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War and Inflation

[This talk was delivered at the Future of Freedom Foundation‘s conference on “Restoring the Republic: Foreign Policy and Civil Liberties,” on June 6, 2008, in Reston, Virginia.]

The US central bank, called the Federal Reserve, was created in 1913. No one promoted this institution with the slogan that it would make wars more likely and guarantee that nearly half a million Americans will die in battle in foreign lands, along with millions of foreign soldiers and civilians.

No one pointed out that this institution would permit Americans to fund, without taxes, the destruction of cities abroad and overthrow governments at will. No one said that the central bank would make it possible for the United States to be at large-scale war in one of every four years for a full century. It was never pointed out that this institution would make it possible for the US government to establish a global empire that would make imperial Rome and Britain look benign by comparison.

You can line up 100 professional war historians and political scientists to talk about the 20th century, and not one is likely to mention the role of the Fed in funding US militarism. And yet it is true: the Fed is the institution that has created the money to fund the wars. In this role, it has solved a major problem that the state has confronted for all of human history. A state without money or a state that must tax its citizens to raise money for its wars is necessarily limited in its imperial ambitions. Keep in mind that this is only a problem for the state. It is not a problem for the people. The inability of the state to fund its unlimited ambitions is worth more for the people than every kind of legal check and balance. It is more valuable than all the constitutions every devised.

The state has no wealth that is its own. It is not a profitable enterprise. Everything it possesses it must take from society in a zero-sum game. That usually means taxes, but taxes annoy people. They can destabilize the state and threaten its legitimacy. They inspire anger, revolt, and even revolution. Rather than risk that result, the state from the Middle Ages to the dawn of the central-banking age was somewhat cautious in its global ambitions simply because it was cautious in its need to steal openly and directly from the people in order to pay its bills.

To be sure, it doesn’t require a central bank for a state to choose inflation over taxes as a means of funding itself. All it really requires is a monopoly on the production of money. Once acquired, the monopoly on money production leads to a systematic process of depreciating the currency, whether by coin clipping or debasement or the introduction of paper money, which can then be printed without limit. The central bank assists in this process in a critical sense: it cartelizes the banking system, the essential conduit by which money is lent to the public and to the government itself. The banking system thereby becomes a primary funding agency to the state, and, in exchange for its services, the banking system is guaranteed against insolvency and business failure as it profits from inflation. If the goal of the state is the complete monopolization of money under an infinitely flexible paper-money system, there is no better path for the state than the creation of a central bank. This is the greatest achievement for the victory of power over liberty.

The connection between war and inflation, then, dates long before the creation of the Federal Reserve. In fact, it dates to the founding itself. The fate of the Continental currency during and after the Revolutionary War, for example, was a very bad omen for our future, and the whole country paid a very serious price. It was this experience that later led to the gold clause in the US Constitution. Except for the Hamiltonians, that entire generation of political activists saw the unity of freedom and sound money, and regarded paper money as the fuel of tyranny.

Consider Thomas Paine:

Paper money is like dram-drinking, it relieves for a moment by deceitful sensation, but gradually diminishes the natural heat, and leaves the body worse than it found it. Were not this the case, and could money be made of paper at pleasure, every sovereign in Europe would be as rich as he pleased…. Paper money appears at first sight to be a great saving, or rather that it costs nothing; but it is the dearest money there is. The ease with which it is emitted by an assembly at first serves as a trap to catch people in at last. It operates as an anticipation of the next year’s taxes.

But the wisdom of this generation, attacked by Lincoln, was finally thrown out during the Progressive Era. It was believed that an age of scientific public policy needed a scientific money machinery that could be controlled by powerful elites. The dawn of the age of central banking was also the dawn of the age of central planning, for there can be no government control over the nation’s commercial life without first controlling the money. And once the state has the money and the banking system, its ambitions can be realized.

Before the creation of the Federal Reserve, the idea of American entry into the conflict that became World War I would have been inconceivable. In fact, it was a highly unpopular idea, and Woodrow Wilson himself campaigned on a platform that promised to keep us out of war. But with a money monopoly, all things seem possible. It was a mere four years after the Fed was invented under the guise of scientific policy planning that the real agenda became obvious. The Fed would fund the US entry into World War I.

It was not only entry alone that was made possible. World War I was the first total war. It involved nearly the whole of the civilized world, and not only their governments but also the civilian populations, both as combatants and as targets. It has been described as the war that ended civilization in the 19th-century sense in which we understand that term. That is to say, it was the war that ended liberty as we knew it. What made it possible was the Federal Reserve. And not only the US central bank; it was also its European counterparts. This was a war funded under the guise of scientific monetary policy.

Reflecting on the calamity of this war, Ludwig von Mises wrote in 1919

One 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.

