Ray Johnson needs some full-strength .458s loaded with flat-nosed solids Henry thought. Three hundred ought to do him for a while. Henry thought about whether or not he had enough components on hand to load that much .458 ammo, or if he'd have to shoot up some of his 400-grain rock-busting loads to get enough empty cases. Then he remembered two .50 caliber cans full of fired .458 brass he had put under the loading bench at the end of the summer.

No time like the present he thought as he headed for the basement stairs.

February 3, 1974 "The Regulated American Economy," James Nelson said in a loud voice. "This course is about government regulation of the free market. Much of the curriculum will focus on utility companies and other government-regulated monopolies." Nelson was an expert on industries that were most efficient when addressed by a single supplier.

"This department is known for its free-market philosophy, so it may surprise some of you to hear me advocate government-sanctioned monopolies." He saw that he had their attention, and continued.

"An existing utility company-the phone company, for example-can double its capacity and serve twice as many customers for a fraction of the cost of duplicating its entire plant and equipment. A general rule of thumb for a single entity of this type is that capacity increases as the square of the cost. This is because most of the necessary hardware is already in place." Nelson paced across the front of the room and went on.

"This fact has been known for many years, but sometimes our legislators forget it. Years ago, the local decision-makers realized Amherst was growing, and needed more water service. They passed a law decreeing that there had to be a second choice for water service in this town, and solicited sealed bids. They chose the company that offered the town the most for the privilege of competing in the water-supply business."

"They didn't dig up the streets and put in duplicate water mains!" Henry said reflexively. "That's exactly what they did," Nelson said with a laugh. "Care to guess what happened?" No one answered. "Mister...Bowman, is it?" Henry licked his lips and took a stab at the question. "The existing company cut their prices, maybe even to where they were losing money, and they drove the new guys out of business." Nelson smiled as he nodded in agreement.

"Then what?" the professor asked.

"Well, ah...I guess after the new company went bust, the old one was able to buy up their hardware-you know, the pipes and all-for a few cents on the dollar, and ended up in an even stronger position than before."

"Right. And on top of that," Nelson added, "the town subsidized the construction. It was a hundred years ago, and they're still paying off the debt incurred by that fiasco. Can anyone tell me what was the one smart thing the town council did in making this law?" He saw Henry grinning. "Mister Bowman, you look like you may have a suggestion."

"They were really smart to decide that there should be two water companies competing for everyone's business, and not ten."

March 20,1974 James Nelson stared down at the term paper in his hand. He wished he'd known about it earlier. It would have made a good senior thesis, not just a mid-term paper.

The assignment had been to identify and discuss a case where government intervention had introduced a noticeable distortion into the economy. Most students chose tobacco price supports, the tax-deductible aspects of drilling for oil, or some other well-travelled area of government regulation with which James Nelson was intimately familiar and which had much in common with many other laws. Henry Bowman, by contrast, had selected a law Nelson had never heard of.

Bowman had also claimed in the very first sentence that this law forced those it affected into circumstances entirely unlike those created by any other piece of government legislation. After reading his paper twice, James Nelson believed him.

Nelson decided to do two things that were very unusual for him. The first was that he did not make a single mark on the entire paper, but instead put all of his comments on a separate sheet.

The second thing was that he gave the paper a grade of A+.

PROHIBITION'S UGLY LEGACY Three-Tier Legal Status and Three-Tier Pricing Caused by the National Firearms Act Of 1934 as Amended by the Gun Control Act of 1968 by

Henry F. Bowman

Professor Nelson Econ. 20

March 12, 1974

INTRODUCTION.

A year after the 1933 repeal of Prohibition, Congress passed the National Firearms Act of 1934 and created a situation that was (and is) both unique and bizarre. The situation is unique because no other consumer good or manufactured product in the entire country is treated under the law in the same way that NFA firearms are treated. The situation is bizarre because under this law, two absolutely identical guns, consecutively produced within one minute of each other by the same manufacturer on the same assembly line, can fall into such drastically different legal categories that possession of one has the government's blessing, while possession of the other (even by the same person) merits a ten-year prison sentence. As if this were not unusual enough, a 1968 amendment to the National Firearms Act now prohibits the owner of the "bad" weapon (whichever of the two guns it may be) from placing himself in compliance with federal law.

