WEBVTT NOTE War and Inflation: Financing the Empire 1 00:00:00.000 --> 00:00:10.000 Well, our next speaker showed up a while, a couple years ago. 2 00:00:10.000 --> 00:00:21.000 Abraham Lincoln was resting comfortably, 135 years, a hero, freer of the slaves, all that jazz. 3 00:00:21.000 --> 00:00:28.000 And then our next speaker showed up and told the truth about him, and he's never been the same. 4 00:00:28.000 --> 00:00:39.000 Our next speaker is an economics professor at Loyola College in Maryland. He's a senior faculty member, of course, with the Ludwig von Mises Institute. 5 00:00:39.000 --> 00:00:52.000 He's the author of numerous books, The Real Lincoln, A New Look at Abraham Lincoln, His Agenda in Unnecessary War, How Capitalism Saved America, Lincoln Unmasked, and of course his latest book is Hamilton's Curse, 6 00:00:52.000 --> 00:00:59.000 and how Jefferson's archenemy betrayed the American Revolution and what it means to Americans today. 7 00:00:59.000 --> 00:01:06.000 I urge you again, he has two essays in Reassessing the Presidency. 8 00:01:06.000 --> 00:01:11.000 He is talking today about war and inflation financing the empire. 9 00:01:11.000 --> 00:01:16.000 Please help me welcome Tom DiLorenzo. 10 00:01:16.000 --> 00:01:21.000 Thank you, Doug. 11 00:01:21.000 --> 00:01:26.980 Thank you all for coming and thanks to Jim Rodney for being our sponsor today and I can't 12 00:01:26.980 --> 00:01:34.380 help saying when Doug said there was a committed Marxist in the executive mansion in Zimbabwe, 13 00:01:34.380 --> 00:01:39.400 what popped into my head was we got one of those too. 14 00:01:39.400 --> 00:01:43.480 And when he said that about how Ghana was blaming the weather and everything else for 15 00:01:43.480 --> 00:01:49.160 the inflation, it reminded me of how Alan Greenspan has been blaming Asians who saved 16 00:01:49.160 --> 00:01:58.160 That's the official explanation of the Fed for the boom is that those darn Asians save too much of their money. 17 00:01:58.160 --> 00:02:03.160 And he's been repeating that. It hasn't stuck yet, but that's his story and he's sticking to it. 18 00:02:03.160 --> 00:02:09.160 And maybe he'll come up with the weather example a little later. 19 00:02:09.160 --> 00:02:14.160 My topic is war and central banking in American history. 20 00:02:14.160 --> 00:02:28.160 It's a big topic for a half-hour talk, but I just recently wrote an article that I was invited to write for the American Conservative Magazine on this topic, and so it's kind of a fun challenge to me. 21 00:02:28.160 --> 00:02:43.160 They throw out these gigantic topics to fit it into a nine-page article, so I gave it a shot, and the theme of it is captured by a quotation by Ludwig von Mises in his book Nation, State and Economy. 22 00:02:43.160 --> 00:03:07.160 One can say, without exaggeration, that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly. War weariness would set in much earlier. 23 00:03:07.160 --> 00:03:18.160 and of course you have to understand there are three ways of financing war and government in general is taxes, debt and the printing of money, inflation. 24 00:03:18.160 --> 00:03:30.160 Taxes of course are the most direct way and the most painful and so really you can argue it's the most democratic way in terms of allowing the public to get a clear view of the cost of government. 25 00:03:30.160 --> 00:03:45.160 Taxes are the most painful. Debt is a little less painful because it enables politicians to impose the burdens of spending today on future generations as far as the tax burden anyway is concerned. 26 00:03:45.160 --> 00:03:50.160 And so that's why politicians, of course, always like debt. They don't have to raise taxes immediately. 27 00:03:50.160 --> 00:03:59.160 Although when they use real resources, when they spend the money and they use real resources, they do divert the resources away from the private sector to the government sector. 28 00:03:59.160 --> 00:04:09.160 in the government sector. So there is a cost, an opportunity cost now from deficit spending, but the tax costs can be delayed, hidden, disguised, and so forth. 29 00:04:09.160 --> 00:04:24.160 And of course inflation is the worst in terms of the invisibility of the cost of any government program, including war, because not only is it unseen by the average person, 30 00:04:24.160 --> 00:04:29.040 Inflation, but when the prices do go up, when we do have price inflation, the typical person 31 00:04:29.040 --> 00:04:32.480 tends to blame it on the businesses who are charging the prices. 