War and Inflation: Financing the Empire

0:00Well, our next speaker showed up a while, a couple years ago. Abraham Lincoln was resting comfortably, 135 years, a hero, freer of the slaves, all that jazz. And then our next speaker showed up and told the truth about him, and he's never been the same. Our next speaker is an economics professor at Loyola College in Maryland. He's a senior faculty member, of course, with the Ludwig von Mises Institute. He's the author of numerous books, The Real Lincoln, A New Look at Abraham Lincoln, His Agenda in Unnecessary War, How Capitalism Saved America, Lincoln Unmasked, and of course his latest book is Hamilton's Curse, and how Jefferson's archenemy betrayed the American Revolution and what it means to Americans today.

0:59I urge you again, he has two essays in Reassessing the Presidency. He is talking today about war and inflation financing the empire. Please help me welcome Tom DiLorenzo. Thank you, Doug. Thank you all for coming and thanks to Jim Rodney for being our sponsor today and I can't help saying when Doug said there was a committed Marxist in the executive mansion in Zimbabwe, what popped into my head was we got one of those too. And when he said that about how Ghana was blaming the weather and everything else for the inflation, it reminded me of how Alan Greenspan has been blaming Asians who saved That's the official explanation of the Fed for the boom is that those darn Asians save too much of their money.

1:58And he's been repeating that. It hasn't stuck yet, but that's his story and he's sticking to it. And maybe he'll come up with the weather example a little later. My topic is war and central banking in American history. It's a big topic for a half-hour talk, but I just recently wrote an article that I was invited to write for the American Conservative Magazine on this topic, and so it's kind of a fun challenge to me. They throw out these gigantic topics to fit it into a nine-page article, so I gave it a shot, and the theme of it is captured by a quotation by Ludwig von Mises in his book Nation, State and Economy.

2:43One can say, without exaggeration, that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly. War weariness would set in much earlier. and of course you have to understand there are three ways of financing war and government in general is taxes, debt and the printing of money, inflation. Taxes of course are the most direct way and the most painful and so really you can argue it's the most democratic way in terms of allowing the public to get a clear view of the cost of government.

3:30Taxes are the most painful. Debt is a little less painful because it enables politicians to impose the burdens of spending today on future generations as far as the tax burden anyway is concerned. And so that's why politicians, of course, always like debt. They don't have to raise taxes immediately. Although when they use real resources, when they spend the money and they use real resources, they do divert the resources away from the private sector to the government sector. in the government sector. So there is a cost, an opportunity cost now from deficit spending, but the tax costs can be delayed, hidden, disguised, and so forth. And of course inflation is the worst in terms of the invisibility of the cost of any government program, including war, because not only is it unseen by the average person, Inflation, but when the prices do go up, when we do have price inflation, the typical person tends to blame it on the businesses who are charging the prices.

4:32Capitalism, markets, there's not enough regulation, that sort of thing, and so inflation inevitably leads to sort of an ideological attack on capitalism because it's always blamed for the inflation by government and by the court historians who support the government and so forth, so it's a very insidious process, but of course there's no free lunch to inflation in addition to just paying higher prices it makes economic calculation almost impossible when prices are rising rapidly like that and so business planning becomes chaotic in a regime of inflation and that hurts everybody that hurts everybody and also as a general rule you know inflationary finance of war is what economists call a fiscal illusion anything government does The phrase that some economists use is fiscal illusion, which I always kind of love. It's a nice, accurate phrase, and we're about to experience a big fiscal illusion if we adopt a value-added tax, by the way.

5:38That's the sneakiest and most odious of all taxes. It's a tax imposed at every step of production, on production, so that when you pay for the final product, all that tax is built into it, and who are you going to blame? Inflation does the same thing, and so as a rule, as Mises said, the longer a war lasts, the more centrally planned and government controlled the entire economy becomes, so to the extent that the government is able to hide the cost of war with inflation, it puts us further and further down on the road to what I would call economic fascism, sort of a, a, a, a, a, a, a, a, a, a, a, a, a, a, Ostensibly private property, but a private property and private enterprise that is more and more controlled and regulated and regimented by the state.