The National Firearms Act introduced a huge distortion into the free market for all guns which fell under its scope. The result is a threetier pricing schedule in the market for firearms regulated by this obscure section of the U.S. Code, as well as several legal questions which, to date, have not yet been resolved.

This paper addresses a distortion in the free market caused by government intervention. It is not intended to be a political science treatise. However, in order to fully understand this distortion and "how we got here", some history is in order. This is an unfamiliar area to most people, and it is quite possible that without a thorough explanation of the history behind current law, the average person would refuse to believe our present situation.

HISTORY.

The issue of owning militia-type arms to protect oneself and one's freedoms was not controversial in the early days of our country's history. It was taken for granted. All citizens of this country had this basic right. Prior to 1934, there were no federal laws regulating firearms ownership1, and prior to 1865, there were virtually no such state laws, either. All prohibitions (and attendant punishment) focused on violent criminal actions and not possession of inanimate objects.

Two events changed this situation on a state level: The Emancipation Proclamation, and large-scale immigration. Many lawmakers did not like the idea of foreigners and former slaves having the same rights as whites. They especially disliked the idea of these "undesirables" being able to protect themselves and control their own destinies.

Legislators didn't want blacks being able to defend their freedoms, either at the voting booth, or by having guns. Because the Second Amendment guaranteed the right to keep and bear arms, and the Fourteenth Amendment guaranteed equal protection under the law, legislative creativity was required.

Poll taxes and literacy tests solved the problem of blacks voting. Blocking Constitutionally-protected black possession of inanimate objects required a slightly different strategy. One solution to the dilemma was to require permits to possess or to carry arms2 . These permits could then be arbitrarily denied. Another answer was for a state to enact an outright prohibition on carrying weapons for selfprotection3 . These outright prohibitions were then selectively enforced. The South Carolina legislature, perhaps pleased with the success of their poll tax, passed a law in 1875 prohibiting ownership of all firearms other than those manufactured by Colt or Winchester1 Since these makes were much more expensive than all others, this law was a novel way to prevent poor people of all races from having guns Immigrants got similar treatment. In complete defiance of the U S. Constitution, California state law prohibited Chinese from testifying against whites in any court of law for a 20-year period in the late 1800s5 . In New York, discussion urging the passage of the 1907 Sullivan Law made mention of how that law would make it illegal for "swarthy immigrants" to have guns6 . Texas gun restrictions subjugated Americans of Mexican origin7.

All these laws, however, were passed on a state level. It was not until 1934 that any federal law was enacted which affected firearms possession. There is some disagreement about the impetus behind this law, as will soon be discussed.

THE NATIONAL FIREARMS ACT OF 1934.

The first significant federal gun law was passed in June of 1934 with minimal fanfare. It attracted little attention because it only affected a small number of arms: Full-automatic weapons (machine guns), rifles and shotguns with barrels shorter than eighteen inches (amended to sixteen inches for rifles in 1958), and rifles and shotguns with overall lengths less than twenty-six inches. These arms now fell under federal regulation. In addition, any device designed or redesigned to muffle the report of a firearm (a "silencer") also fell under the scope of the National Firearms Act8 , despite the fact that these devices were not and are not in any way, shape, or form, "firearms".

Because of the Second Amendment, Congress realized it did not have the authority to ban these arms. Instead, the bill was slipped in as a revenue-raising measure under the Interstate Commerce Clause. Under the National Firearms Act, no person may transport, deliver, or sell in interstate commerce any firearm or silencer as described above without first having in his possession a stamp-affixed form for the firearm. The tax stamp must first be bought so that it can be affixed to the federal form when it is approved. For the form to be approved, the applicant must be fingerprinted, signed off by the local police chief, and submit to an FBI records check. The "stamp" referred to in the law costs $200. The owner of an NFA-regulated weapon must have this approved form (with the $200 stamp affixed) in his possession before the arm (or silencer) in question may be transported in interstate commerce. This $200 tax must be paid each time the NFA-regulated item changes ownership.