32 00:04:32.480 --> 00:04:38.020 Capitalism, markets, there's not enough regulation, that sort of thing, and so inflation inevitably 33 00:04:38.020 --> 00:04:43.520 leads to sort of an ideological attack on capitalism because it's always blamed for 34 00:04:43.520 --> 00:04:48.380 the inflation by government and by the court historians who support the government and 35 00:04:48.380 --> 00:04:53.940 so forth, so it's a very insidious process, but of course there's no free lunch to inflation 36 00:04:53.940 --> 00:04:58.740 in addition to just paying higher prices it makes economic calculation almost 37 00:04:58.740 --> 00:05:04.380 impossible when prices are rising rapidly like that and so business 38 00:05:04.380 --> 00:05:10.100 planning becomes chaotic in a regime of inflation and that hurts everybody 39 00:05:10.100 --> 00:05:15.540 that hurts everybody and also as a general rule you know inflationary 40 00:05:15.540 --> 00:05:21.500 finance of war is what economists call a fiscal illusion anything government does 41 00:05:21.500 --> 00:05:38.500 The phrase that some economists use is fiscal illusion, which I always kind of love. It's a nice, accurate phrase, and we're about to experience a big fiscal illusion if we adopt a value-added tax, by the way. 42 00:05:38.500 --> 00:05:50.500 That's the sneakiest and most odious of all taxes. It's a tax imposed at every step of production, on production, so that when you pay for the final product, all that tax is built into it, and who are you going to blame? 43 00:05:50.500 --> 00:06:20.500 Inflation does the same thing, and so as a rule, as Mises said, the longer a war lasts, the more centrally planned and government controlled the entire economy becomes, so to the extent that the government is able to hide the cost of war with inflation, it puts us further and further down on the road to what I would call economic fascism, sort of a, a, a, a, a, a, a, a, a, a, a, a, a, a, 44 00:06:20.500 --> 00:06:29.500 Ostensibly private property, but a private property and private enterprise that is more and more controlled and regulated and regimented by the state. 45 00:06:29.500 --> 00:06:42.500 Our friend Bob Higgs, who wrote a classic book, Crisis in Leviathan, which is probably for sale out here, said this about World War I, the effects of World War I, he said, 46 00:06:42.500 --> 00:06:51.500 The corporatism of massive government collusion with organized special interest groups occurred. 47 00:06:51.500 --> 00:06:56.500 There was the de facto nationalization of the ocean shipping and railroad industries, 48 00:06:56.500 --> 00:07:03.500 the increased federal intrusion in labor markets, capital markets, communications and agriculture, 49 00:07:03.500 --> 00:07:11.500 and enduring changes in constitutional doctrines regarding conscription and governmental suppression of free speech. 50 00:07:11.500 --> 00:07:19.500 That was all magnified by World War II, Korean War, the Vietnam War, and our current wars, all of these things. 51 00:07:19.500 --> 00:07:31.500 And so inflation as a way of financing war does a lot more damage than just higher prices and making us have lower real wages. 52 00:07:31.500 --> 00:07:38.500 It really does put us way down the road to despotism, which is the theme of this day's conference, 53 00:07:38.500 --> 00:07:42.740 by putting more and more government in control of the private sector. 54 00:07:42.740 --> 00:07:47.740 And inflationary finance invariably leads to calls for price controls, 55 00:07:47.740 --> 00:07:52.460 which are almost always imposed during wartime 56 00:07:52.460 --> 00:07:57.220 when inflation has created these problems. 57 00:07:57.220 --> 00:08:00.300 The government, and this creates all kinds of problems, 58 00:08:00.300 --> 00:08:02.780 of course, shortages and so forth, 59 00:08:02.780 --> 00:08:05.900 and the government typically uses these problems that it created 60 00:08:05.900 --> 00:08:13.900 to grant itself even more powers, and this reminds me of what happened as a result of the Vietnam War inflation. 61 00:08:13.900 --> 00:08:26.900 Famously, Lyndon Johnson financed a great deal of the Vietnam War with inflation by urging, cajoling, pressuring the Fed to monetize the debt, which the Fed accommodated by doing that. 62 00:08:26.900 --> 00:08:34.900 So by the time we got to the early 70s, you know, we had the beginnings of stagflation, and of course the Arab oil embargo didn't help things out either. 63 00:08:34.900 --> 00:08:39.900 The FED responded to the Arab Oil Embargo with even more inflation. 64 00:08:39.900 --> 00:08:45.900 But there were price controls. The price controls were put on by Nixon before the Arab Oil Embargo. 65 00:08:45.900 --> 00:08:50.900 That was a response to the inflation created by the financing of the Vietnam War. 66 00:08:50.900 --> 00:08:56.900 And so this is one of the things I'm talking about. War and inflation inevitably leave the price controls. 67 00:08:56.900 --> 00:09:01.900 And so the price controls, of course, cause all sorts of havoc, shortages. 