6:29Our friend Bob Higgs, who wrote a classic book, Crisis in Leviathan, which is probably for sale out here, said this about World War I, the effects of World War I, he said, The corporatism of massive government collusion with organized special interest groups occurred. There was the de facto nationalization of the ocean shipping and railroad industries, the increased federal intrusion in labor markets, capital markets, communications and agriculture, and enduring changes in constitutional doctrines regarding conscription and governmental suppression of free speech. That was all magnified by World War II, Korean War, the Vietnam War, and our current wars, all of these things.

7:19And so inflation as a way of financing war does a lot more damage than just higher prices and making us have lower real wages. It really does put us way down the road to despotism, which is the theme of this day's conference, by putting more and more government in control of the private sector. And inflationary finance invariably leads to calls for price controls, which are almost always imposed during wartime when inflation has created these problems. The government, and this creates all kinds of problems, of course, shortages and so forth, and the government typically uses these problems that it created to grant itself even more powers, and this reminds me of what happened as a result of the Vietnam War inflation.

8:13Famously, Lyndon Johnson financed a great deal of the Vietnam War with inflation by urging, cajoling, pressuring the Fed to monetize the debt, which the Fed accommodated by doing that. So by the time we got to the early 70s, you know, we had the beginnings of stagflation, and of course the Arab oil embargo didn't help things out either. The FED responded to the Arab Oil Embargo with even more inflation. But there were price controls. The price controls were put on by Nixon before the Arab Oil Embargo. That was a response to the inflation created by the financing of the Vietnam War. And so this is one of the things I'm talking about. War and inflation inevitably leave the price controls. And so the price controls, of course, cause all sorts of havoc, shortages.

9:01Many of you in this room remember this, remember the long lines, and you remember the keystone cop's atmosphere of the government trying to centrally plan the energy markets in America. And so in my book, How Capitalism Saved America, on page 211, I quoted our first energy czar. You know, President Obama has taken a lot of heat for having all these czars, which he kind of likes, but we've had czars before. William Simon was the first energy czar before they called him the head of the Department of Energy. They called him the czar. It's kind of funny, isn't it, Americans politicians like this word czar, you know, a dictator. And here's what Simon said about what the government did in response to the problems it created with price controls.

9:49As for the centralized allocation process itself, that is the allocation of oil and The kindest thing I can say about it is that it was a disaster. Even with a stack of sensible sounding plans for even-handed allocation of gas and oil all over the country, the system kept falling apart, and chunks of the populace suddenly found themselves without gas. There was no logic to the pattern of failures. In Palm Beach, suddenly there was no gas, while ten miles away, gas was plentiful. Parts of New Jersey suddenly went dry while other parts of New Jersey were well supplied. Every day in different parts of the country, people waited in line for gasoline for two, three, and four hours. The normal market distribution system is so complex yet so smooth that no government mechanism could simulate it.

10:35And so it was one big mess created by de facto central planning of the energy markets that was a response to the price controls. And if you study history like I do, economic history, this has happened over and over and over again ever since before the Constitution. Even the Revolutionary War days, this sort of thing went on. And so what I'm going to do the rest of my time is talk a little bit about the history of the relationship between central banking and war. And Murray Rothbard, in his history of money and banking in the United States, points out that even though the Chinese invented paper in printing, it was the Massachusetts colony that was the first to print money.