Because of the size of the tax, the frequency with which it must be paid, and the method by which it is levied, the National Firearms Act bears a strong resemblance to the Stamp Act of 17659 .

Being fingerprinted and forced to submit to an FBI investigation is unusual, to say the least, for a revenue-raising measure. To put this "revenue raising" tax in perspective, in 1934, $200 was more than a month's wages for a worker building Model "A"s on the Ford assembly line in Dearborn, Michigan10 . In the '20s, silencers sold for $2 in hardware stores and Thompson submachine guns could be bought out of the Sears catalog for $125. The idea that levying a $200 tax on these manufactured goods would actually raise revenue is absurd. The demand for each of the items covered by the National Firearms Act was elastic enough that virtually no one was willing to pay the government an additional $200 for any of them According to Treasury Department records, there was not a single tax-paid registration in 193411 , and there was one in 193512 .

Another consequence of the Act was that new development of machine guns by individual inventors stopped overnight. Given that the vast majority of full-auto weapons now in use were designed by private individuals, this is a serious issue The U.S.'s foremost authority on machine guns, Lt. Col. George M. Chinn, has frequently described the Act a devastating blow to American security in that it has crippled all future military small arms development in this country and will continue to do so until it is repealed13 .

After passage of the Act, there were only three classes of people who continued to buy these goods: Large companies bought the weapons for strike control and other labor relations purposes14 . Police departments, the military, and special occupational taxpayers15 continued to buy, for they were exempt from the tax. Violent criminals continued to buy these weapons outside of legal channels, just as they had obtained liquor during Prohibition.

This reality brings us to the next issue concerning this obscure federal law.

REASONS FOR THE PASSAGE OF THE NATIONAL FIREARMS ACT.

In almost every published description of the National Firearms Act of 1934 is a mention of the 1929 "St. Valentine's Day Massacre" , and a statement to the effect that the Act was passed because machine guns were being used with horrible results by bootleggers and other organized crime figures. There are several things wrong with this claim.

First, it is laughable to hope that people for whom murder is a standard business practice will go present themselves to the local police chief to get fingerprinted, and pay $200 for the privilege. Similarly, it is ludicrous to think that putting legal restrictions on firearms will reduce their availability to those people whose entire livelihood involves finding, buying, transporting, selling, and delivering illegal goods.

Second, the highly publicized incidents of underworld gangs machinegunning each other over liquor shipments stopped overnight with the repeal of Prohibition, which occurred a full year before passage of the National Firearms Act.

Third, the Act also affects weapons other than machine guns; rifles and shotguns with barrels or overall lengths below a certain minimum are regulated by the NFA. It is very difficult to conceive of a reason why the owner of a shotgun with a barrel 17 1/2" long should be charged with a felony if he refuses to be fingerprinted and pay $200, when owning a shotgun with a barrel a half-inch longer is no crime at all. To compound this utter absence of logic, under the National Firearms Act a person becomes a felon if he affixes a piece of wood to the butt of his pistol (doubling the weapon's physical size), for he is now in possession of a "short-barreled rifle", which is covered by the Act.

To make the final leap from the illogical to the ridiculous, the Act regulates noise mufflers, which are not firearms at all. Hollywood to the contrary, the FBI has been unable to document a single case of a firearm silencer being used in a crime in the last fifty years17 . Given that citizens fire upwards of six billion rounds of ammunition per year18' , the inclusion of silencers into the NFA is one of the greatest contributors to hearing loss in the United States and therefore must rank as one of the largest public health blunders of this century19 .

The real reason for the passage of the National Firearms Act can be summed up in four words: Expansion of federal powers. In 1934, two major changes had recently occurred in the United States. The first was that Franklin Roosevelt had initiated an exponential increase in the size and power of the federal government. The second change was the ratification of the Twenty-first Amendment, which repealed Prohibition. Let us examine the latter incident first.

