The 20th century was the century of total
war. Limitations on the scope of war,
built up over many centuries, had already begun to break down in the 19th
century, but they were altogether obliterated in the 20th. And of course the
sheer amount of resources that centralized states could bring to bear in war,
and the terrible new technologies of killing that became available to them,
made the 20th a century of almost unimaginable horror.
terribly often that people discuss the development of total war in tandem with
the development of modern central banking, which — although antecedents existed
long before — also came into its own in the 20th century. It's no surprise that
Ron Paul, the man in public life who has done more than anyone to break through
the limits of what is permissible to say in polite society about both these
things, has also been so insistent that the twin phenomena of war and central
banking are linked. "It is no coincidence," Dr. Paul said, "that
the century of total war coincided with the century of central banking."
every American taxpayer had to submit an extra five or ten thousand dollars to
the IRS this April to pay for the war, I'm quite certain it would end very
quickly. The problem is that government finances war by borrowing and printing
money, rather than presenting a bill directly in the form of higher taxes. When
the costs are obscured, the question of whether any war is worth it becomes
For now I take
it as uncontroversial that central banks perform three significant functions for the banking
system and the government.
First, they serve as lenders of last resort, which in practice means
bailouts for the big financial firms.
Second, they coordinate the inflation of the money supply by
establishing a uniform rate at which the banks inflate, thereby making the
fractional-reserve banking system less unstable and more consistently
profitable than it would be without a central bank (which, by the way, is why
the banks themselves always clamor for a central bank).
Finally, they allow governments, via inflation, to finance their
operations far more cheaply and surreptitiously than they otherwise
As an enabler of inflation, the Fed is
ipso facto an enabler of war. Looking back on World
War I, 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."
No government has ever said, "Because
we want to go to war, we must abandon central banking," or "Because we want to go to war, we must
abandon inflation and the fiat money system." Governments always say, "We must abandon the gold standard because
we want to go to war." That alone
indicates the restraint that hard money places on governments. Precious metals
cannot be created out of thin air, which is why governments chafe at monetary
systems based on them.
can raise revenue in three ways.
Taxation is the most visible
means of doing so, and it eventually meets with popular resistance.
the money they need, but this borrowing is likewise visible to the public in the
form of higher interest rates — as the federal government competes for a
limited amount of available credit, credit becomes scarcer for other borrowers.
money out of thin air, the third option, is preferable for governments, since the process by
which the political class siphons resources from society via inflation is far
less direct and obvious than in the cases of taxation and borrowing. In the old
days the kings clipped the coins, kept the shavings, then spent the coins back
into circulation with the same nominal value. Once they have it, governments
guard this power jealously. Mises once said that if the Bank of England had
been available to King Charles I during the English Civil War of the 1640s, he
could have crushed the parliamentary forces arrayed against him, and English
history would have been much different.
Mariana, a Spanish Jesuit who wrote in the 16th and early 17th centuries, is
best known in political philosophy for having defended regicide in his 1599
Casual students often assume that it must have been for this provocative claim
that the Spanish government confined him for a time. But in fact it was
his Treatise on the Alteration of Money, which condemned
monetary inflation as a moral evil, that got him in trouble.
about that. Saying the king could be killed was one thing. But taking direct
aim at inflation, the lifeblood of the regime? Now that was taking things too
days, if a war were to be funded partly by monetary debasement, the process was
direct and not difficult to understand. The sequence of events today is more
complicated, but as I've said, not fundamentally different. What happens today
is not that the government needs to pay for a war, comes up short, and simply
prints the money to make up the difference. The process is not quite so crude.
