WEBVTT NOTE The Biggest Lies about Recessions and War 1 00:00:00.000 --> 00:00:06.000 When I first started preparing this lecture, 2 00:00:06.000 --> 00:00:09.600 the biggest lies about recession and war, 3 00:00:09.600 --> 00:00:12.300 so many months ago, 4 00:00:12.300 --> 00:00:16.900 it seemed more of a manageable topic than it does today, 5 00:00:16.900 --> 00:00:22.600 after a long series of lies about the current recession and war. 6 00:00:22.600 --> 00:00:28.900 Of course, the current war is not noteworthy for the types of lies it has generated, 7 00:00:28.900 --> 00:00:33.060 only in the quantity of lies and the boldness of the liars themselves. 8 00:00:33.060 --> 00:00:38.420 As a general proposition, states or governments engage in war because that is what they do. 9 00:00:39.380 --> 00:00:47.220 States benefit from war. They like to do it. It gets them more territory, more subjects to rule, 10 00:00:47.220 --> 00:00:54.820 more power, and an expanded tax base if they conquer their opponents. Even in the case of 11 00:00:54.820 --> 00:01:10.820 In the face of most losses, stalemates or draws, the state gains power and authority over their own territory and subjects because war provides them with an excuse to expand power of the state. 12 00:01:10.820 --> 00:01:16.620 Professor Robert Higgs, in his book Crisis and Leviathan, speaks directly to this point, 13 00:01:16.620 --> 00:01:22.820 and he shows that war is the primary crisis on which the state builds itself, and that 14 00:01:22.820 --> 00:01:29.580 during war, barriers against government growth break down, the state greatly expands itself 15 00:01:29.580 --> 00:01:35.740 in terms of spending, in terms of employees, in terms of regulations, and then after the 16 00:01:35.740 --> 00:01:56.780 Only in the case when a state is conquered outright does that state lose from war. Therefore, 17 00:01:56.780 --> 00:02:01.900 instigators of war will typically attack states that can be easily defeated or who have little 18 00:02:01.900 --> 00:02:05.300 No chance of actually overthrowing the instigator. 19 00:02:05.300 --> 00:02:09.740 And if you'll think back to Walter's talk this morning about all of the confrontations 20 00:02:09.740 --> 00:02:15.940 the United States have had in recent decades, most of them have been against insignificant 21 00:02:15.940 --> 00:02:20.020 opponents, easy victories. 22 00:02:20.020 --> 00:02:26.520 Instigators also prefer to blame their targets for the war itself and yet to fight on the 23 00:02:26.520 --> 00:02:28.820 target's own territory. 24 00:02:28.820 --> 00:02:38.160 This obviously involves a great deal of propaganda, or lies, because it is necessary to blame 25 00:02:38.160 --> 00:02:42.760 the other nation for the war and then to invade it. 26 00:02:42.760 --> 00:02:48.180 Instigators also tend to be economically mercantilists and interventionists in their 27 00:02:48.180 --> 00:02:49.880 economic policy. 28 00:02:49.880 --> 00:02:56.520 War, in this sense, helps cover up for their economic policies and failures and offers 29 00:02:56.520 --> 00:03:05.520 gives them the opportunity for new resources, new markets, and an expanded tax base if the war is successful. 30 00:03:05.520 --> 00:03:15.520 In one sense, we can think of war as a zero-sum game when territory is transferred and subjects are transferred from one country to another. 31 00:03:15.520 --> 00:03:24.520 Say, for example, if Canada invaded and took over Minnesota, the United States would lose Minnesota. 32 00:03:24.520 --> 00:03:31.520 Canada would gain Minnesota, there would be no net loss or no net gain for the two countries. 33 00:03:31.520 --> 00:03:39.520 Canada would win, but America would lose the same amount of territory and the same amount of subjects. 34 00:03:39.520 --> 00:03:50.520 But in reality, war is always beneficial for state power, because in my example, the U.S. power would grow in opposition to Canada. 35 00:03:50.520 --> 00:04:10.520 The first big lie, therefore, is that states or governments seek peace, not war. The reality is states seek war, not peace, and they take every opportunity to do so. 36 00:04:10.520 --> 00:04:27.520 The effect of war is to always cause a regression in the economy. During the war and its aftermath, production for the purposes of human survival, consumer satisfaction and social betterment is reduced. 37 00:04:27.520 --> 00:04:35.520 War diverts resources from the productive economy to the destructive economy. 38 00:04:35.520 --> 00:04:38.520 And these resources have to be paid for in some way. 39 00:04:38.520 --> 00:04:41.520 States resort to conscription and confiscation. 40 00:04:41.520 --> 00:04:45.520 They simply take the property from their owners. 