In the thirteen years that Prohibition had been in effect, there was a great proliferation of people involved in the illicit manufacture, importation, and distribution of alcohol. This in turn produced a tremendous expansion of the Treasury Department and the number of its agents20 . With repeal, liquor distribution was done by legitimate businessmen, and thousands of Treasury agents were idled. Federal legislation levying $200 taxes on goods worth between $3 and $100 was guaranteed to promote non-compliance by the citizens, thereby giving former Prohibition agents something to enforce.

It is interesting to note that the original draft of the National Firearms Act included all handguns then in existence in the United States. Because of the handgun language, some of the strongest opposition to the original version of the National Firearms Act came from women, who were vulnerable to attack from stronger assailants and got the greatest benefit from being able to carry a small weapon for personal protection.

The number of pistols and revolvers in the U.S in 1934 has been variously estimated at between thirty and one hundred million21 Compare this figure with perhaps one million machine guns and short-barreled long guns that fell under the Treasury's jurisdiction in the National Firearms Act's final form22 . One can only guess at what would have happened if in 1934 the government had told every citizen to cough up $200 for each handgun he owned that he might some day want to take or ship across state lines.

The removal of handguns from the National Firearms Act may explain the odd inclusion of silencers in the legislation. In the first third of this century, silencers were commonly available in any store where firearms were sold. The term "silencer" is in fact a misnomer It was a trade name coined by Hiram P. Maxim, an automotive engineer who applied the principles of muffler design to safety valves, compressors, blowers, and firearms23 . A "silencer" does not make a firearm noiseless, any more than the muffler on a diesel truck exhaust conceals the fact that the truck is approaching24 . With the 1934 Act making it a felony to transport common noise mufflers in interstate commerce without paying $200 (each!) to the government, millions of citizens were now in violation of federal law.

Although the National Firearms Act stipulated a grace period where owners could register these weapons and silencers free of charge, the Treasury reported that a grand total of 15,791 registrations occurred in this period25 . This indicates approximately 1% compliance. The 1934 Act was thus a huge success at turning millions of citizens into criminals.

The National Firearms Act fit in perfectly with the systematic creation of government programs and deficit spending that Franklin Roosevelt immediately began to institute the instant he took office. The NFA was a model vehicle for the continued expansion of government power: It was arbitrary (i.e. the 18-inch rule); it gave the government sweeping authority over something very common; it focused on inanimate objects rather than criminal behavior; it levied draconian taxes on these objects; and most importantly, it created millions of criminals with the stroke of a pen, just as Prohibition had.

A clear example of the fact that the National Firearms Act had nothing to do with crime and everything to do with government power occurred immediately prior to its passage. Senator Hatton Sumners of Texas, the Chairman of the House Judiciary Committee, had been a virulent opponent of the proposed bill and had bottled it up because it "did violence to states' rights"26 . On April 23, 1934, Roosevelt called Sumners into the White House for a chat. Sumners agreed to vote for passage27.

ENFORCEMENT OF THE NATIONAL FIREARMS ACT PRIOR TO 1968.

After the NFA was passed, sales of affected items came to an abrupt halt. Domestic firearms manufacturers stopped producing any long guns with barrels shorter than 18". They also quit making any pistols with lugs on the butt for shoulder stocks. Manufacturers of noise reducers (most notably the Maxim Silencer Co.) went out of business entirely.

After the short grace period, citizens who owned NFA-regulated items on which the tax had not been paid had several choices. The first was to pay $200 to the Treasury for each item. In 1934, no one did this. The second choice was to relinquish NFA-regulated items to the Treasury without any compensation. No one did this, either. The third option, theoretically at least, was to avoid selling or transporting anything covered under the Act outside the state. The fourth was to disassemble the machine gun, short-barreled long gun, or silencer so that it was inoperable, and keep the parts separate. In the case of short-barreled arms, the owner could also replace the barrel with one of 18" or longer, and have a legal, functional gun again without paying $200.

