising that economic thinking by the end of the nineteenth century had fixated almost completely on monetary and financial affairs. Today is it often claimed that there were regular crises in the nineteenth century under the gold standard, but the gold standard cannot be blamed for crises caused by leaving the gold standard or for those that took place while the gold standard was not operating. Gold’s performance as a benchmark of monetary value during the century was impeccable. Liquidity-shortage crises are not inherent to the gold standard, and the problem of the liquidity-shortage crisis was eventually solved within the gold standard framework. After 1913 the income tax, even as it allowed the financing of wars and desired welfare programs, opened a whole new realm for policy error in the United States and in the countries around the world that mimicked the U.S.’s conventional wisdom. As governments attempted to solve problems caused by their poor tax and tariff policies, they reached for monetary manipulation and devaluation. GOLD: THE ONCE AND FUTURE MONEY 60
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