41 00:04:45.520 --> 00:04:49.520 Of course, taxes can be levied to fight popular defensive wars, 42 00:04:49.520 --> 00:04:56.520 but such taxes often accelerate opposition to unpopular wars. 43 00:04:56.520 --> 00:05:08.520 Borrowing is also feasible for reputable governments, especially those on the defensive, who seek to delay the cost of the war in order to better ensure their own victory. 44 00:05:08.520 --> 00:05:24.520 Most importantly, inflation and borrowing is used to finance war, and this is the sneaky way to finance war, and therefore very popular amongst politicians. 45 00:05:24.520 --> 00:05:29.520 It seems to be a particular favorite of the Bush family. 46 00:05:29.520 --> 00:05:36.520 Inflation and borrowing deludes the population that the costs of the war are low, 47 00:05:36.520 --> 00:05:44.520 and the resulting higher prices further delude the people by providing a smokescreen of false prosperity. 48 00:05:44.520 --> 00:05:57.520 Everybody has a job, wages are going up, prices are going up as well, but there's a smokescreen of prosperity that occurs during an inflationary financed war. 49 00:05:57.520 --> 00:06:10.520 For more on this inflation as a smokescreen, see Professor Salerno's essay, War and the Money Machine, Concealing the Cost of War Beneath the Veil of Inflation. 50 00:06:10.520 --> 00:06:17.480 It's in the Cost of War book which is edited by John Denson. Through all its procurement policies, 51 00:06:17.480 --> 00:06:23.240 its spending and inflation, the war governments create a great deal of activity. So there's a 52 00:06:23.240 --> 00:06:29.960 great deal of activity during war instigated for military purposes, but none of this improves our 53 00:06:29.960 --> 00:06:34.440 Our Standard of Living. 54 00:06:34.440 --> 00:06:41.700 The second big lie is that war can stimulate the economy. 55 00:06:41.700 --> 00:06:47.520 The military engages their opponents in warfare and in the process soldiers on both sides 56 00:06:47.520 --> 00:06:54.700 are killed and damaged in a variety of ways mentally, physically and economically. 57 00:06:54.700 --> 00:07:00.580 Military goods are used up, destroyed, along with innocent civilians and capital goods such 58 00:07:00.580 --> 00:07:06.740 as homes and businesses, neighborhoods, business centers, industrial complexes and in whole 59 00:07:06.740 --> 00:07:10.740 cities are destroyed. 60 00:07:10.740 --> 00:07:18.100 Warfare is an entirely destructive process. 61 00:07:18.100 --> 00:07:24.100 Mises in his book Nation, State and Economy put the issue of wartime prosperity in proper 62 00:07:24.100 --> 00:07:34.780 Every unprejudiced person can naturally have no doubt that war can really cause economic 63 00:07:34.780 --> 00:07:42.700 boom. War prosperity is like the prosperity that an earthquake or a plague brings. The 64 00:07:42.700 --> 00:07:49.940 earthquake means good business for construction workers, and cholera improves the business 65 00:07:49.940 --> 00:07:56.380 of Physicians, Pharmacists and Undertakers, but no one has for that reason yet sought 66 00:07:56.380 --> 00:08:05.780 to celebrate earthquakes and cholera as stimulators of productive forces in the general interest. 67 00:08:05.780 --> 00:08:13.020 Unfortunately for us, the general level of economic understanding has fallen so low, 68 00:08:13.020 --> 00:08:42.260 The third big lie is that war can improve the economy in the post-war period. 69 00:08:42.260 --> 00:08:55.260 That's the lie. World War II would seem to be an exception to this rule because the war was preceded by the Great Depression and followed by a return to prosperity. 70 00:08:55.260 --> 00:09:10.260 My relatives were all completely under this delusion, but I can understand them and their delusions because here we have a group of, and I had about 25 great aunts and uncles from this era, 71 00:09:10.260 --> 00:09:24.260 A group of Irish Americans who came of age during alcohol prohibition and then went into the Great Depression, then World War II. 72 00:09:24.260 --> 00:09:29.260 Now none of them was drafted. Talk about the luck of the Irish. 73 00:09:29.260 --> 00:09:38.260 This was really the first time that they, A, could buy liquor legally and B, had the money to do so. 74 00:09:38.260 --> 00:09:54.260 However, as been mentioned before, Professor Robert Higgs has proven, I think substantially, that World War II, the war part of it, did not improve the economy in any way. 75 00:09:54.260 --> 00:10:11.260 The primary measure, personal consumption, personal consumption expenditures, adjusted for changes in prices on a per capita basis, was the same during and throughout the war as it was during the Great Depression. 