11:22And it's an interesting story, and those of us who knew Murray Rothbard could just imagine him chuckling as he was writing this. He said that the Massachusetts government, this is in 1690, long before the American Revolution, And so they were, quote, accustomed to launching plunder expeditions against the prosperous French colony in Quebec. And so the government of Massachusetts said, hey, there's some wealthy people over in Quebec, let's go rob them. And so they would hire mercenaries, soldiers, to go up there and loot, pillage, and plunder the people in Quebec, and then come back home and they would share some of the loot with the soldiers and pay the mercenaries. But, of course, the people in Quebec caught on that they should defend themselves against these New Englanders, invading New Englanders, and so they hired their own mercenaries.

12:13And one of these expeditions was a failure. They got their butts kicked, in other words. So they came back home to Massachusetts with no plunder. And imagine these politicians in Massachusetts, They're sitting there with all these soldiers, mercenaries, with guns, and the soldiers are saying, where's our money? And the politicians are saying, we're broke, we don't have any money. And so what do they do? They printed money. They printed up 7,000 British pounds and paid them. And that was, according to Murray Rothbard, that was the first instance of the inflationary finance of, it wasn't a war, but it was an invasion of Quebec by the Massachusetts government.

12:59And so that was the very first example of this phenomenon. And then during the American Revolution itself, the Continental Congress printed up the continental paper money. And they printed so much of it, this was in 1775, they started printing the continentals. By 1781, they were worth nothing, they were worth zero. It was sort of Zimbabwean type inflation, I guess, that with the continental, and the phrase not worth a continental, you know, was popular for generations to depict this. And some of the states, it created so much inflation that some of the states during the American Revolution imposed price control laws. The state of Pennsylvania almost caused George Washington's army to starve to death in the field in Pennsylvania because of their price control laws.

13:49They imposed a law that applied price controls to quote, those commodities used by the army. They thought they were doing the army a good thing by holding down the price below free market prices of food and things the army was using. But of course they took the profit out of producing all these things and all these things dried up and disappeared. And they literally almost starved to death in the field because of this. And it created such a crisis that the Continental Congress issued a resolution on June 4th, 1778, urging all the states to abolish their price control laws. Think about that. Here we just had a big giant law that's going to put price controls on every aspect of medical care, but in those days they were wiser.

14:36Here's what they said, the Continental Congress said this, whereas it hath been found by experience that limitations upon the prices of commodities are not only ineffectual for the purpose proposed, but likewise productive of the very evil consequences resolved that it be recommended to the several states to repeal or suspend all laws limiting, regulating, or restraining the price of any article, end quote. And Pennsylvania did, and within a month or two, it became profitable to supply the army with whatever it needed. And so George Washington and his army literally could have been defeated by price controls if it weren't for the Continental Congress and their understanding of the experience of price controls.

15:22Now, this was before there was a central bank. Now, before, the founding father of central banking in America is Alexander Hamilton. In one of my latest books, Hamilton's Curse, I quote a Fed publication as calling him the founding father of central banking in America, because the original central bank was called the Bank of the United States, and it was Hamilton's idea. and this Fed publication even brags and it says Hamilton even sounded like a contemporary Fed chairman and and which is true I've read all of Hamilton's speeches and reports on banking and they're very long-winded most of it doesn't make any sense at all it's a you know he knew very little about finance really I don't know where he got this reputation of not knowing a lot about finance he didn't he never studied it really seriously and he does sound like like Alan Greenspan. No two sentences are connected in often times. So that's true.

16:23In Hamilton, you have to understand why Hamilton wanted a bank, a central bank. And it wasn't just him, it was his party, his political party, the Federalists. And he was the lightning rod. He was the main mover and shaker of the Federalists in the government. And he wanted A Bank To Fund What He Called Sudden Emergencies, Like War, For Example, And Unlike George Washington And Thomas Jefferson, Their Foreign Policy Philosophy Was Commercial Relations With All Nations But Entangling Alliances With None, Hamilton, Just The Opposite, He Wanted To Pursue Empire, He Wanted An American Empire That Would Rival The British Empire, The Jeffersonians Hamilton said, well, we just fought a war against the British Empire.

