The Biggest Lies about Recessions and War

0:00When I first started preparing this lecture, the biggest lies about recession and war, so many months ago, it seemed more of a manageable topic than it does today, after a long series of lies about the current recession and war. Of course, the current war is not noteworthy for the types of lies it has generated, only in the quantity of lies and the boldness of the liars themselves. As a general proposition, states or governments engage in war because that is what they do. States benefit from war. They like to do it. It gets them more territory, more subjects to rule, more power, and an expanded tax base if they conquer their opponents. Even in the case of In the face of most losses, stalemates or draws, the state gains power and authority over their own territory and subjects because war provides them with an excuse to expand power of the state.

1:10Professor Robert Higgs, in his book Crisis and Leviathan, speaks directly to this point, and he shows that war is the primary crisis on which the state builds itself, and that during war, barriers against government growth break down, the state greatly expands itself in terms of spending, in terms of employees, in terms of regulations, and then after the Only in the case when a state is conquered outright does that state lose from war. Therefore, instigators of war will typically attack states that can be easily defeated or who have little No chance of actually overthrowing the instigator.

2:05And if you'll think back to Walter's talk this morning about all of the confrontations the United States have had in recent decades, most of them have been against insignificant opponents, easy victories. Instigators also prefer to blame their targets for the war itself and yet to fight on the target's own territory. This obviously involves a great deal of propaganda, or lies, because it is necessary to blame the other nation for the war and then to invade it. Instigators also tend to be economically mercantilists and interventionists in their economic policy. War, in this sense, helps cover up for their economic policies and failures and offers gives them the opportunity for new resources, new markets, and an expanded tax base if the war is successful.

3:05In one sense, we can think of war as a zero-sum game when territory is transferred and subjects are transferred from one country to another. Say, for example, if Canada invaded and took over Minnesota, the United States would lose Minnesota. Canada would gain Minnesota, there would be no net loss or no net gain for the two countries. Canada would win, but America would lose the same amount of territory and the same amount of subjects. But in reality, war is always beneficial for state power, because in my example, the U.S. power would grow in opposition to Canada.

3:50The first big lie, therefore, is that states or governments seek peace, not war. The reality is states seek war, not peace, and they take every opportunity to do so. The effect of war is to always cause a regression in the economy. During the war and its aftermath, production for the purposes of human survival, consumer satisfaction and social betterment is reduced. War diverts resources from the productive economy to the destructive economy. And these resources have to be paid for in some way.

4:38States resort to conscription and confiscation. They simply take the property from their owners. Of course, taxes can be levied to fight popular defensive wars, but such taxes often accelerate opposition to unpopular wars. Borrowing is also feasible for reputable governments, especially those on the defensive, who seek to delay the cost of the war in order to better ensure their own victory. Most importantly, inflation and borrowing is used to finance war, and this is the sneaky way to finance war, and therefore very popular amongst politicians.

5:24It seems to be a particular favorite of the Bush family. Inflation and borrowing deludes the population that the costs of the war are low, and the resulting higher prices further delude the people by providing a smokescreen of false prosperity. Everybody has a job, wages are going up, prices are going up as well, but there's a smokescreen of prosperity that occurs during an inflationary financed war. For more on this inflation as a smokescreen, see Professor Salerno's essay, War and the Money Machine, Concealing the Cost of War Beneath the Veil of Inflation.

6:10It's in the Cost of War book which is edited by John Denson. Through all its procurement policies, its spending and inflation, the war governments create a great deal of activity. So there's a great deal of activity during war instigated for military purposes, but none of this improves our Our Standard of Living. The second big lie is that war can stimulate the economy. The military engages their opponents in warfare and in the process soldiers on both sides are killed and damaged in a variety of ways mentally, physically and economically. Military goods are used up, destroyed, along with innocent civilians and capital goods such as homes and businesses, neighborhoods, business centers, industrial complexes and in whole cities are destroyed.

7:10Warfare is an entirely destructive process. Mises in his book Nation, State and Economy put the issue of wartime prosperity in proper Every unprejudiced person can naturally have no doubt that war can really cause economic boom. War prosperity is like the prosperity that an earthquake or a plague brings. The earthquake means good business for construction workers, and cholera improves the business of Physicians, Pharmacists and Undertakers, but no one has for that reason yet sought to celebrate earthquakes and cholera as stimulators of productive forces in the general interest.