76 00:10:11.260 --> 00:10:28.260 In other words, there's a lot of economic activity, everybody had a job, lots of people were being killed, but per capita consumption of goods and services was the same during World War II as it was during the Great Depression. 77 00:10:28.260 --> 00:10:38.260 Essentially, it was a continuation of the Great Depression. It wasn't sleepy and lazy, it was a lot of activity. 78 00:10:38.260 --> 00:11:01.260 Professor Olson has also shown that the economic success stories in places like Japan and Germany was in large part due not to the destruction that those economies absorbed because they were heavily destroyed by allied bombings. 79 00:11:01.260 --> 00:11:17.260 The success that came out of post-World War II Germany and post-World War II Japan was the fact that the fascist economic policies, labor unions, regulations had been largely wiped out in the war itself. 80 00:11:17.260 --> 00:11:28.260 So in other words, a return to the free market principles of Ludwig Erhart and so on were more responsible for that post-war success stories. 81 00:11:28.260 --> 00:11:34.260 It had nothing to do with the fact that the economies were obliterated and they had to start over again. 82 00:11:34.260 --> 00:11:38.260 What did get us out of the Great Depression in the United States? 83 00:11:38.260 --> 00:11:47.260 Well, at the end of the war, of course, the U.S. and the international community did return to some form of gold standard. 84 00:11:47.260 --> 00:11:53.260 There had been a huge buildup of savings, which is important for economic prosperity, 85 00:11:53.260 --> 00:12:09.260 and also the removal or at least the cutback in interventionist economic policies and in particular I would note that at the end of the war there was the death of FDR and the New Deal policy. 86 00:12:09.260 --> 00:12:21.260 The death of FDR and the increase in the stock market happened to coincide and I would suggest that it wasn't just a matter of coincidence but that capitalists and entrepreneurs and investors 87 00:12:21.260 --> 00:12:37.260 The real truth of the matter is that recessions and depressions are more likely to get us into wars, 88 00:12:37.260 --> 00:12:43.260 everything from World War II to the recent American invasion of Iraq, 89 00:12:43.260 --> 00:12:47.260 but wars do not get us out of recessions and depressions. 90 00:12:47.260 --> 00:13:04.260 History shows us time and time again this fact. Wag the dog. If their misguided and selfish mercantilist policies fail, a good war will rally the population and divert their attention from their mistakes. 91 00:13:04.260 --> 00:13:17.260 In my limited time here I would like to address the second third lies which are more strictly economic and both are essentially applications of Bastiat's lesson of the broken window. 92 00:13:17.260 --> 00:13:33.260 I'll be looking at the American Civil War and its aftermath. It's a big war and big wars provide some of the best evidence whereas small little wars it's hard to see the actual impact especially on a large economy. 93 00:13:33.260 --> 00:13:39.260 In the Civil War it was said to be a pivotal event in American history and in the American economy. 94 00:13:39.260 --> 00:13:47.260 The war changed the economy for the better because America changed from a steady agrarian agricultural economy 95 00:13:47.260 --> 00:13:53.260 based on exporting raw agricultural products and largely confined east of the Mississippi 96 00:13:53.260 --> 00:14:00.260 to a dynamic industrial powerhouse that laid railroad tracks across to the west to the Pacific 97 00:14:00.260 --> 00:14:03.260 and Achieved America's Manifest Destiny. 98 00:14:03.260 --> 00:14:09.860 That's essentially the story that we are told in American history books, that America developed 99 00:14:09.860 --> 00:14:16.500 from a sort of a farming by hand economy to one where, you know, they're forging metal 100 00:14:16.500 --> 00:14:23.660 and great iron smelters and international, intercontinental travel and giant locomotives. 101 00:14:23.660 --> 00:14:25.500 But what really happened? 102 00:14:25.500 --> 00:14:30.100 Was the Civil War good for the American economy and the American people? 103 00:14:30.100 --> 00:14:38.100 Did it lead to a transformation of the American economy into its modern form and a world economic 104 00:14:38.100 --> 00:14:39.100 powerhouse? 105 00:14:39.100 --> 00:14:44.460 Well, first of all, we cannot forget that over one million people on both sides were 106 00:14:44.460 --> 00:14:48.140 killed or wounded during the war. 107 00:14:48.140 --> 00:14:55.780 If we look at the North, wage rates in the North did increase by almost 50 percent. 