17:09Why would we want to become one like them? And Hamilton, though, he wanted a government that would pursue, in his words, imperial glory. Not a government that would simply protect life, liberty, and property. He wanted to be an imperialist. And of course, it takes a lot of money to be an imperialist. And how do you get all this money? Well, you print it. You print it. It was at the Central Bank. There's a biographer of Hamilton named Clinton Rossiter. He's long since passed away. He was a professor of history at Cornell for many years. And he said this about Hamilton. He said, quote, Hamilton's overriding purpose was to build the foundations of a new empire, end quote. And so, as I said, to have a new empire, you needed a central bank. This is why Jefferson loathed Hamilton.

17:57He really despised Hamilton. He thought everything he was talking about doing and his party was a threat to destroy liberty in America and there's an interesting story about Jefferson's take on why Hamilton really wanted a central bank, I'll insert this here, is that Jefferson had been observing the antics of Hamilton and his political cronies and one of the things Hamilton did when he was secretary of treasury was to nationalize the debt, nationalize the of the States. But the way they went about it was all the political insiders in Congress and their political supporters knew that the government was going to pay off all these old bonds, government bonds, at face value. And this, for the young people in the audience, this was before the internet.

18:49And so the insiders knew that if you could buy one of these bonds that was currently selling between two and ten percent of face value in a month from now you're going to be able to cash it in for a hundred percent of face value and so there was a mad rush up and down the eastern seaboard of stage coaches, horses, carriages, every means, boats, sailing ships, all hired by the movers and shakers in the government, including members of Congress, including Hamilton himself, to buy up all these bonds from whoever would sell them, many of them were Revolutionary War veterans, The arbitrage created millions of dollars in profits, one biographer that I read said that Robert Morris himself made 18 million dollars in this, in this whole gambit, and so here's Jefferson observing all of this, and he's asking himself, well what is the purpose of all this? What are they after here?

19:48And his interpretation is that Hamilton had this expansionist agenda, he called the Constitution a frail and worthless fabric because it limited government too much. He wanted an empire. He needed votes in Congress to go along with his version of big government in an empire. How do you win votes in Congress? Well, you win them like Nancy Pelosi does, you bribe members of Congress. And so this whole gambit of the debts was a way to bribe members of Congress to get them to go along with the Hamilton Federalist Party agenda of big government. But Jefferson said there's a problem. These guys are going to die. They're going to die off and retire. And therefore the agenda of the Federalist Party will die off and retire if it doesn't have the votes of these people who have been bought off.

20:37So the dilemma to Hamilton, Jefferson said, was how to create a permanent engine of corruption. The debt gambit was a temporary engine of corruption that would fuel this big government agenda. The central bank is the answer. That's why Hamilton wanted a central bank. It could be used as a permanent engine of corruption, and I think he was exactly right about that. Look at today's Fed, or yesterday's Fed, the same thing. And so, Jefferson understood the link between a central bank and war also. One of the reasons he opposed a large public debt, which Hamilton was in favor of, and a large public debt monetized by a government bank, is he said, the European monarchs had done this, he said, The perpetuation of debt has drenched the earth with blood.

21:32He's referring to the fact that the Bank of England, the ability to issue large amounts of public debt to finance wars, drenched the European earth with blood for centuries with all these unnecessary wars of imperialism, wars of conquest. He did not want America to go down the same road. Hamilton did. And so that was the origins of central banking in America. in America. It was related to war to some extent. And of course, the first Bank of the United States was created in 1791. It created 72% inflation in the first five years. It generated corruption. And it was such a bad idea in retrospect to so many members of Congress that they did not re-charter it. It had a 20-year charter. And then came the War of 1812. And there was no central bank during the War of 1812.