8:05Unfortunately for us, the general level of economic understanding has fallen so low, The third big lie is that war can improve the economy in the post-war period. That's the lie. World War II would seem to be an exception to this rule because the war was preceded by the Great Depression and followed by a return to prosperity.

8:55My relatives were all completely under this delusion, but I can understand them and their delusions because here we have a group of, and I had about 25 great aunts and uncles from this era, A group of Irish Americans who came of age during alcohol prohibition and then went into the Great Depression, then World War II. Now none of them was drafted. Talk about the luck of the Irish. This was really the first time that they, A, could buy liquor legally and B, had the money to do so. However, as been mentioned before, Professor Robert Higgs has proven, I think substantially, that World War II, the war part of it, did not improve the economy in any way.

9:54The primary measure, personal consumption, personal consumption expenditures, adjusted for changes in prices on a per capita basis, was the same during and throughout the war as it was during the Great Depression. In other words, there's a lot of economic activity, everybody had a job, lots of people were being killed, but per capita consumption of goods and services was the same during World War II as it was during the Great Depression. Essentially, it was a continuation of the Great Depression. It wasn't sleepy and lazy, it was a lot of activity. Professor Olson has also shown that the economic success stories in places like Japan and Germany was in large part due not to the destruction that those economies absorbed because they were heavily destroyed by allied bombings.

11:01The success that came out of post-World War II Germany and post-World War II Japan was the fact that the fascist economic policies, labor unions, regulations had been largely wiped out in the war itself. So in other words, a return to the free market principles of Ludwig Erhart and so on were more responsible for that post-war success stories. It had nothing to do with the fact that the economies were obliterated and they had to start over again. What did get us out of the Great Depression in the United States? Well, at the end of the war, of course, the U.S. and the international community did return to some form of gold standard.

11:47There had been a huge buildup of savings, which is important for economic prosperity, and also the removal or at least the cutback in interventionist economic policies and in particular I would note that at the end of the war there was the death of FDR and the New Deal policy. The death of FDR and the increase in the stock market happened to coincide and I would suggest that it wasn't just a matter of coincidence but that capitalists and entrepreneurs and investors The real truth of the matter is that recessions and depressions are more likely to get us into wars, everything from World War II to the recent American invasion of Iraq, but wars do not get us out of recessions and depressions.

12:47History shows us time and time again this fact. Wag the dog. If their misguided and selfish mercantilist policies fail, a good war will rally the population and divert their attention from their mistakes. In my limited time here I would like to address the second third lies which are more strictly economic and both are essentially applications of Bastiat's lesson of the broken window. I'll be looking at the American Civil War and its aftermath. It's a big war and big wars provide some of the best evidence whereas small little wars it's hard to see the actual impact especially on a large economy.

13:33In the Civil War it was said to be a pivotal event in American history and in the American economy. The war changed the economy for the better because America changed from a steady agrarian agricultural economy based on exporting raw agricultural products and largely confined east of the Mississippi to a dynamic industrial powerhouse that laid railroad tracks across to the west to the Pacific and Achieved America's Manifest Destiny. That's essentially the story that we are told in American history books, that America developed from a sort of a farming by hand economy to one where, you know, they're forging metal and great iron smelters and international, intercontinental travel and giant locomotives.

14:23But what really happened? Was the Civil War good for the American economy and the American people? Did it lead to a transformation of the American economy into its modern form and a world economic powerhouse? Well, first of all, we cannot forget that over one million people on both sides were killed or wounded during the war. If we look at the North, wage rates in the North did increase by almost 50 percent. So if you were living in the North and working in the North, you would have on average received a 50% increase in pay from the beginning of the war to the end of the war. So it would seem good, but if you adjusted that for inflation, your real wages would have fallen by over 20%.

15:12Now in the South, where you are now, wage rates in the South increased during the war by almost 400%. But when adjusted for inflation, real wages and your real purchasing power declined by almost 90 percent. So you can imagine the standard of living is falling both north and south but falling dramatically in the south. The inflation during this war, both north and south, was caused by government regulation of Banking, and the issuance of paper money, which supposedly according to the Republicans was the great wave of the future. The Union won the war in large measure because it inflated less than the South.

