There is smoke coming out of my ears from all these talks of theories so I'm just going to throw my ideas out the door and hope I don't regret doing so.
When the government taxes people, they're doing so for the good of the (city/state/country). Local taxes pay for police, firemen, utilities, etc. When the government taxes people, they take the money and put it in their budget, allocating spending to cover the three basic needs every country's leaders need to focus on: Territorial Defense and Internal Stability
Almost no one here would say we're on the defense here in the United States or Great Britain. We're engaged in wars overseas and haven't had a foreign army on our soil in hundreds of years. Yet we are on the defense. Every single nation is on the defense when it comes to protecting their interests on the national stage. For the US and UK, the primary focus is to protect their interests against foreign powers such as the People's Republic of China and global terrorism.
The military gets a huge budget as a result. While sometimes it seems that we're just using the military to fund a war over oil or invading countries like Afghanistan, there are definite reasons for doing so. The entire US and UK economies are dependent upon oil, because we need oil for vehicles to transport goods. Not only that, but the military buys directly from many industries and provides funding for research into new weapons and armor, which can produce results that independent entrepreneurs can then adapt for their own needs to build a business.
In 2010, the US Government spent 685.1 Billion dollars on the combined forces of the military[1
], of which, 140.1 billion was spent on procurement (such as obtaining weapons and ammunition) and 79.1 billion on research and development, as well as 23.9 billion on construction (such as bases). That's a total of 243.1 billion dollars (35.5% of the total budget) going immediately out to civilian corporations. Given that the US Government's total budget for 2010 (3,456 billion) [2
], the military draws almost 20% of the total budget. That's 7% of the budget immediately going back into the hands of civilians. And that's just the military.Internal Stability
As far as Internal Stability goes, the US is fairly stable for the most part. Most cities contain crime fairly well, riots don't just spark for no reason, and for the most part civilians obey the majority of the laws and pay their taxes. A nation must be secure militarily, economically, and socially in order to remain a viable power, and that's where the budget can come into play. We've already discussed how the military, which can help establish order when it begins to break down, gets a plentiful share of the federal government, but like it's been mentioned already, the government functions as a non-competing member of the financial world.
when the banks began to go under, the majority of people correctly assumed it was because of bad business practices. Many laws had been allowed to be ignored, and so banks began to operate by lumping loans with less than ideal credit ratings with others and dumping them into insured bundles within other banks. The same situation happened in the 1920s when people borrowed money with no collateral, and then when the money came due, they couldn't pay, and it happened on a grand scale. The same thing happened, and it just so happened that a rushed deal between Bank of America and Merrill Lynch helped make the situation decidedly worse.
For the most part, banks are in the business of lending to turn a profit. More loans means more interest, which means greater profits. The US Government insures deposits up to a certain amount, but for the most part, the banks are responsible for maintaining their books. However, it's one thing to play dirty with money, and another to have the government pushing for the banks to begin making less than ideal loans to people in order to get them into houses, as the government did during the 90s. It was believed that if the majority of Americans could own their own homes, it would boost the economy and lead to greater economic success in the future.
The point here is that while the government does have the power to manipulate the economy to help it expand, it must also be in a position to regulate the economy such that the disasters of the past don't become the problems of today. That's why major banks now have US Treasury representatives on their boards, to oversee their operations to ensure they don't begin a downward spiral that will once again force the Government to step in. The entire issue of bailing the banks out was because so much money was tied up within the banking system that a complete collapse would have plunged the US economy into the very depths of hell.Expanding without Expanding
For the longest time, the US didn't operate according to how we view it today. The government was responsible for printing money, but handled the economy by letting it roam free. Businesses were allowed to grow unchecked, but the US was in a period of expansion until the 1900s. As the country expanded, new opportunities arose, allowing new businesses to pop up and grow. Because gold and silver were being discovered in the west, the Government was able to back dollars directly with their equivalency in gold and silver, which was standard practice at the time.
As the US took on its current continental shape, businesses which had begun to accumulate great wealth suddenly found themselves with a country that, rather than pushing frontiers, now had two major coastlines and was growing rapidly through the center. This let business tycoons such as Rockefeller, Vanderbilt and others build up monopolies that threatened to crush the US economy in its vicelike grip. Breaking up these monopolies became important to insure that men such as Rockefeller couldn't simply take control of the country by threatening to cut off the oil supply.
It was after the Great Depression that the idea of economic inflation
became a reality. Unlike before, when the US was growing, the US was now locked and no longer able to expand and grow the economy through traditional means. This meant that in order to keep money from being locked away, the government would need to artificially expand the markets to allow wiggle room for new business to grow. As a result, the US government allows a certain amount of inflation to creep in every year. It was only during the 90s that inflation took off, and lead us to where we are now.
I'm going for a smoke, that post wound me up.