Short-barreled rifles and shotguns were produced in low numbers in the years prior to 193428 but the same could not be said for machine guns. The Colt-manufactured Thompson, BAR, and belt-fed Brownings had all been produced in large numbers and had been available on the civilian market for over a decade. Furthermore, two million American soldiers had been sent to Europe in WWI, and over half of these had served in combat units. These veterans brought home many "war trophies", as they are called, with complete legality29. Machine guns were a relatively new and interesting battlefield weapon in 191830, and captured examples were brought home by most soldiers. A conservative estimate of the fullautomatic WWI weapons brought into the United States by the returning two million veterans is one million31. Other knowledgeable sources place the figure at over twice that32.

The Treasury Department decreed that owners of these weapons could either register them for $200, or remove critical parts (such as the bolt) from them, which would render them inoperable. In this latter case, the gun was no longer considered a weapon subject to registration and $200 tax, but rather a "DEWAT", which was the Treasury's acronym (sort of) for Deactivated War Trophy.

When agents encountered an otherwise law-abiding citizen with a nontaxed machine gun in his possession, standard procedure was to give him the choice of paying the $200 tax and registering it "live", or removing the bolt and/or other internal parts.

As years passed, the economy improved, wages and prices went up, and the U.S. fought in two more wars. A few million more veterans returned home from WWII and Korea with a few million more war trophies. By the '50s and '60s, some citizens actually were paying $200 and getting tax stamps from the Treasury Department on weapons brought back from WWI, WWII, and Korea, and on newly-purchased machine guns from the many manufacturers around the world.

THE GUN CONTROL ACT OF 1968.

In 1968, the National Firearms Act was amended by the Gun Control Act of 1968. This 1968 law enacted sweeping infringements on citizens' rights to purchase and own virtually all types of guns. In also introduced a "sporting use" test on importation of firearms and ammunition. If certain guns or ammunition were determined by the Director of the Treasury to be not suitable for "sporting use", importation of them was prohibited. The fact that the Bill of Rights concerns the preservation of freedom and not recreation is ignored in the 1968 Act. A 1939 Supreme Court decision ruling that military weapons are Constitutionally protected whereas sporting arms are not33 was ignored also.

GCA '68 also contained language which modified the treatment under the law of NFA-regulated weapons. Since these provisions did not immediately affect nearly as many people as the rest of the new legislation, their significance was not fully understood at the time.

Under the new provisions, all existing machine guns in the hands of U.S. citizens had to be registered with the NFA immediately, including DEWATS. A one-month Amnesty was instituted where the $200-per-gun NFA tax was waived. After this amnesty ended, however, registration of existing non-taxed machine guns was prohibited. Registration of machine guns manufactured in the U.S. after passage of these provisions posed serious problems for citizens and created legal questions that have not to this day been addressed.

First of all, among the millions of owners of live machine guns and DEWATS, not everyone even knew about the one-month amnesty before it was over. Second, of those who were aware of the one-month grace period, there was a tremendous fear that the entire amnesty was a trap and the guns presented for registration would be confiscated. For this reason, only a tiny fraction of machine guns and DEWATS were submitted for NFA registration during the Amnesty34.

The 1968 amendments to the National Firearms Act and the one-time Amnesty completely ignored the fact that the Act only applies to those weapons transported in interstate commerce. The 1934 Act does not apply to a machine gun owner who never takes his gun out of state. The 1968 amendments have placed such owners in the position where they cannot now comply with the law. An owner of a machine gun on which the tax has not been paid is prohibited by the 1968 amendments from paying the tax and putting the weapon on the NFA registry. This has created a situation not duplicated anywhere else in the entire U.S. Code.

As an example of how this law introduces a severe distortion into both the economy and the lives of U.S. citizens, let us look at an example: A coal company heir owns a consecutive numbered pair of Model 1921 Thompson guns, serial numbers 1410 and 1411, which have been in his family in the same location since the mid-1920s. In 1965 (but this could be any year between 1934 and 1968), thinking he might someday want to take one of the guns outside the state, he pays $200 and registers one of them (either one) under NFA 1934. Just to be safe, he removes the bolt from the other, rendering it inoperable. Prior to GCA 1968, he was in complete compliance with the law.