68 00:09:01.900 --> 00:09:07.660 Many of you in this room remember this, remember the long lines, and you remember the keystone 69 00:09:07.660 --> 00:09:13.900 cop's atmosphere of the government trying to centrally plan the energy markets in America. 70 00:09:13.900 --> 00:09:21.580 And so in my book, How Capitalism Saved America, on page 211, I quoted our first energy czar. 71 00:09:21.580 --> 00:09:25.020 You know, President Obama has taken a lot of heat for having all these czars, which 72 00:09:25.020 --> 00:09:28.540 he kind of likes, but we've had czars before. 73 00:09:28.540 --> 00:09:33.000 William Simon was the first energy czar before they called him the head of the Department 74 00:09:33.000 --> 00:09:34.000 of Energy. 75 00:09:34.000 --> 00:09:35.000 They called him the czar. 76 00:09:35.000 --> 00:09:42.740 It's kind of funny, isn't it, Americans politicians like this word czar, you know, a dictator. 77 00:09:42.740 --> 00:09:47.680 And here's what Simon said about what the government did in response to the problems 78 00:09:47.680 --> 00:09:49.720 it created with price controls. 79 00:09:49.720 --> 00:09:53.900 As for the centralized allocation process itself, that is the allocation of oil and 80 00:09:53.900 --> 00:09:57.900 The kindest thing I can say about it is that it was a disaster. 81 00:09:57.900 --> 00:10:04.900 Even with a stack of sensible sounding plans for even-handed allocation of gas and oil all over the country, 82 00:10:04.900 --> 00:10:10.900 the system kept falling apart, and chunks of the populace suddenly found themselves without gas. 83 00:10:10.900 --> 00:10:13.900 There was no logic to the pattern of failures. 84 00:10:13.900 --> 00:10:18.900 In Palm Beach, suddenly there was no gas, while ten miles away, gas was plentiful. 85 00:10:18.900 --> 00:10:23.900 Parts of New Jersey suddenly went dry while other parts of New Jersey were well supplied. 86 00:10:23.900 --> 00:10:28.900 Every day in different parts of the country, people waited in line for gasoline for two, three, and four hours. 87 00:10:28.900 --> 00:10:35.900 The normal market distribution system is so complex yet so smooth that no government mechanism could simulate it. 88 00:10:35.900 --> 00:10:44.900 And so it was one big mess created by de facto central planning of the energy markets that was a response to the price controls. 89 00:10:44.900 --> 00:10:54.900 And if you study history like I do, economic history, this has happened over and over and over again ever since before the Constitution. 90 00:10:54.900 --> 00:11:01.900 Even the Revolutionary War days, this sort of thing went on. 91 00:11:01.900 --> 00:11:09.900 And so what I'm going to do the rest of my time is talk a little bit about the history of the relationship between central banking and war. 92 00:11:09.900 --> 00:11:22.900 And Murray Rothbard, in his history of money and banking in the United States, points out that even though the Chinese invented paper in printing, it was the Massachusetts colony that was the first to print money. 93 00:11:22.900 --> 00:11:30.900 And it's an interesting story, and those of us who knew Murray Rothbard could just imagine him chuckling as he was writing this. 94 00:11:30.900 --> 00:11:36.900 He said that the Massachusetts government, this is in 1690, long before the American Revolution, 95 00:11:36.900 --> 00:11:44.900 And so they were, quote, accustomed to launching plunder expeditions against the prosperous French colony in Quebec. 96 00:11:44.900 --> 00:11:50.900 And so the government of Massachusetts said, hey, there's some wealthy people over in Quebec, let's go rob them. 97 00:11:50.900 --> 00:11:56.900 And so they would hire mercenaries, soldiers, to go up there and loot, pillage, and plunder the people in Quebec, 98 00:11:56.900 --> 00:12:02.900 and then come back home and they would share some of the loot with the soldiers and pay the mercenaries. 99 00:12:02.900 --> 00:12:09.300 But, of course, the people in Quebec caught on that they should defend themselves against these New Englanders, 100 00:12:09.300 --> 00:12:13.540 invading New Englanders, and so they hired their own mercenaries. 101 00:12:13.540 --> 00:12:18.260 And one of these expeditions was a failure. They got their butts kicked, in other words. 102 00:12:18.260 --> 00:12:21.620 So they came back home to Massachusetts with no plunder. 103 00:12:21.620 --> 00:12:29.020 And imagine these politicians in Massachusetts, 104 00:12:29.020 --> 00:12:35.500 They're sitting there with all these soldiers, mercenaries, with guns, and the soldiers are saying, 105 00:12:35.500 --> 00:12:40.860 where's our money? And the politicians are saying, we're broke, we don't have any money. 