There is always a price to be paid for funding war through the central bank. The postwar situation in America was a classic case. There was inflation. There were massive dislocations. There was recession or what was then called depression, a direct result of capital dislocation that masked itself as an economic boom, but which was then followed by a bust. The depression hit in 1920, but it is not a famous event in United States economic history. Why is that? Because the Federal Reserve had not yet acquired the tools to manufacture an attempt to save the economy. Instead, neither the Fed nor Congress nor the president did much of anything about it — a wholly praiseworthy response! As a result, the depression was brief and became a footnote to history. The same would have happened in 1930, had Hoover not attempted to use the government as the means of resuscitation.

Sadly, the easy recovery of 1920–1922 tempted the central bank to get back into the business of inflation, with the eventual result of a stock market boom that led to bust, then depression, and finally the destruction of the gold standard itself. FDR found that even fascist-style economic planning and inflation could not restore prosperity, so he turned to the ancient method of looking for a war to enter. Here is where the history of the United States and the Fed intersects with the tragic role of the German central bank.

The German government also funded its Great War through inflation. By war’s end, money in circulation had risen fourfold. Prices were up 140%. Yet, on international exchange, the German mark had not suffered as much as one might expect. The German government looked at this with encouragement and promptly attempted to manufacture a complete economic recovery through inflation. Incredibly, by 1923, the mark had fallen to one-trillionth of its 1914 gold value. The US dollar was then equal to 4.2 trillion marks. It was an example of currency destruction that remains legendary in the history of the world — all made possible by a central bank that obliged the government and monetized its war debt.

But did people blame the printing press? No. The popular explanation dealt directly with the Treaty of Versailles. It was the harsh peace imposed by the allies that had brought Germany to the brink of total destruction — or so it was believed. Mises himself had written a full book that he hoped would explain that Germany owed its suffering to war and socialism, not Versailles as such. He urged the German people to look at the real cause and establish free markets, lest imperial dictatorship be the next stage in political development. But he was ignored.

The result, we all know, was Hitler.

Turning to Russia, the untold truth about the Bolshevik revolution is that Lenin’s greatest propaganda tool involved the suffering of the Russian people during World War I. Men were drafted and killed at a horrific level. Lenin called this capitalist exploitation, based on his view that the war resulted from capitalist motives. In fact, it was a foreshadowing of the world that socialism would bring about, a world in which all people and all property are treated as means to statist ends. And what made the prolongation of the Russian role in World War I possible was an institution created in 1860 called the State Bank of the Russian Empire — the Russian version of the Fed.

The Russian war itself was funded through money creation, which also led to massive price increases and controls and shortages during the war. I’m not of the opinion, unlike the neocons, that the Russian monarchy was a particularly evil regime, but the temptation that the money machine provided the regime proved too inviting. It turned a relatively benign monarchy into a war machine. A country that had long been integrated into the worldwide division of labor and was under a gold standard became a killing machine. And as horrific and catastrophic as the war dead were for Russian morale, the inflation affected every last person and inspired massive unrest that led to the triumph of Communism.

At this juncture in history, we can see what central banking had brought to us. It was not an end to the business cycle. It was not merely more liquidity for the banking system. It was not an end to bank runs and bank panics. It certainly wasn’t scientific public policy. The world’s major economies were being lorded over by money monopolies, and the front men had become some of the worst despots in the history of the world. Now they were preparing to fight each other with all the resources they had at their disposal. The resources they did not have at their disposal they would pay for with their beloved machinery of central banking.

In wartime, the printing presses ran overtime, but with a totalitarian level of rationing, price controls, and all-around socialization of resources in the whole of the Western world, the result of inflation was not merely rising prices. It was vast suffering and shortages in Britain, Russia, Germany, Italy, France, Austria-Hungary, the United States, and pretty much the entire planet.

So we can see here the amazing irony of central banking at work. The institution that was promoted by economists working with bankers, in the name of bringing rationality and science to bear on monetary matters, had given birth to the most evil political trends in the history of the world: Communism, socialism, Fascism, Nazism, and the despotism of economic planning in the capitalist West. The story of central banking is one step removed from the story of atom bombs and death camps. There is a reason the state has been unrestrained in the last 100 years, and that reason is the precise one that many people think of as a purely technical issue that is too complicated for mere mortals.

Fast-forward to the Iraq War, which has all the features of a conflict born of the power to print money. There was a time when the decision to go to war involved real debate in the House of Commons or the US House of Representatives. And what was this debate about? It was about resources and the power to tax. But once the executive state was unhinged from the need to rely on tax dollars and did not have to worry about finding willing buyers for its unbacked debt instruments, the political debate about war was silenced.

