With regard to the war or “war,” the hot-and-cold rhetoric of the Bush II administration, lo! these many months, has been wonderful to behold: first they say that “we” must launch an aggressive war against Iraq now, or “we” are doomed. Tomorrow will be too late! Then they say that, on the other hand, the press has been stirring up unneeded excitement, so why don’t they calm down?
And so it has gone, with Colin Powell playing the good cop against a whole raft of bad cops, and with W grinning his way through it all.
One is almost tempted to take up that variant of conspiracy theory which holds that, from time to time, some little cabal meets and makes plans to rule the world. The plan is this: “We must,” they say, “create chaos. Then we shall put ourselves forward as the only ones who can control the chaos. All power will be ours!”
You can imagine them taking a lidless eye surrounded by fire, or maybe an eye in a pyramid, as their symbol but that is a topic for another column, one about how the US authorities in their Darwin-given wisdom strive to bring everything and everyone, everywhere, under their panoptical-Benthamite surveillance.
Today, I want to look briefly at an older-style issue: Who will pay for this war or non-war and how will they do it? Good questions, and ones that it was once customary to address.
A REAL DEBATE
US entry into World War I provoked a genuine debate over methods of financing war. Evidently, as long as people supported the war in principle, even Woodrow Wilson and his federal spies and hirelings would leave them room in which to debate such details. At the same time, the crazed loyalty-enforcing volunteers and amateur proto-fascists called into being by the Wilson administration probably did not read the American Economic Review where debate over war finance raged.
Rather than summarize the larger debate, I shall simply stipulate that most of the contributions to it were badly tainted with notions about the organic grandeur of the state and its undebatable right to take over society and property in a state-decreed emergency. These ideas had been picked up in Germany, where a whole generation of American economists had done their graduate work. This was a generation in transition away from laissez faire and toward various forms of statism.
Now they fielded erroneous German ideas as weapons in a war against Germany.
The exception in this discussion of war finance, a debate which outlasted the actual war, was H. J. Davenport, an American adherent of the Austrian School economics of Carl Menger and Eugen von Böhm-Bawerk. In his contribution, “The War-Tax Paradox,”(1) he wrote that “War must cut into product in the degree that it seriously interferes with the forthcoming or the upkeep of capital goods.” This “loss” was “not a tax” but “a reduction in the ability to bear taxes, a partial paralysis of production product prevented rather than product absorbed.”(2)
Capital decumulation and lower (civilian) production were, of course, not the only costs of war. Present labor, materials, and capital had to be shifted to make the war effort possible. And there was the rub.
The question was: What would be the best way to bring this about? Bonds or direct taxes? Davenport argued, quite sensibly, that given the war, the best approach was the latter.
In the nature of the case, a war cannot be fought with future goods or future money. Davenport commented: “If a great war is to go on, the burden of it has to be drastically severe on the poor as well as on the rich. Whatever the fiscal forms of collection, a high rate of charge must trench upon even the relatively meager incomes. Only when the masses contribute, and contribute greatly, can the fiscal return be considerable.”(3)
Now, if rulers finance a war through heavy direct taxation, people will know in realistic terms just what the war is costing them. From the standpoint of the rulers this could be bad. It might erode enthusiasm for whatever crusade the rulers have gotten up. (Davenport doesn’t make these last points in this way, but what he does say is quite interesting.)
The rulers, for the reasons just given, will prefer to cover part of the costs of war through public borrowing. This will inevitably be inflationary. The “special function of inflation as a device of war finance” is as follows: “In one way or another in war time real wages have to suffer. There must be either falling net money wages with stable general prices, or stable or rising money wages with a more than offsetting general rise in commodity prices.”(4)
The politician prefers the second option because it throws a veil of monetary illusion over the lowered real wages of those still employed on the home front.
As for someone unlucky enough to be at the war front, he is paying “a 100 per cent levy on his assets as a going concern his connections, his job, a practically complete appropriation of his wages, the possible requirement of his life.”(5) After the war, should he live through it, he is then made to pay new taxes, which will go to those clever fellows who issued or bought the bonds with which the government paid for (part of) the war.
In effect, the soldier is taxed twice; at 100% to fight the war, and at some lower rate to pay off bondholders after the war. The worker at home is also taxed twice: by falling real wages during the wartime inflation and, like the soldier, by payments to the bondholders after the war.
It would be better if everything needed for the war were seized outright by main force. Then people would know what they are paying, both in money and lost liberty. Of course that might lower their morale. That would never do.
REAL DEBATE NO LONGER NEEDED
Austrian economist Ludwig von Mises made much the same argument against inflationary war finance the same year as Davenport.(6) Discussion of this issue is well worth having, as honesty in government seems desirable in principle, if unlikely to exist in real life. Knowing what we are paying for something might be of great value.
There was a rather tepid debate over war finance during World War II. The participants limited themselves to the merits of various combinations of taxation and inflationary measures. The Cold War made inflationary finance routine.
Discussion was no longer need. A few “reactionaries” like Senator Robert A. Taft complained that an ambitious program of Cold War intervention would lead inevitably to domestic inflation. But Taft died in 1953, and later Republicans were content to assert that with them in power, everything would be kept under control since they were just the sort of fellows to keep things under control. Democrats chimed in that, anyway, with the magic of Keynesian fiscal policy there was no need to fret. Inflation and recessions were gone forever.
When the inflationary financing of the Vietnam War came home to roost under Richard M. Nixon,(7) there was great unhappiness but not much real analysis, except from fringy fellows like Murray Rothbard, another Austrian School economist.
Yet John Taylor of Caroline had already made the case in 1814.
Disillusioned by the policies of his political allies, the Jeffersonian Republicans, who had blundered into the War of 1812, Taylor wrote: “War is among the most plausible means used to delude a nation into the errour of anticipation [i.e., living indefinitely on credit]. Yet it cannot bring up from futurity a gun, a soldier, a ration, or a cartridge. The present generation suffers every hardship and cost of war, although anticipation pretends that it is covered by future generations. And this delusion is used to involve nations in wars, which they would never commence, if they knew that all the expense would fall upon themselves. It is twice suffered; by the living, who supply all the expenses of war; by the unborn, who supply an equivalent sum, to take up certificates of the expenses paid by the living.”(8)
As a result, “one war is converted into two, and every period of natural, begets an equal period of artificial war.”(9)
Unlike the national debt, which we fictively and mythically “owe ourselves,” we probably do owe it to ourselves to assess the costs of the wars we are offered, especially when the costs are hidden and, indeed, go on being collected in times of so-called peace.
7. For a broad overview, see Joseph T. Salerno, “War and the Money Machine: Concealing the Costs of War Beneath the Veil of Inflation,” in John V. Denson, ed., The Costs of War (New Brunswick, NJ: Transaction Books, 1999), pp. 433-453.