106 00:12:40.860 --> 00:12:46.060 And so what do they do? They printed money. They printed up 7,000 British pounds and paid them. 107 00:12:46.060 --> 00:12:51.340 And that was, according to Murray Rothbard, that was the first instance of the inflationary 108 00:12:51.340 --> 00:12:58.540 finance of, it wasn't a war, but it was an invasion of Quebec by the Massachusetts government. 109 00:12:59.020 --> 00:13:02.300 And so that was the very first example of this phenomenon. 110 00:13:02.300 --> 00:13:05.380 And then during the American Revolution itself, 111 00:13:05.380 --> 00:13:11.260 the Continental Congress printed up the continental paper money. 112 00:13:11.260 --> 00:13:14.980 And they printed so much of it, this was in 1775, 113 00:13:14.980 --> 00:13:17.020 they started printing the continentals. 114 00:13:17.020 --> 00:13:21.540 By 1781, they were worth nothing, they were worth zero. 115 00:13:21.540 --> 00:13:24.460 It was sort of Zimbabwean type inflation, I guess, 116 00:13:24.460 --> 00:13:26.300 that with the continental, 117 00:13:26.300 --> 00:13:33.340 and the phrase not worth a continental, you know, was popular for generations to depict this. 118 00:13:33.340 --> 00:13:37.580 And some of the states, it created so much inflation that some of the states during the 119 00:13:37.580 --> 00:13:43.980 American Revolution imposed price control laws. The state of Pennsylvania almost caused George 120 00:13:43.980 --> 00:13:49.580 Washington's army to starve to death in the field in Pennsylvania because of their price control laws. 121 00:13:49.580 --> 00:13:56.140 They imposed a law that applied price controls to quote, those commodities used by the army. 122 00:13:56.300 --> 00:14:06.300 They thought they were doing the army a good thing by holding down the price below free market prices of food and things the army was using. 123 00:14:06.300 --> 00:14:11.300 But of course they took the profit out of producing all these things and all these things dried up and disappeared. 124 00:14:11.300 --> 00:14:15.300 And they literally almost starved to death in the field because of this. 125 00:14:15.300 --> 00:14:23.300 And it created such a crisis that the Continental Congress issued a resolution on June 4th, 1778, 126 00:14:23.300 --> 00:14:26.900 urging all the states to abolish their price control laws. 127 00:14:26.900 --> 00:14:31.100 Think about that. Here we just had a big giant law that's going to put price 128 00:14:31.100 --> 00:14:33.340 controls on every aspect of medical care, 129 00:14:33.340 --> 00:14:36.860 but in those days they were wiser. 130 00:14:36.860 --> 00:14:40.300 Here's what they said, the Continental Congress said this, whereas 131 00:14:40.300 --> 00:14:44.860 it hath been found by experience that limitations upon the prices of 132 00:14:44.860 --> 00:14:45.780 commodities 133 00:14:45.780 --> 00:14:49.380 are not only ineffectual for the purpose proposed, 134 00:14:49.380 --> 00:14:53.060 but likewise productive of the very evil consequences 135 00:14:53.060 --> 00:15:03.060 resolved that it be recommended to the several states to repeal or suspend all laws limiting, regulating, or restraining the price of any article, end quote. 136 00:15:03.060 --> 00:15:11.060 And Pennsylvania did, and within a month or two, it became profitable to supply the army with whatever it needed. 137 00:15:11.060 --> 00:15:22.060 And so George Washington and his army literally could have been defeated by price controls if it weren't for the Continental Congress and their understanding of the experience of price controls. 138 00:15:22.060 --> 00:15:32.060 Now, this was before there was a central bank. Now, before, the founding father of central banking in America is Alexander Hamilton. 139 00:15:32.060 --> 00:15:41.060 In one of my latest books, Hamilton's Curse, I quote a Fed publication as calling him the founding father of central banking in America, 140 00:15:41.060 --> 00:15:46.060 because the original central bank was called the Bank of the United States, and it was Hamilton's idea. 141 00:15:46.060 --> 00:15:52.100 and this Fed publication even brags and it says Hamilton even sounded like a 142 00:15:52.100 --> 00:15:56.680 contemporary Fed chairman and and which is true I've read all of Hamilton's 143 00:15:56.680 --> 00:16:01.280 speeches and reports on banking and they're very long-winded most of it 144 00:16:01.280 --> 00:16:05.140 doesn't make any sense at all it's a you know he knew very little about finance 145 00:16:05.140 --> 00:16:08.740 really I don't know where he got this reputation of not knowing a lot about 146 00:16:08.740 --> 00:16:14.500 finance he didn't he never studied it really seriously and he does sound like 147 00:16:14.500 --> 00:16:23.300 like Alan Greenspan. No two sentences are connected in often times. So that's true. 148 00:16:23.300 --> 00:16:28.180 In Hamilton, you