Today, the taxed gun is completely transferable to other citizens, and the gun can change hands an indefinite number of times, providing police and FBI checks are performed and $200 is paid to the Treasury for a tax stamp each time the weapon is transferred.

Ownership of the non-taxed gun (the one without the bolt) is a felony35 , and there is no provision in the law to allow the owner to place this weapon on the NFA registry. He can offer to pay two million dollars instead of two hundred, and he will still be denied registration. Under present interpretations of the 1968 amendments, the 1921 Thompson without the bolt is contraband and it must be surrendered to BATF without any compensation. A Model 1921 Thompson is worth between $1500 and $2000 at the time of this writing if it is transferable36.

There is another serious problem caused by the 1968 amendments to the 1934 Act. The "sporting test" section of the 1968 Act prohibits importation of non-sporting weapons and ammunition into the U.S. This includes importation of U.S.-made weapons produced before 1968 but which were outside the country at the time GCA 1968 was passed. The exemption for this import ban is for military and law enforcementrelated sales. Thus, a 1921 Thompson gun currently in England (there are thousands there) may only be imported into the United States by an agency of the U.S. Government, a police department, or a special occupational taxpayer who may then sell it only to one of these two types of purchasers.

THREE-TIER LEGAL STATUS AND PRICING.

The example listed above makes it clear that government regulation has created three-tier status for identical manufactured goods. Machine guns made in the United States can fall into three categories: a) Fully transferable to any law-abiding resident37 upon federal approval after FBI investigation and payment of $200 to the Treasury; b) Transferable (tax-exempt) to Special Occupational Taxpayers, police, or government agencies; and c) contraband weapons which may not be made legal.

These three different legal categories result in three different prices for otherwise identical guns. To continue the Thompson example, a transferable, mint-condition 1921 Thompson now brings approximately $1800 on the U.S. collector market38 . An identical gun recently imported from England and sitting in a customs bonded warehouse will bring at most $150, for it can only be sold to police and government agencies, and these entities are not willing to pay much for obsolete, fifty-year-old weapons. What the third gun is worth is anyone's guess, for the only buyers for it will be those willing to risk a felony conviction39 .

FUTURE OF THE NATIONAL FIREARMS ACT The Gun Control Act of 1968, with its amendments to the National Firearms Act of 1934, is a recent continuation of the trend started during the Roosevelt Administration towards more government and less freedom. Recent and current Administrations show no sign of reversing this trend. When freedom is at odds with government policy, one of two things eventually happens: Either freedom is crushed, or political leaders are forced out in disgrace and replaced with guardians of individual liberty.

CONCLUSION.

The National Firearms Act of 1934 is a bad law. Colonel Chinn has said on many occasions that the 1934 Act is the single most devastating piece of legislation to this nation's defense ever enacted.

From an economic viewpoint, the NFA of 1934 is a bad law because its tax is so high that it stops enterprise cold and distorts the free market. NFA 1934 is a bad law because it raises virtually no revenue at; all, when a $5 tax and relaxed regulations might easily raise millions of dollars for the Treasury Department.

The 1968 amendments to the 1934 Act are bad law because these amendments actually prohibit those people who want to pay the tax on their guns from doing so. These 1968 amendments have made criminals out of people with no criminal intent, and give these citizens no option other than to surrender their property without compensation. These are the kinds of laws which led to the American Revolution. The National Firearms Art of 1934 should be repealed in its entirety.

1. There was a law enacted in 1920 which prohibited sending handguns through the mail except by law enforcement entities, and required that a common carrier be used instead.

2. Laws of this nature were passed in many states at one time or another. Notable exceptions were Vermont and New Hampshire.

3. Many states, including my native Missouri, have such outright prohibitions. Such statutes rely on vague wording, such as Missouri's prohibition on carrying a weapon for protection into any "church, school, or any other assembly of persons met for any lawful purpose." (emphasis added) This last item allows police to arrest blacks and ignore whites.

4. I have not found the actual text of this law, but there are many references to it in several publications.