108 00:14:55.780 --> 00:15:00.220 So if you were living in the North and working in the North, you would have on average received 109 00:15:00.220 --> 00:15:05.440 a 50% increase in pay from the beginning of the war to the end of the war. 110 00:15:05.440 --> 00:15:09.820 So it would seem good, but if you adjusted that for inflation, your real wages would 111 00:15:09.820 --> 00:15:12.920 have fallen by over 20%. 112 00:15:12.920 --> 00:15:19.060 Now in the South, where you are now, wage rates in the South increased during the war 113 00:15:19.060 --> 00:15:22.100 by almost 400%. 114 00:15:22.100 --> 00:15:28.020 But when adjusted for inflation, real wages and your real purchasing power declined by 115 00:15:28.020 --> 00:15:32.060 almost 90 percent. 116 00:15:32.060 --> 00:15:36.500 So you can imagine the standard of living is falling both north and south but falling 117 00:15:36.500 --> 00:15:39.380 dramatically in the south. 118 00:15:39.380 --> 00:15:45.920 The inflation during this war, both north and south, was caused by government regulation 119 00:15:45.920 --> 00:15:52.600 of Banking, and the issuance of paper money, which supposedly according to the Republicans 120 00:15:52.600 --> 00:15:55.200 was the great wave of the future. 121 00:15:55.200 --> 00:16:03.120 The Union won the war in large measure because it inflated less than the South. 122 00:16:03.120 --> 00:16:07.880 This new monetary system was supposed to make for a more efficient payment system to prevent 123 00:16:07.880 --> 00:16:13.920 instability and bank failures, and result in the easy convertibility of paper money 124 00:16:13.920 --> 00:16:20.920 into Species. Instead, the system created monetary and cyclical instability and chaos. 125 00:16:21.820 --> 00:16:27.800 After the war, there were four major bank panics. There were frequent stock market crashes 126 00:16:27.800 --> 00:16:34.800 and the system actually delayed convertibility of paper into gold for many years. Things 127 00:16:36.600 --> 00:16:43.600 were much worse in the South during and after the war. Statistically, Confederate money 128 00:16:43.920 --> 00:16:48.920 The monetary policy seems to have changed drastically after the war. 129 00:16:48.920 --> 00:16:53.920 Confederate officials gave the appearance of having learned their lesson during the war, 130 00:16:53.920 --> 00:16:59.920 apparently placing strict controls on the money supply after the war 131 00:16:59.920 --> 00:17:03.920 and adopting a permanently balanced budget. 132 00:17:03.920 --> 00:17:11.920 As a result, the value of Confederate currency actually rose after the war from a level of about zero 133 00:17:11.920 --> 00:17:19.920 to nowadays where it's valued at one confederate dollar is equal to ten U.S. dollars. 134 00:17:19.920 --> 00:17:28.920 What about after the war? Did America become an industrial superpower by throwing off the yoke of agrarianism? 135 00:17:28.920 --> 00:17:38.920 Well, America did become industrial as Tom's talk indicated, but this occurred in large measure because of those protective tariffs 136 00:17:38.920 --> 00:17:43.480 which insulated domestic producers at the expense of the general population. 137 00:17:43.480 --> 00:17:50.680 21 major industries received over 100% protection. In other words, no import competition at all. 138 00:17:53.000 --> 00:17:59.960 Transcontinental railroads were built, but by modern calculations these enterprises were shown 139 00:17:59.960 --> 00:18:06.680 to be essentially public works projects. They were corrupt and efficient and came at a huge cost 140 00:18:06.680 --> 00:18:22.680 One of the most momentous institutional changes in America as a result of the Civil War was the National Banking Act, which fundamentally altered money and banking. 141 00:18:22.680 --> 00:18:28.680 After studying this in detail, historian Robert Sharkey concluded, 142 00:18:28.680 --> 00:18:45.680 As the national banking system took shape after the war, it was apparent that human ingenuity would have had difficulty contriving a more perfect engine for class and sectional exploitation. 143 00:18:45.680 --> 00:18:57.680 Creditors finally obtaining the upper hand as opposed to debtors and the developed east holding the whip over the underdeveloped west and south. 144 00:18:57.680 --> 00:19:02.780 South. This tipping of the class and sectional balance of power was, in my 145 00:19:02.780 --> 00:19:09.960 opinion, the most momentous change over the 23-year period from 1850 to 1873. 146 00:19:09.960 --> 00:19:16.360 It's often said that technology is improved by war because of the 147 00:19:16.360 --> 00:19:21.080 necessities of war. Militaries and governments adopt all sorts of new 148 00:19:21.080 --> 00:19:25.960 technology and that this technology then carries over a positive benefit into the 149 00:19:25.960 --> 00:19:27.960 Post-War Period. 