But when we examine it carefully, it turns out to be essentially the same
banks, established by the world's governments, allow those governments to spend
more than they receive in taxes. Borrowing allowed them to spend more than
they received in taxes, but government borrowing led to higher interest rates,
which in turn can provoke the public in undesirable ways. When central banks
create money and inject it into the banking system, they serve the purposes of
governments by pushing those interest rates back down, thereby concealing the
effects of government borrowing.
central banking does more than this. It essentially prints up money and hands
it to the government, though not quite so directly and obviously.
federal government is able to sell its bonds at artificially high prices (and
correspondingly low interest rates) because the buyers of its debt know they
can turn around and sell to the Federal Reserve. It's true that the federal government
has to pay interest on the securities the Federal Reserve owns, but at the end
of the year the Fed pays that money back to the Treasury, minus its trivial
operating expenses. That takes care of the interest. And in case you're
thinking that the federal government still has to pay out at least the
principal, it really doesn't. The government can roll over its existing debt
when it comes due, issuing a new bond to pay off the principal of the old one.
this convoluted process — a process, not coincidentally, that the general
public is unlikely to know about or understand — the federal government is in
fact able to do the equivalent of printing money and spending it. While
everyone else has to acquire resources by spending money they earned in a productive
enterprise — in other words, they first have to produce something for society,
and then they may consume — government may acquire resources without first
having produced anything. Money creation via government monopoly thus becomes
another mechanism whereby the exploitative relationship between government and
the public is perpetuated.
because the central bank allows the government to conceal the cost of
everything it does, it provides an incentive for governments to engage in
additional spending in all kinds of areas, not just war. But because war
is enormously expensive and because the sacrifices that accompany it place such
a strain on the public, it is wartime expenditures for which the assistance of
the central bank is especially welcome for any government.
Reserve System, which was established in late 1913 and opened its doors the
following year, was first put to the test during World War I. Unlike some
countries, the United States did not abandon the gold standard during the war,
but it was not operating under a pure 100 percent gold standard in any case.
The Fed could and did engage in credit expansion. On Mises.org we feature an article by John Paul
Koning that takes the reader through the exact process by which
the Fed carried out its monetary inflation in those early years. In brief, the
Fed essentially created money and used it to add war bonds to its balance
sheet. Benjamin Anderson, the Austrian-sympathetic economist, observed at the
time, "The growth in virtually all the items of the balance sheet of the
Federal Reserve System since the United States entered the war has been very
Fed's accommodating role was not confined to wartime itself. InAmerica's Money Machine, Elgin Groseclose
the war was over in 1918, in a fighting sense, it was not over in a financial
sense. The Treasury still had enormous obligations to meet, which were
eventually covered by a Victory loan. The main support in the market again was
the Federal Reserve.
expansion was especially helpful to the US government during the Vietnam War. Lyndon Johnson
could have both his Great Society programs and his overseas war, and the strain
on the public was kept — at first, at least — within manageable limits.
confident had the Keynesian economic planners become that by 1970, Arthur Okun,
one of the decade's key presidential advisers on the economy, was noting in a
published retrospective that wise economic management seemed to have done away
with the business cycle. But reality could not be evaded forever, and the
apparently strong war economy of the 1960s gave way to the stagnation of the
There is a
law of the universe according to which every time the public is promised that
the boom-bust business cycle has been banished forever, a bust is right around
the corner. One month after Okun's rosy book was published, the recession
paid a steep cost for the inflation of the 1960s. The loss of life resulting
from the war itself was the most gruesome and horrific of these costs, but the
economic devastation cannot be ignored. As many of us well remember, years of
unemployment and high inflation plagued the US economy. The stock market fared
even worse. Mark Thornton points out that
May 1970, a portfolio consisting of one share of every stock listed on the Big
Board was worth just about half of what it would have been worth at the start
of 1969. The high flyers that had led the market of 1967 and 1968 —
conglomerates, computer leasers, far-out electronics companies, franchisers —
were precipitously down from their peaks. Nor were they down 25 percent, like
the Dow, but 80, 90, or 95 percent.
