Monetary Liberalization: Instrument of War

Proponents of monetary intervention often argue that it can help stabilize the business cycle and the financial system.  While that claim is dubious, monetary manipulation is a very effective tool to undermine the free market.  John Maynard Keynes, considered the godfather of modern-day economic policy, wrote:

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.

Printing, and the devaluation it causes, allow a government to seize the resources of its people, for whatever means it desires, without actually taking from them any physical thing.  Governments have, throughout history, exploited monetary manipulation to broaden their own power at the expense of the people; the United States is no exception.

Proponents of the Federal Reserve assert the Fed’s “independence” protects the people from manipulation of the monetary system for political ends.  While that may be true in a very literal sense, the Fed has historically cranked on the presses to finance government budget deficits:

Adjusted Monetary Base and Gross Federal Debt, indexed to June 30, 1939

When governments borrow money as the United States has, interest rates naturally rise.  To maintain stable interest rates, the Fed must create more money.  This inevitability undermines central bank independence.  If the central bank fulfills its mandate and creates stable borrowing conditions for individuals and businesses, it does the same for the government.  The government, in turn, can run much larger budget deficits than it ordinarily could without monetary expansion.  This printed money necessarily devalues the money already in existence, as the money is created without the government holding any additional real wealth to back it.

As many historical examples show, the worst budget deficits often occur in times of war.  By monetizing government debt, central banks encourage and subsidize governments that make expensive fiscal choices; this includes entering and continuing military conflicts.  For example, look at what happened to the money supply during U.S. involvement in World War II:

Monetary Base, GDP, Consumer Prices, and Gross Federal Debt (June 1939 - September 1945)

During the war, real GDP rose sharply, unemployment fell to less than 2%, and consumer prices exploded, rising 25% in six years.  The economic indicators would’ve called for monetary tightening as prices rose.  The Fed, however, kept the presses running, boosting the monetary base by 150% in a five year period.

The Fed was printing new money not to spur employment, but to finance government debt, and by extension, U.S. involvement in World War II.  The same pattern occurred during the Vietnam War:

The Fed went to work monetizing the cost of the war by buying federal debt with new dollars.  Predictably, prices spiked, in one of the worst episodes of inflation since… the end of World War II.  Of course, World War II wasn’t the first example: the American Civil War was financed with massive hyperinflation on both sides, for example.

Thousands died in Vietnam, at least 60 million in World War II — about 25,000 people each day. The question then becomes, how many lives has the United States’ monetary liberalization cost?  How much productivity, property, and wealth has it destroyed?  Is the illusory “stability” it provides really worth those human costs?

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About Matt Murphy

I'm a software engineer with a certain company you've probably heard of. In my free time, I'm an advocate for individual liberty and free markets.
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