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
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.
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
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.
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.
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
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.
they fielded erroneous German ideas as weapons in
a war against Germany.
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)
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.
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.
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)
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.)
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)
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.
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.
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.
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
DEBATE NO LONGER NEEDED
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.
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
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.
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.
John Taylor of Caroline had already made the case
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)
a result, "one war is converted into two, and
every period of natural, begets an equal period of
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
H. J. Davenport, "The War-Tax Paradox,"
American Economic Review, 9, 1 (March 1919),
Davenport, pp. 35-36.
Ibid., p. 39.
Ibid., p. 44.
Ibid., p. 42.
Ludwig von Mises, Nation, State, and Economy
(New York: New York University, 1983 ), pp.
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.
John Taylor of Caroline, An Inquiry into the Principles
and Policy of the Government of the United States
(London: Routledge and Kegan Paul, 1950 ), p.
Taylor, Inquiry, p. 235.