In the entire run-up to war, George Bush just assumed as a matter of policy that it was his decision alone whether to invade Iraq. The objections by Ron Paul and some other members of Congress and vast numbers of the American population were reduced to little more than white noise in the background. Imagine if he had to raise the money for the war through taxes. It never would have happened. But he didn’t have to. He knew the money would be there. So despite a $200 billion deficit, a $9 trillion debt, $5 trillion in outstanding debt instruments held by the public, a federal budget of $3 trillion, and falling tax receipts in 2001, Bush contemplated a war that has cost $525 billion dollars — or $4,681 per household. Imagine if he had gone to the American people to request that. What would have happened? I think we know the answer to that question. And those are government figures; the actual cost of this war will be far higher — perhaps $20,000 per household.

Now, when left-liberals talk about these figures, they like to compare them with what the state might have done with these resources in terms of funding health care, public schools, Head Start centers, or food stamps. This is a mistake because it demonstrates that the Left isn’t really providing an alternative to the Right. It merely has a different set of priorities in how it would use the resources raised by the inflation machine. It’s true that public schools are less costly in terms of lives and property than war itself. But the inflation-funded welfare state also has a corrosive effect on society. The pipe dream that the inflation monster can be used to promote good instead of evil illustrates a certain naïveté about the nature of the state itself. If the state has the power and is asked to choose between doing good and waging war, what will it choose? Certainly in the American context, the choice has always been for war.

It is equally naïve for the Right to talk about restraining the government while wishing for global war. So long as the state has unlimited access to the printing press, it can ignore the pleas of ideological groups concerning how the money will be spent. It is also very silly for the Right to believe that it can have its wars, its militarism, its nationalism and belligerence, without depending on the power of the Federal Reserve. This institution is the very mechanism by which the dreams of both the fanatical Right and the fanatical Left come true.

The effect of the money machine goes well beyond funding undesirable government programs. The Fed creates financial bubbles that lead to economic dislocation. Think of the technology bubble of the late 1990s or the housing bubble. Or the boom that preceded the current bust. These are all a result of the monopolization of money.

These days, the American consumer has been hit very hard with rising prices in oil, clothing, food, and much else. For the first time in decades, people are feeling this and feeling it hard. And just as in every other inflation in world history, people are looking for the culprit and finding all the wrong ones. They believe it is the oil companies who are gouging us, or that foreign oil dealers are restricting supply, or that gas station owners are abusing a crisis to profit at our expense.

I wouldn’t entirely rule out the possibility that price controls are around the corner. When Nixon imposed them in 1971, neither he nor his advisors believed that they would actually result in controlling inflation. Rather, the purpose was to redirect the target of public anger from the government and its bank over to retailers, who would become scapegoats. In this sense, price controls do work. They make people believe that the government is trying to lower prices while the private sector is attempting to raise them. This is the real political dynamic at work with price controls.

The question is whether you will be taken in by these tactics. It is long past time for us to take note that the cause of the real trouble here is not the manufacturers, or even the war as such, but the agency that has been granted a legal right to counterfeit at will and lower the value of the currency while fueling every manner of statist scheme, whether welfare or warfare. We need to look at the Fed and say, this is the enemy.

Note that the Federal Reserve is not a political party. It is not a recognized interest group. It is not a famed lobby in Washington. It is not really even a sector of public opinion. It seems completely shielded from vigorous public debate. If we truly believe in liberty and decry the leviathan state, this situation cannot be tolerated.

I say to the sincere Right, if you really want to limit the state, you will have to give up your dreams of remaking the world at the point of a gun. Wars and limited government are impossible. Moreover, you must stop ignoring the role of monetary policy. It is a technical subject, to be sure, but one that we must all look into and understand if we expect to restore something that resembles the American liberty of the founders.

I say to the sincere Left, if you really want to stop war and stop the spying state, and put an end to the persecution of political dissidents and the Guantánamo camps for foreign peoples, and put a stop to the culture of nationalism and militarism, you must join us in turning attention to the role of monetary policy. The printing presses must be unplugged. It’s true that this will also hit programs that are beloved by the Left, such as socialized health care and federalized education programs. But so long as you expect the state to fund your dreams, you cannot expect that the state will not also fund the dreams of people you hate.

And let me say a few words to libertarians, who dream of a world with limited government under the rule of law, a world in which free enterprise reigns and where the state has no power to interfere in our lives so long as we behave peacefully. It is completely absurd to believe that this can be achieved without fundamental monetary reform. And yet, until the most recent Ron Paul campaign — and aside from Murray Rothbard and the 26-year-long work of the Mises Institute — I don’t recall that libertarians themselves have cared much about this issue at all.

In 1983, the Mises Institute held a large academic conference on the gold standard, and we held it in Washington, D.C. (There were scholarly papers and Ron Paul debated a Fed governor. Ron won.) Even back then, I recall that D.C. libertarians ridiculed us for holding such a meeting to talk about the Fed and its replacement with sound money. They said that this would make the Mises Institute look ridiculous, that we would be tarred with the brush of gold bugs and crazies. We did it anyway. And all these years later, the book that came out of that conference remains a main source for understanding the role of money in the advance of despotism or resistance to it, and a blueprint for the future.