150 00:19:27.960 --> 00:19:34.400 But after studying these issues, Robert Bruce, who was an historian of technology, showed 151 00:19:34.400 --> 00:19:42.720 conclusively that the Civil War did not result in the adoption of applied science and was 152 00:19:42.720 --> 00:19:48.640 actually a distinct detriment to the development of basic science. 153 00:19:48.640 --> 00:19:55.000 And so there was real no adoption or creation of new technologies during the war. 154 00:19:55.000 --> 00:20:07.000 As a matter of fact, both sides were reluctant in many cases to adopt existing technology that had been recently created. 155 00:20:07.000 --> 00:20:15.000 The same is true when we look at innovations for business management, manufacturing technology and innovation. 156 00:20:15.000 --> 00:20:21.000 It was really the pre-war period in which the greatest leaps in innovation and technology took place. 157 00:20:21.000 --> 00:20:26.140 and therefore it should not be surprising that this is in the 1840s was when the 158 00:20:26.140 --> 00:20:32.360 term Yankee ingenuity was first coined. That's when America was developing the 159 00:20:32.360 --> 00:20:38.060 new manufacturing techniques, the new management techniques that helped the 160 00:20:38.060 --> 00:20:43.680 economy a great deal. When we look at the capital stock of the United States and 161 00:20:43.680 --> 00:20:47.860 we look at how much is being added to the capital stock and that's really one 162 00:20:47.860 --> 00:21:00.860 The Theory of Money and Credit is one of the primary indicators of economic success and failure. What we see in the United States is that the growth in the capital stock is fairly low at the beginning of the 19th century. 163 00:21:00.860 --> 00:21:06.940 but that growth continues to increase and achieves its highest rate of almost 3% 164 00:21:07.900 --> 00:21:15.580 adjusted for inflation and so on in the antebellum period from 1840 to 1860 so it's that period 165 00:21:15.580 --> 00:21:21.660 in which the United States is actually achieving its greatest source of economic growth and then 166 00:21:21.660 --> 00:21:27.820 after the war when we look at that same category what we see is the additions to the capital stock 167 00:21:27.820 --> 00:21:39.820 that rate of flow of new capital into the economy diminishes after the war to the end of the 19th century and then the rate decreases further in the beginning of the 20th century. 168 00:21:39.820 --> 00:21:49.820 The same is true when we look at statistics like income growth, adjusted for inflation, wage rate growth. 169 00:21:49.820 --> 00:21:56.380 Growth. In all of these areas, the economy performs poorer after the war than it had 170 00:21:56.380 --> 00:22:02.020 been prior to the war. Outside of those connected to special interest groups, very few people 171 00:22:02.020 --> 00:22:08.540 benefited economically after the war. Except the former slave population, which despite 172 00:22:08.540 --> 00:22:14.820 any support from the government, did see dramatic increases in their income, their education 173 00:22:14.820 --> 00:22:27.080 A very recent study has found that of those who were wounded during the war or injured 174 00:22:27.080 --> 00:22:34.220 during the war, exposed to serious diseases during the war, but still survived the war, 175 00:22:34.220 --> 00:22:39.660 that those people continued to lag behind economically for the rest of their lives. 176 00:22:39.660 --> 00:22:46.140 resulted in what you might call a 50-year economic hangover for hundreds of thousands 177 00:22:46.140 --> 00:22:48.700 of American families. 178 00:22:48.700 --> 00:22:54.220 The Civil War, like all war, does not create prosperity and did not create prosperity. 179 00:22:54.220 --> 00:22:56.420 It can only hinder it. 180 00:22:56.420 --> 00:23:02.460 Why then, many people have asked, why then is there a temptation to place a positive 181 00:23:02.460 --> 00:23:24.900 One Civil War historian, Thomas Cochran, grappled with this conundrum and concluded the following, 182 00:23:24.900 --> 00:23:36.900 For most standpoints, the Civil War was a national disaster, but Americans like to see their history in terms of optimism and progress. 183 00:23:36.900 --> 00:23:51.900 Perhaps the war was put in a perspective suited to the culture by seeing it as good because in addition to achieving freedom for the Negro, it brought about industrial progress. 184 00:23:51.900 --> 00:24:11.900 For the sake of the next American soldier to die in war and their family, I would suggest that this so-called American desire to see their history in terms of optimism and progress has created the ultimate lie. 185 00:24:11.900 --> 00:24:22.900 And this ultimate lie is killing not just our soldiers and innocent civilians, but all the optimism and progress in America's future.