have to understand why Hamilton wanted a bank, a central bank. And it wasn't 149 00:16:28.180 --> 00:16:32.620 just him, it was his party, his political party, the Federalists. And he was the lightning 150 00:16:32.620 --> 00:16:39.500 rod. He was the main mover and shaker of the Federalists in the government. And he wanted 151 00:16:39.500 --> 00:16:46.980 A Bank To Fund What He Called Sudden Emergencies, Like War, For Example, And Unlike George Washington 152 00:16:46.980 --> 00:16:52.880 And Thomas Jefferson, Their Foreign Policy Philosophy Was Commercial Relations With All 153 00:16:52.880 --> 00:16:59.060 Nations But Entangling Alliances With None, Hamilton, Just The Opposite, He Wanted To 154 00:16:59.060 --> 00:17:06.340 Pursue Empire, He Wanted An American Empire That Would Rival The British Empire, The Jeffersonians 155 00:17:06.340 --> 00:17:09.300 Hamilton said, well, we just fought a war against the British Empire. 156 00:17:09.300 --> 00:17:12.340 Why would we want to become one like them? 157 00:17:12.340 --> 00:17:21.020 And Hamilton, though, he wanted a government that would pursue, in his words, imperial glory. 158 00:17:21.020 --> 00:17:23.780 Not a government that would simply protect life, liberty, and property. 159 00:17:23.780 --> 00:17:26.340 He wanted to be an imperialist. 160 00:17:26.340 --> 00:17:30.260 And of course, it takes a lot of money to be an imperialist. 161 00:17:30.260 --> 00:17:31.260 And how do you get all this money? 162 00:17:31.260 --> 00:17:32.260 Well, you print it. 163 00:17:32.260 --> 00:17:33.260 You print it. 164 00:17:33.260 --> 00:17:34.260 It was at the Central Bank. 165 00:17:34.260 --> 00:17:36.960 There's a biographer of Hamilton named Clinton Rossiter. 166 00:17:36.960 --> 00:17:39.260 He's long since passed away. 167 00:17:39.260 --> 00:17:42.260 He was a professor of history at Cornell for many years. 168 00:17:42.260 --> 00:17:43.660 And he said this about Hamilton. 169 00:17:43.660 --> 00:17:46.360 He said, quote, Hamilton's overriding purpose 170 00:17:46.360 --> 00:17:50.360 was to build the foundations of a new empire, end quote. 171 00:17:50.360 --> 00:17:53.560 And so, as I said, to have a new empire, you needed a central bank. 172 00:17:53.560 --> 00:17:57.760 This is why Jefferson loathed Hamilton. 173 00:17:57.760 --> 00:17:59.360 He really despised Hamilton. 174 00:17:59.360 --> 00:18:01.460 He thought everything he was talking about doing 175 00:18:01.460 --> 00:18:07.860 and his party was a threat to destroy liberty in America and there's an 176 00:18:07.860 --> 00:18:12.260 interesting story about Jefferson's take on why Hamilton really wanted a central 177 00:18:12.260 --> 00:18:18.580 bank, I'll insert this here, is that Jefferson had been observing the antics 178 00:18:18.580 --> 00:18:23.980 of Hamilton and his political cronies and one of the things Hamilton did when 179 00:18:23.980 --> 00:18:30.620 he was secretary of treasury was to nationalize the debt, nationalize the 180 00:18:30.620 --> 00:18:37.340 of the States. But the way they went about it was all the political insiders in Congress and their 181 00:18:37.340 --> 00:18:42.700 political supporters knew that the government was going to pay off all these old bonds, government 182 00:18:42.700 --> 00:18:48.300 bonds, at face value. And this, for the young people in the audience, this was before the internet. 183 00:18:49.180 --> 00:18:56.620 And so the insiders knew that if you could buy one of these bonds that was currently selling 184 00:18:56.620 --> 00:19:26.620 between two and ten percent of face value in a month from now you're going to be able to cash it in for a hundred percent of face value and so there was a mad rush up and down the eastern seaboard of stage coaches, horses, carriages, every means, boats, sailing ships, all hired by the movers and shakers in the government, including members of Congress, including Hamilton himself, to buy up all these bonds from whoever would sell them, many of them were Revolutionary War veterans, 185 00:19:26.620 --> 00:19:48.620 The arbitrage created millions of dollars in profits, one biographer that I read said that Robert Morris himself made 18 million dollars in this, in this whole gambit, and so here's Jefferson observing all of this, and he's asking himself, well what is the purpose of all this? What are they after here? 186 00:19:48.620 --> 00:19:59.620 And his interpretation is that Hamilton had this expansionist agenda, he called the Constitution a frail and worthless fabric because it limited government too much. 187 00:19:59.620 --> 00:20:06.620 He wanted an empire. He needed votes in Congress to go along with his version of big government in an empire. 188 00:20:06.620 --> 00:20:11.620 How do you win votes in Congress? Well, you win them like Nancy Pelosi does, you bribe members of Congress. 