22:27But the Federal Government did intervene in the monetary system and what it did was it first encouraged the creation of a lot of private banks and then it issued an edict suspending species payment during the war. In 1814, the Federal Government declared that these banks were to suspend species payment, which means they don't have to pay gold or silver for the paper currency that people took in to redeem. And that allowed the banks to issue money that they could use to buy up the government debt that was used to finance the useless and futile War of 1812, which didn't benefit America in any way whatsoever. A libertarian friend of mine told me the one benefit of the War of 1812 was that the British burned down much of Washington, D.C.

23:16But other than that, you know, what on earth was the benefit of the War of 1812? Defense contractors always make a good living out of these things, but certainly the average citizen didn't benefit in any way for it. And so, and of course, this did create an inflation. Inflation during the War of 1812 averaged about 35% a year. And then the government decided, well, with all this inflation and this war debt, the private banks aren't going to be able, sufficient, to finance the war debt. Therefore, the Bank of the United States was resurrected in 1817, and it made the inflation even worse after that. And Murray Rothbard, because it continued to monetize the war debt, the War of 1812 war debt.

24:06And Murray Rothbard in his History of Money and Banking explains the impetus, the real, the individuals involved in bringing back this Hamilton's Bank, the Bank of the United States. And here's what he says. He says, The second bank of the United States was pushed through Congress, particularly by the Secretary of the Treasury, Alexander J. Dallas, a wealthy Philadelphia lawyer and and close friend, counsel, and financial associate of Philadelphia merchant and banker Stephen Girard, reputedly one of the two wealthiest men in the country. Girard was the largest stockholder of the first bank of the United States, and during the War of 1812, Girard became a very heavy investor in the war debt of the federal government.

24:56Imagine that. As a way to unload his public debt, Girard began to agitate for a new bank of the United The Second Bank of the United States launched a spectacular inflation of money and credit and it promptly created the Panic of 1819. That was actually the title of Rothbard's doctoral dissertation at Columbia many, many years ago. and it's published as a book, it's usually for sale on the front, The Panic of 1819. In the 19th century, depressions were called panics. And I believe it was Herbert Hoover who decided that's too scary a term.

25:42Let's call them depressions. People won't be fearful of depression, but panic. They might panic over panic. And so that didn't work out too well. And this was the first real depression in American history, the panic of 1819 caused by the Bank of the United States which came back into being because of the War of 1812, and it was the first time where there was large-scale unemployment in American cities. For example, in Philadelphia, employment in manufacturing, which was mostly handicrafts in those days, fell from 9,700 people in 1815 to 2,100 people in 1819. So there was serious unemployment. It was the first real depression in American history. And again, the bank was created so much of a boom and bust cycle, corruption, fraud, some of the money was stolen that Andrew Jackson, President Andrew Jackson defunded the bank.

26:36He vetoed the bill to re-charter the bank in 1834 and the bank disappeared, eventually went out of business. Business. But the advocates of central banking did not. And one of the most faithful advocates of central banking was Abraham Lincoln. As many of you know, I've read several books about him. And there's a big fat history of the Whig Party written by a University of Virginia professor named Michael Holt. And he said during this time, roughly the 1830s 1860, Michael Holt says there was no more of a forceful proponent of bringing back the central bank than Abraham Lincoln. He made stump speeches for Whig Party candidates all over the country who advocated bringing back the bank and inflation and so forth. And so when Lincoln became president, the Lincoln administration brought back central banking. They didn't bring back the bank Bank of the United States, but the Legal Tender Act of 1862 empowered the Treasury Secretary to issue paper money, greenbacks, they were used to, they were not at the time redeemable

27:45in gold or silver, then there were the National Currency Acts of 1863 and 1864 that created the system of nationally chartered banks that could issue bank notes that were supplied to them by the new comptroller of the currency. was created in the Lincoln administration along with the first income tax for his military conscription law, the internal revenue bureaucracy was created and the greenback dollars devalued by in one year they were only worth 35 cents in gold in just one year and during the Civil War the Confederate government was much worse. They financed their war effort mostly with printing money so inflation in the Confederate States during the Civil War averaged about 2,200 percent per year because they went down the same road and the northern states didn't go down that road quite as fast.

