Montreal, Canada

Did a surge in individual and business taxation in the 1930s exacerbate the Great Depression? If so, the trend in state and federal government taxes isn't friendly to an economy that remains badly fractured by weak credit demand and rising unemployment.

In yesterday's Wall Street Journal (page A25), Arthur Laffer (Laffer Associates) makes a strong historical case about taxes, the Great Depression and comparisons with today's economic challenges. His findings make for a sobering read.

If he's right, we're heading down the wrong path over the next two years as tax rates rise significantly following the expiration of the Bush tax cuts in 2011. And raising taxes in the middle of a recovery is not the way to build prosperity. The late President Reagan knew that but Obama lives on a different planet.

According to Laffer, "The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s."

Laffer also goes on about gold and how government confiscation of the yellow metal in May 1933 blew deflation fears wide open as the public flocked to gold; the metal was fixed to the dollar at $20.67 an ounce. Fears of a dollar devaluation vis-à-vis gold unleashed a gold-buying panic by mid-1932. U.S. consumer prices plunged a cumulative 27% from late 1929 until early 1933.

By early 1933, the federal government under FDR declared a bank holiday prohibiting U.S. banks from exchanging dollars for gold; the public was not permitted to exchange foreign currency, either. If you held gold, most of it was to be handed back to the government at the official rate of $20.67 an ounce; by January 1934, however, the government revalued gold at $35 an ounce.

Says Laffer, "In less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That's one helluva tax."

Meanwhile, dollars were apparently in short supply last year as the credit crisis blew wide open. Or were they?

The same fears didn't play-out last year as the financial system almost collapsed.

From July 2008 and until March 2009 the dollar went through the roof in what is widely believed to be a "flight to safety" amid outright panic. But I don't buy that. The dollar rallied because de-leveraging was in full force coupled by massive redemption requests from global investors as they dashed out of risky assets and headed almost overnight into cash.

How can the dollar be a "safe haven" when the epicentre of the financial crisis lies in the United States? I can't make sense of that anomaly. I mean, c'mon, the Fed is printing like a drunk and the government has committed something like $12 trillion dollars to this mess. Then we've got Social Security, Medicare and other unfunded entitlement programs – you know the rest. How on Earth can a sensible investor scramble to buy dollars?

I also don't buy the euro or other currencies as a "safe haven" because they're also plagued by similar problems – some worse than others. There isn't a single currency out there that's better than gold. Not one.

Basically, gold is the only asset outside of the credit system that remains no one else's liability. And that's why it's rallying in 2009 – its ninth consecutive calendar year gain.