189 00:20:11.620 --> 00:20:21.620 And so this whole gambit of the debts was a way to bribe members of Congress to get them to go along with the Hamilton Federalist Party agenda of big government. 190 00:20:21.620 --> 00:20:28.620 But Jefferson said there's a problem. These guys are going to die. They're going to die off and retire. 191 00:20:28.620 --> 00:20:37.620 And therefore the agenda of the Federalist Party will die off and retire if it doesn't have the votes of these people who have been bought off. 192 00:20:37.620 --> 00:20:45.620 So the dilemma to Hamilton, Jefferson said, was how to create a permanent engine of corruption. 193 00:20:45.620 --> 00:20:51.620 The debt gambit was a temporary engine of corruption that would fuel this big government agenda. 194 00:20:51.620 --> 00:20:55.620 The central bank is the answer. That's why Hamilton wanted a central bank. 195 00:20:55.620 --> 00:21:02.620 It could be used as a permanent engine of corruption, and I think he was exactly right about that. 196 00:21:02.620 --> 00:21:09.620 Look at today's Fed, or yesterday's Fed, the same thing. 197 00:21:09.620 --> 00:21:15.620 And so, Jefferson understood the link between a central bank and war also. 198 00:21:15.620 --> 00:21:19.620 One of the reasons he opposed a large public debt, which Hamilton was in favor of, 199 00:21:19.620 --> 00:21:24.620 and a large public debt monetized by a government bank, is he said, 200 00:21:24.620 --> 00:21:28.620 the European monarchs had done this, he said, 201 00:21:28.620 --> 00:21:32.620 The perpetuation of debt has drenched the earth with blood. 202 00:21:32.620 --> 00:21:41.620 He's referring to the fact that the Bank of England, the ability to issue large amounts of public debt to finance wars, 203 00:21:41.620 --> 00:21:49.620 drenched the European earth with blood for centuries with all these unnecessary wars of imperialism, wars of conquest. 204 00:21:49.620 --> 00:21:53.620 He did not want America to go down the same road. Hamilton did. 205 00:21:53.620 --> 00:21:57.620 And so that was the origins of central banking in America. 206 00:21:57.620 --> 00:22:27.620 in America. It was related to war to some extent. And of course, the first Bank of the United States was created in 1791. It created 72% inflation in the first five years. It generated corruption. And it was such a bad idea in retrospect to so many members of Congress that they did not re-charter it. It had a 20-year charter. And then came the War of 1812. And there was no central bank during the War of 1812. 207 00:22:27.620 --> 00:22:41.220 But the Federal Government did intervene in the monetary system and what it did was it first encouraged the creation of a lot of private banks and then it issued an edict suspending species payment during the war. 208 00:22:41.220 --> 00:22:54.220 In 1814, the Federal Government declared that these banks were to suspend species payment, which means they don't have to pay gold or silver for the paper currency that people took in to redeem. 209 00:22:54.220 --> 00:23:06.220 And that allowed the banks to issue money that they could use to buy up the government debt that was used to finance the useless and futile War of 1812, which didn't benefit America in any way whatsoever. 210 00:23:06.220 --> 00:23:16.220 A libertarian friend of mine told me the one benefit of the War of 1812 was that the British burned down much of Washington, D.C. 211 00:23:16.220 --> 00:23:21.720 But other than that, you know, what on earth was the benefit of the War of 1812? 212 00:23:21.720 --> 00:23:29.720 Defense contractors always make a good living out of these things, but certainly the average citizen didn't benefit in any way for it. 213 00:23:29.720 --> 00:23:39.220 And so, and of course, this did create an inflation. Inflation during the War of 1812 averaged about 35% a year. 214 00:23:39.220 --> 00:23:50.220 And then the government decided, well, with all this inflation and this war debt, the private banks aren't going to be able, sufficient, to finance the war debt. 215 00:23:50.220 --> 00:23:59.220 Therefore, the Bank of the United States was resurrected in 1817, and it made the inflation even worse after that. 216 00:23:59.220 --> 00:24:06.220 And Murray Rothbard, because it continued to monetize the war debt, the War of 1812 war debt. 217 00:24:06.220 --> 00:24:12.100 And Murray Rothbard in his History of Money and Banking explains the impetus, the real, 218 00:24:12.100 --> 00:24:16.980 the individuals involved in bringing back this Hamilton's Bank, the Bank of the United 219 00:24:16.980 --> 00:24:17.980 States. 