Inflation is caused by an increase in the money supply – the
rate of inflation is determined by the quantity of goods vs. the money supply
- more money chasing the same amount of, or fewer goods, causes price
increases. The higher the price increases the higher the rate of inflation is
said to be.
Wars cause inflation - war affects everything from international
trading to labor costs to quantity of available consumer goods to product
demand because governments:
- Conscript labor Bid up prices in markets for
natural resources and industrial goods
- Divert capital and technology from civilian to
military applications
War always causes a rise in prices.
"In World War I, the American people were characteristically
unwilling to finance the total war effort out of increased taxes. This had
been true in the Civil War and would also be so in World War II and the
Vietnam War. Much of the expenditures in World War I, were financed out of
the inflationary increases in the money supply."
David Hackett Fischer, Author, The Great Wave, Price Revolutions and the
Rhythm of History
“Every major war in the past century brought inflation to some
degree. And so did two upheavals in the Middle East, the Yom Kippur War of
1973 and the Iranian Revolution of 1979, which did not directly involve the
United States, except through their effect on the price of oil. Why is this
so? The big reason is that wars must be paid for, somehow. They require
resources that civilians would otherwise use. Those resources must be
diverted to the war effort. Usually, inflation is the easiest way. World War
I was largely financed by inflation, and so were the Revolutionary and Civil
Wars before that. So, though on a smaller scale, was Vietnam.
“Inflation applies the law of the jungle to war finance. Prices
and profits rise, wages and their purchasing power fall. Thugs, profiteers
and the well connected get rich. Working people and
the poor make out as they can. Savings erode, through the unseen mechanism of
the "inflation tax" -- meaning that the government runs a big
deficit in nominal terms, but a smaller one when inflation is factored in.” Economist James Galbraith
“War has a profound effect on the economy, our government and
its fiscal and monetary policies. These effects have consistently led to high
inflation.” Blanchard Economic Research
"War is inflationary. It is always wasteful no matter how just
the cause. It is cost without income, destruction financed (more often than
not) by credit creation. It is the essence of inflation." James Grant, Grant's Interest Rate
Observer
"This country's first two experiences with high inflation were
during the American War of Independence (1775-83) and during the Civil War.
There was also high inflation associated with the First World War; the
unifying theme running through inflation episodes are the occurrence of bad
times, often as a result of war or its aftermath. After the Second World War,
inflation became the norm everywhere in the industrial world. There was
another surge of inflation during the Korean War, which took inflation in the
U.S. above 9% in 1951 (and wholesale price inflation into double digits). The
inflation that accompanied the Vietnam War and the Yom Kippur War, and oil
price shocks in the 1970s, led people to increase their inflationary
expectations, which aggravated inflation itself." Roger Bootle, Author, The Death of Inflation
War and Inflation in US History
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The United States has experienced two currency collapses due to
inflation:
- Continental Currency during
the Revolutionary War
- Confederation notes during
the Civil War
“One can say without exaggeration that inflation is an
indispensable means of militarism.” Ludwig von Mises
The American Colonies lacked the necessary finances to rebel against
Britain - instead of raising money through taxation they decided to print a
“Continental Currency”.
Unfortunately for the Colonies their new currency was easily
counterfeited. And Britain did so, counterfeiting large amounts and giving
it away to destroy its value.
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Between the combination of counterfeits and increased continental
printing the value of the colonies paper currency became worth 1/1,000th of
its original face value by the end of the war. The saying "not worth a
continental" was a result of this massive devaluation.
The Civil War’s direct cost was $6.7 billion in 1860 money
– over $140 billion in today’s.
“At the beginning of the war on January 1, 1861 one
Confederate dollar would purchase one gold dollar. By May it took $1.05
Confederate dollars to purchase one Gold Dollar or 5% inflation in four
months. By February of 1861 it took $1.25 Confederate Dollars to buy one Gold
Dollar or 25% inflation. By February 1863 it took $3.00 Confederate Dollars
to buy one Gold Dollar or 200% inflation since 1861 but because inflation is
generally measured Annually we have to compare the price to the price a year
earlier. So from $1.25 to $3.00 is 140% inflation. From October of 1861 to
March of 1864 the commodity price index rose an
average rate of 10 percent per month. When the Civil War ended in April 1865
the cost of living in the South was 92 times what it was before the war
started.” Inflationdata.com
http://www.globalresearch.ca
The top four inflationary periods in the US are:
- American
Revolution – 23%
Military Spending Today
Worldwide military spending edged up in 2010, to a record $1.6
trillion, the Stockholm International Peace Research Institute said in April
2011.
Spending in Europe shrank 2.8 percent to $382 billion,
the biggest cuts were in small economies in central and eastern Europe, and
in countries such as crisis stricken Greece.
United States Military Spending
The Unites States increased spending, in 2010, by 2.8 percent to $698
billion – six times as much as China spent for defense spending. Not
included in US numbers are nuclear weapons spending, black ops, interest on
the defense portion of the debt and ongoing military obligations to veterans.
The budget for nuclear weapons falls under the Department of Energy, other military expenses - care for veterans, health
care, military training, aid and secret operations – are put under
other departments or are accounted for separately.
The US numbers are already eye opening - they amount to more than half
of all government discretionary spending and represent, at the very least, an
astounding 43% of total military spending on the planet.
US Defense spending in 2011 is slated to increase, by a reported $5
billion over 2010 levels.
"The United States has increased its military spending by 81
percent since 2001. At 4.8 percent of gross domestic product, U.S. military
spending in 2010 represents the largest economic burden outside the Middle
East." SIPRI Military Expenditure Project chief Sam Perlo-Freeman.
“Of all the enemies to public liberty war is, perhaps, the most
to be dreaded because it comprises and develops the germ of every other. War
is the parent of armies; from these proceed debts
and taxes … known instruments for bringing the many under the
domination of the few.… No nation could preserve its freedom in the
midst of continual warfare.” James Madison, Political Observations, 1795
Conclusion
Wars are:
- Expensive in money and other resources
- Destructive of capital and human capital
- Disruptive of trade, resource availability and
labor management
“Congress and the Federal Reserve Bank have a cozy, unspoken
arrangement that makes war easier to finance. Congress has an insatiable
appetite for new spending, but raising taxes is politically unpopular. The
Federal Reserve, however, is happy to accommodate deficit spending by
creating new money through the Treasury Department. In exchange, Congress
leaves the Fed alone to operate free of pesky oversight and free of political
scrutiny. Monetary policy is utterly ignored in Washington, even though the
Federal Reserve system is a creation of Congress.
The result of this arrangement is inflation. And inflation finances
war.” Congressman Ron Paul
Sun Tzu said to keep your wars short and have the money in hand before
assembling an army.
Inflation acts as an indirect tax on an economy. Perhaps the US
Congress should consider Sun Tzu’s advice? At any rate, inflation
should be on every investors radar screen. Is it on yours?
If not, maybe it should be.
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