28:40And one of the side effects of this, the printing of money to finance the Civil War, was the northern manufacturers became a powerful lobbying force for more inflation because they realized says that a falling dollar caused by inflation makes domestic prices cheaper and it makes imports look more expensive. So they saw this as a form of veiled protectionism and they became a lobbying force for a more centralized governmental control of banking and the creation of inflation. The railroad corporations, which were the biggest corporations in the world at the time, they also became a lobbying force for inflation because they were heavy in the the Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit

29:51of 1812. It had no good purpose for Americans at all. It was none of our business. It turned out to be a disaster. Hundreds of thousands of dead soldiers for nothing. It led to World War II. And the Fed financed about 14 percent of this. And I used to quote some left-wing author who wrote a book on taxes as saying, thank God we had the Fed, otherwise we couldn't have entered World War I. But also I know I can also cite Milton Friedman. He says the The same thing in his famous history of money and banking, co-author with Anna Schwartz, they say the same thing, that if it were not for the Fed, we wouldn't have been able to enter World War I. What a disaster that would have been. And so, it sounds kind of kooky to me, but that's the way it is. And so, they accounted for about 14% of the direct monetary costs of the war. The amount of money in circulation between 1914, the first year the Fed was in

30:48Business in 1920 doubled, the money supply doubled as did the price level. So the price level doubled and consider this from 1787, 1789, the year that the Constitution was ratified, 1789, to 1913, the price level was about the same. There were ups and downs but it was about the same and And then from 1914 to 1920 it doubled, you know, it's a hundred percent. And so that was just one cost of the Fed's financing of World War I, the American participation of World War I. And it created a boom, a bit of a boom, and of course the bust came in 1920. There was a depression in 1920 that was even worse, the first year of this, the one year of this was even worse than the first year of the Great Depression, A Decade Later, and gross domestic product declined by 24% from 1920 to 1921.

31:47Imagine that, a fourth reduction in the whole size of the economy in one year. Unemployment, the number of unemployed Americans went from 2.1 million to 4.9 million in one year in 1920. And this is our friend Tom Woods has talked about this as the depression no one ever heard of. Why do you think no one ever heard of this? Well, it's because President Warren Harding, his response to this, the Great Depression of 1920, was to cut government spending and cut taxes, and that's why it only lasted one year. And so this is a very politically incorrect depression. That's why you don't even read about it in the textbooks, that Harding ended it in one year with government spending cuts.

32:32And so, you know, you have to come to one of these seminars to ever hear about this. If you ever heard, there was a depression in 1920. And so, the central banking of this, of war, World War I, World War II, has inflicted the same kinds of damage on American society. Inflation, economic chaos, reduced real wages, price controls, other government interventions, and ideological attacks on capitalism as the culprit. And of course, the adoption of a sort of a fascist economy with more and more government controls. And I'm going to conclude by quoting Adam Smith, who some of us here consider him to be a dangerous left-winger as far as economics goes, but he's good on some things, Adam Smith. And here's one thing he said, Adam Smith, in his famous book, The Wealth of Nations, he said, Wars would in general be more speedily concluded and less wantonly undertaken without inflationary finance.

33:30He said, the people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and the government, in order to humor them, would not be under the necessity of carrying it on longer than it was necessary to do so. This was in 1776, Adam Smith was writing about this. and of course politicians don't seem to have any incentive whatsoever to pay attention to this wise advice and I don't have any magic solution as to how to make the politicians pay attention to this advice but at least educating ourselves is the first step toward this and so I think that's about all I wanted to say to you for today about the gloomy picture of the relationship between war and central banking and central planning and it's something we need to to avoid, not like the plague, but like Zimbabwe, we don't want to be like Zimbabwe, and thank you very much.