220 00:24:17.980 --> 00:24:18.980 And here's what he says. 221 00:24:18.980 --> 00:24:23.820 He says, The second bank of the United States was pushed through Congress, particularly 222 00:24:23.820 --> 00:24:32.620 by the Secretary of the Treasury, Alexander J. Dallas, a wealthy Philadelphia lawyer and 223 00:24:32.620 --> 00:24:38.700 and close friend, counsel, and financial associate of Philadelphia merchant and banker Stephen 224 00:24:38.700 --> 00:24:43.940 Girard, reputedly one of the two wealthiest men in the country. 225 00:24:43.940 --> 00:24:49.580 Girard was the largest stockholder of the first bank of the United States, and during 226 00:24:49.580 --> 00:24:56.020 the War of 1812, Girard became a very heavy investor in the war debt of the federal government. 227 00:24:56.020 --> 00:24:57.280 Imagine that. 228 00:24:57.280 --> 00:25:02.600 As a way to unload his public debt, Girard began to agitate for a new bank of the United 229 00:25:02.600 --> 00:25:23.600 The Second Bank of the United States launched a spectacular inflation of money and credit and it promptly created the Panic of 1819. 230 00:25:23.600 --> 00:25:28.600 That was actually the title of Rothbard's doctoral dissertation at Columbia many, many years ago. 231 00:25:28.600 --> 00:25:33.600 and it's published as a book, it's usually for sale on the front, The Panic of 1819. 232 00:25:33.600 --> 00:25:36.600 In the 19th century, depressions were called panics. 233 00:25:36.600 --> 00:25:42.600 And I believe it was Herbert Hoover who decided that's too scary a term. 234 00:25:42.600 --> 00:25:47.600 Let's call them depressions. People won't be fearful of depression, but panic. 235 00:25:47.600 --> 00:25:50.600 They might panic over panic. 236 00:25:50.600 --> 00:25:54.600 And so that didn't work out too well. 237 00:25:54.600 --> 00:26:00.600 And this was the first real depression in American history, the panic of 1819 caused by the Bank of the United States 238 00:26:01.320 --> 00:26:08.120 which came back into being because of the War of 1812, and it was the first time where there was large-scale unemployment in American cities. 239 00:26:08.120 --> 00:26:10.120 For example, in Philadelphia, 240 00:26:10.320 --> 00:26:14.160 employment in manufacturing, which was mostly handicrafts in those days, fell from 241 00:26:15.120 --> 00:26:20.000 9,700 people in 1815 to 2,100 people in 1819. 242 00:26:20.200 --> 00:26:24.240 So there was serious unemployment. It was the first real depression in American history. 243 00:26:24.240 --> 00:26:36.240 And again, the bank was created so much of a boom and bust cycle, corruption, fraud, some of the money was stolen that Andrew Jackson, President Andrew Jackson defunded the bank. 244 00:26:36.240 --> 00:26:44.240 He vetoed the bill to re-charter the bank in 1834 and the bank disappeared, eventually went out of business. 245 00:26:44.240 --> 00:26:52.900 Business. But the advocates of central banking did not. And one of the most faithful advocates 246 00:26:52.900 --> 00:26:57.160 of central banking was Abraham Lincoln. As many of you know, I've read several books 247 00:26:57.160 --> 00:27:03.140 about him. And there's a big fat history of the Whig Party written by a University of 248 00:27:03.140 --> 00:27:08.440 Virginia professor named Michael Holt. And he said during this time, roughly the 1830s 249 00:27:08.440 --> 00:27:15.640 1860, Michael Holt says there was no more of a forceful proponent of bringing back the 250 00:27:15.640 --> 00:27:20.440 central bank than Abraham Lincoln. He made stump speeches for Whig Party candidates all over the 251 00:27:20.440 --> 00:27:27.400 country who advocated bringing back the bank and inflation and so forth. And so when Lincoln became 252 00:27:27.400 --> 00:27:32.520 president, the Lincoln administration brought back central banking. They didn't bring back the bank 253 00:27:32.520 --> 00:27:39.920 Bank of the United States, but the Legal Tender Act of 1862 empowered the Treasury Secretary 254 00:27:39.920 --> 00:27:45.080 to issue paper money, greenbacks, they were used to, they were not at the time redeemable 255 00:27:45.080 --> 00:27:51.360 in gold or silver, then there were the National Currency Acts of 1863 and 1864 that created 256 00:27:51.360 --> 00:27:55.720 the system of nationally chartered banks that could issue bank notes that were supplied 257 00:27:55.720 --> 00:27:58.960 to them by the new comptroller of the currency. 258 00:27:58.960 --> 00:28:03.920 was created in the Lincoln administration along with the first income tax for his military 259 00:28:03.920 --> 00:28:12.040 conscription law, the internal revenue bureaucracy was created and the greenback dollars devalued 260 00:28:12.040 --> 00:28:19.200 by in one year they were only worth 35 cents in gold in just one year and during the Civil 261 00:28:19.200 --> 00:28:22.000 War the Confederate government was much worse. 