16:03This new monetary system was supposed to make for a more efficient payment system to prevent instability and bank failures, and result in the easy convertibility of paper money into Species. Instead, the system created monetary and cyclical instability and chaos. After the war, there were four major bank panics. There were frequent stock market crashes and the system actually delayed convertibility of paper into gold for many years. Things were much worse in the South during and after the war. Statistically, Confederate money The monetary policy seems to have changed drastically after the war.

16:48Confederate officials gave the appearance of having learned their lesson during the war, apparently placing strict controls on the money supply after the war and adopting a permanently balanced budget. As a result, the value of Confederate currency actually rose after the war from a level of about zero to nowadays where it's valued at one confederate dollar is equal to ten U.S. dollars. What about after the war? Did America become an industrial superpower by throwing off the yoke of agrarianism? Well, America did become industrial as Tom's talk indicated, but this occurred in large measure because of those protective tariffs which insulated domestic producers at the expense of the general population.

17:4321 major industries received over 100% protection. In other words, no import competition at all. Transcontinental railroads were built, but by modern calculations these enterprises were shown to be essentially public works projects. They were corrupt and efficient and came at a huge cost One of the most momentous institutional changes in America as a result of the Civil War was the National Banking Act, which fundamentally altered money and banking. After studying this in detail, historian Robert Sharkey concluded, As the national banking system took shape after the war, it was apparent that human ingenuity would have had difficulty contriving a more perfect engine for class and sectional exploitation.

18:45Creditors finally obtaining the upper hand as opposed to debtors and the developed east holding the whip over the underdeveloped west and south. South. This tipping of the class and sectional balance of power was, in my opinion, the most momentous change over the 23-year period from 1850 to 1873. It's often said that technology is improved by war because of the necessities of war. Militaries and governments adopt all sorts of new technology and that this technology then carries over a positive benefit into the Post-War Period. But after studying these issues, Robert Bruce, who was an historian of technology, showed conclusively that the Civil War did not result in the adoption of applied science and was actually a distinct detriment to the development of basic science.

19:48And so there was real no adoption or creation of new technologies during the war. As a matter of fact, both sides were reluctant in many cases to adopt existing technology that had been recently created. The same is true when we look at innovations for business management, manufacturing technology and innovation. It was really the pre-war period in which the greatest leaps in innovation and technology took place. and therefore it should not be surprising that this is in the 1840s was when the term Yankee ingenuity was first coined. That's when America was developing the new manufacturing techniques, the new management techniques that helped the economy a great deal. When we look at the capital stock of the United States and we look at how much is being added to the capital stock and that's really one The Theory of Money and Credit is one of the primary indicators of economic success and failure. What we see in the United States is that the growth in the capital stock is fairly low at the beginning of the 19th century.

21:00but that growth continues to increase and achieves its highest rate of almost 3% adjusted for inflation and so on in the antebellum period from 1840 to 1860 so it's that period in which the United States is actually achieving its greatest source of economic growth and then after the war when we look at that same category what we see is the additions to the capital stock that rate of flow of new capital into the economy diminishes after the war to the end of the 19th century and then the rate decreases further in the beginning of the 20th century. The same is true when we look at statistics like income growth, adjusted for inflation, wage rate growth.

21:49Growth. In all of these areas, the economy performs poorer after the war than it had been prior to the war. Outside of those connected to special interest groups, very few people benefited economically after the war. Except the former slave population, which despite any support from the government, did see dramatic increases in their income, their education A very recent study has found that of those who were wounded during the war or injured during the war, exposed to serious diseases during the war, but still survived the war, that those people continued to lag behind economically for the rest of their lives.

22:39resulted in what you might call a 50-year economic hangover for hundreds of thousands of American families. The Civil War, like all war, does not create prosperity and did not create prosperity. It can only hinder it. Why then, many people have asked, why then is there a temptation to place a positive One Civil War historian, Thomas Cochran, grappled with this conundrum and concluded the following, For most standpoints, the Civil War was a national disaster, but Americans like to see their history in terms of optimism and progress.

23:36Perhaps the war was put in a perspective suited to the culture by seeing it as good because in addition to achieving freedom for the Negro, it brought about industrial progress. For the sake of the next American soldier to die in war and their family, I would suggest that this so-called American desire to see their history in terms of optimism and progress has created the ultimate lie. And this ultimate lie is killing not just our soldiers and innocent civilians, but all the optimism and progress in America's future.