The Dow index shows that stocks tended to trade in a wide channel for much of
the period between 1965 and 1984. However, if you adjust the value of stocks by
price inflation as measured by the Consumer Price Index, a clearer and more
disturbing picture emerges. The inflation-adjusted or real purchasing power
measure of the Dow indicates that it lost nearly 80% of its peak value.
for all the talk of the Fed's alleged independence, it is not even possible to
imagine the Fed maintaining a tight-money stance when the regime demands
stimulus, or when the troops are in the field. It has been more
than accommodating during the so-called War on Terror. Consider the amount of
debt purchased every year by the Fed, and compare it to that year's war
expenditures, and you will get a sense of the Fed's enabling role.
it's true that a gold standard restrains governments, it's also true that
governments have little difficulty finding pretexts — war chief among them — to
abandon the gold standard. For that reason, the gold standard in and of itself
is not a sufficient restraint on the government's ambitions, at home and
As we look
to the future, we must cast aside all timidity in our proposals for monetary
reform. We do not seek a gold-exchange standard, as existed under the Bretton
Woods system. We do not seek to use the price of gold as a calibration device
to assist the monetary authority in its decisions on how much money to create.
We do not even seek the restoration of the classical gold standard, great
though its merits are.
the 1830s, the hard-money Jacksonian monetary theorists coined the marvelous
phrase "separation of bank and state." That would be a start.
we need today is the separation of money and state.
some ways in which money is unique among goods. For one thing, money is valued
not for its own sake but for its use in exchange. For another, money is not
consumed, but rather is handed on from one person to another. And all other
goods in the economy have their prices expressed in terms of this good.
is nothing about money — or anything else, for that matter — that should make
us think its production must be carried out by the government or its designated
monopoly grantee. Money constitutes one-half of every non-barter market
transaction. People who believe in the market economy, and yet who are prepared
to hand over to the state the custodianship of this most crucial good, ought to
sometimes claim that a particular good is just too important to be left to the
market. The standard free-market reply turns this argument around:
the more important a commodity is, the more essential it is for the government
not to produce it, and to leave its production to the market instead.
is this more true than in the case of money. As Ludwig von Mises
once said, the history of money is the history of government efforts to destroy
money. Government control of money has yielded monetary debasement, the
impoverishment of society relative to the state, devastating business cycles,
financial bubbles, capital consumption (because of falsified profit-and-loss
accounting), moral hazard, and — most germane to my topic today — the expropriation
of the public in ways they are unlikely to understand. It is this silent
expropriation that has made possible some of the state's greatest enormities,
including its wars, and it is all of these offenses combined that constitute a
compelling popular brief against the current system and in favor of a market
war machine and the money machine, in short, are intimately linked. It is vain to
denounce the moral grotesqueries of the US empire without at the same time
taking aim at the indispensable support that makes it all possible. If we wish
to oppose the state and all its manifestations — its imperial adventures, its
domestic subsidies, its unstoppable spending and debt accumulation — we must
point to their source, the central bank, the mechanism that the state and its
kept media and economists will defend to their dying days.
The state has persuaded the people that its
own interests are identical with theirs. It
seeks to promote their welfare. Its wars are their wars. It is the great benefactor,
and the people are to be content in their role as its contented subjects.
Ours is a different view. The state's relationship to the people is not benign, it
is not one of magnanimous giver and grateful recipient. It is an exploitative
relationship, whereby an array of self-perpetuating fiefdoms that produce
nothing live at the expense of the toiling majority. Its wars do not protect
the public; they fleece it. Its subsidies do not promote the so-called public
good; they undermine it. Why should we expect its production of money to be an
exception to this general pattern?
As F.A. Hayek said, it is not reasonable to think
that the state has any interest in giving us a "good money." What the
state wants is to produce the money or have a privileged position vis-à-vis the source of the
money, so it can dispense largesse to its favored constituencies. We should not
be anxious to accommodate it.
The state does not compromise, and
neither should we. In the struggle of liberty against power, few enough will oppose
the state and the conventional wisdom it urges us to adopt. Fewer still will
reject the state and its programs root and branch. We must be those few, as we
work toward a future in which we are the many.
This is our mission today, as
it has been the mission of the Mises Institute for the past 30 years. With your
support, we shall at this critical moment carry on publishing our books and
periodicals, aiding research and teaching in Austrian economics, promoting the
Austrian School to the public, and training tomorrow's champions of the
economics of freedom.