Of course the Austrian tradition fought paper money and central banking from the beginning. Menger was an advocate of the gold standard. Böhm-Bawerk actually established it as finance minister to the Habsburg monarchy. Mises’s book on the topic from 1912 was the first to show the role of money in the business cycle, and he issued dire warnings about central banking. Hayek wrote powerfully against the abandonment of gold in the 1930s. Hazlitt warned of the inevitable breakdown of Bretton Woods and advocated a real gold standard instead. And Rothbard was a champion of sound money and the greatest enemy the Fed has ever had.

But generally, I’ve long detected a tendency in libertarian circles to ignore this issue, in part for precisely the reasons cited above: it is not respectable.

Well, I will tell you why this issue is not considered respectable: it is the most important priority of the state to keep its money machine hidden behind a curtain. Anyone who dares pull the curtain back is accused of every manner of intellectual crime. This is precisely the reason we must talk about it at every occasion. We must end the conspiracy of silence on this issue.

I was intrigued at how Ron Paul, during his campaign, would constantly bring up the subject. Most politicians are out to play up to their audiences, so they say things that people want to hear. I promise you that early in the campaign, no one wanted to hear him talk about the Federal Reserve. But he did it anyway. He worked to educate his audiences about the need for monetary reform. And it worked. For the first time in my life, there is a large and very public movement in this country to take this topic seriously.

Monetary economist Joseph Salerno was called the other day by C-Span, which wanted to interview him on television on the need to restore gold as the basis of our currency. As I watched this excellent interview, I was struck by what a great triumph it truly is for liberty that this topic is again part of the national debate. In the 19th-century, this was a topic on everybody’s mind. It can be again today, provided we do not eschew the truth in the formation of our message.

It might be said that advocating privatization is politically unrealistic, and therefore a waste of time. What’s more, we might say that by continuing to harp on the issue, we only marginalize ourselves, proving that we are on the fringe. I submit that there is no better way to ensure that an issue will always be off the table than to stop talking about it.

Far from being an arcane and anachronistic issue, then, the gold standard and the issues it raises get right to the heart of the current debate concerning the future of war and the world economy. Why do the government and its partisans dislike the gold standard? It removes the discretionary power of the Fed by placing severe limits on the ability of the central bank to inflate the money supply. Without that discretionary power, the government has far fewer tools of central planning at its disposal. Government can regulate, which is a function of the police power. It can tax, which involves taking people’s property. And it can spend, which means redistributing other people’s property. But its activities in the financial area are radically curbed.

Think of your local and state governments. They tax and spend. They manipulate and intervene. As with all governments from the beginning of time, they generally retard social progress and muck things up as much as possible. What they do not do, however, is wage massive global wars, run huge deficits, accumulate trillions in debt, reduce the value of money, bail out foreign governments, provide endless credit to failing enterprises, administer hugely expensive and destructive social insurance schemes, or bring about immense swings in business activity.

State and local governments are awful and they must be relentlessly checked, but they are not anything like the threat of the federal government. Neither are they as arrogant and convinced of their own infallibility and indispensability. They lack the aura of invincibility that the central government enjoys.

It is the central bank, and only the central bank, that works as the government’s money machine, and this makes all the difference. Now, it is not impossible that a central bank can exist alongside a gold standard, a lender of last resort that avoids the temptation to destroy that which restrains it. In the same way, it is possible for someone with an insatiable appetite for wine to sit at a banquet table of delicious vintages and not take a sip. Let’s just say that the existence of a central bank introduces an occasion of sin for the government. That is why under the best gold standard, there would be no central bank, gold coins would circulate as freely as their substitutes, and rules against fraud and theft would prohibit banks from pyramiding credit on top of demand deposits.

So long as we are constructing the perfect system, all coinage would be private. Banks would be treated as businesses: no special privileges, no promises of bailout, no subsidized insurance, and no connection to government at any level.

This is the free-market system of monetary management, which means turning over the institution of money entirely to the market economy. As with any institution in a free society, it is not imposed from above and dictated by a group of experts, but is the de facto result that comes about in a society that consistently respects private-property rights, encourages enterprise, and promotes peace.

It comes down to this. If you hate war, oppose the Fed. If you hate violations of your liberties, oppose the Fed. If you want to restrain despotism, restrain the Fed. If you want to secure freedom for yourself and your descendants, abolish the Fed.

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Llewellyn H. Rockwell Jr.
Llewellyn H. Rockwell, Jr., is founder and chairman of the Mises Institute in Auburn, Alabama, editor of, and author of Fascism versus Capitalism.
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