262 00:28:22.000 --> 00:28:28.080 They financed their war effort mostly with printing money so inflation in the Confederate 263 00:28:28.080 --> 00:28:34.320 States during the Civil War averaged about 2,200 percent per year because they went down 264 00:28:34.320 --> 00:28:40.280 the same road and the northern states didn't go down that road quite as fast. 265 00:28:40.280 --> 00:28:45.360 And one of the side effects of this, the printing of money to finance the Civil War, was the 266 00:28:45.360 --> 00:28:52.760 northern manufacturers became a powerful lobbying force for more inflation because they realized 267 00:28:52.760 --> 00:28:59.280 says that a falling dollar caused by inflation makes domestic prices cheaper and it makes 268 00:28:59.280 --> 00:29:04.760 imports look more expensive. So they saw this as a form of veiled protectionism and they 269 00:29:04.760 --> 00:29:11.200 became a lobbying force for a more centralized governmental control of banking and the creation 270 00:29:11.200 --> 00:29:15.200 of inflation. The railroad corporations, which were the biggest corporations in the world 271 00:29:15.200 --> 00:29:21.280 at the time, they also became a lobbying force for inflation because they were heavy in the 272 00:29:21.280 --> 00:29:28.280 the Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit 273 00:29:51.280 --> 00:29:57.200 of 1812. It had no good purpose for Americans at all. It was none of our business. It turned 274 00:29:57.200 --> 00:30:02.800 out to be a disaster. Hundreds of thousands of dead soldiers for nothing. It led to World 275 00:30:02.800 --> 00:30:09.600 War II. And the Fed financed about 14 percent of this. And I used to quote some left-wing 276 00:30:09.600 --> 00:30:14.840 author who wrote a book on taxes as saying, thank God we had the Fed, otherwise we couldn't 277 00:30:14.840 --> 00:30:20.680 have entered World War I. But also I know I can also cite Milton Friedman. He says the 278 00:30:20.680 --> 00:30:25.800 The same thing in his famous history of money and banking, co-author with Anna Schwartz, 279 00:30:25.800 --> 00:30:29.040 they say the same thing, that if it were not for the Fed, we wouldn't have been able to 280 00:30:29.040 --> 00:30:34.840 enter World War I. What a disaster that would have been. And so, it sounds kind of kooky 281 00:30:34.840 --> 00:30:41.720 to me, but that's the way it is. And so, they accounted for about 14% of the direct monetary 282 00:30:41.720 --> 00:30:48.520 costs of the war. The amount of money in circulation between 1914, the first year the Fed was in 283 00:30:48.520 --> 00:30:54.440 Business in 1920 doubled, the money supply doubled as did the price level. So the price 284 00:30:54.440 --> 00:31:04.280 level doubled and consider this from 1787, 1789, the year that the Constitution was ratified, 1789, 285 00:31:04.280 --> 00:31:10.280 to 1913, the price level was about the same. There were ups and downs but it was about the same and 286 00:31:10.280 --> 00:31:15.680 And then from 1914 to 1920 it doubled, you know, it's a hundred percent. 287 00:31:15.680 --> 00:31:22.780 And so that was just one cost of the Fed's financing of World War I, 288 00:31:22.780 --> 00:31:25.180 the American participation of World War I. 289 00:31:25.180 --> 00:31:30.280 And it created a boom, a bit of a boom, and of course the bust came in 1920. 290 00:31:30.280 --> 00:31:35.680 There was a depression in 1920 that was even worse, the first year of this, 291 00:31:35.680 --> 00:31:39.080 the one year of this was even worse than the first year of the Great Depression, 292 00:31:39.080 --> 00:31:47.080 A Decade Later, and gross domestic product declined by 24% from 1920 to 1921. 293 00:31:47.080 --> 00:31:52.080 Imagine that, a fourth reduction in the whole size of the economy in one year. 294 00:31:52.080 --> 00:32:02.080 Unemployment, the number of unemployed Americans went from 2.1 million to 4.9 million in one year in 1920. 295 00:32:02.080 --> 00:32:07.080 And this is our friend Tom Woods has talked about this as the depression no one ever heard of. 296 00:32:07.080 --> 00:32:09.680 Why do you think no one ever heard of this? 297 00:32:09.680 --> 00:32:16.480 Well, it's because President Warren Harding, his response to this, the Great Depression of 1920, 298 00:32:16.480 --> 00:32:21.780 was to cut government spending and cut taxes, and that's why it only lasted one year. 299 00:32:21.780 --> 00:32:25.080 And so this is a very politically incorrect depression. 300 00:32:25.080 --> 00:32:32.780 That's why you don't even read about it in the textbooks, that Harding ended it in one year with government spending cuts. 301 00:32:32.780 --> 00:32:36.680 And so, you know, you have to come to one of these seminars to ever hear about this. 302 00:32:36.680 --> 00:32:39.680 If you ever heard, there was a depression in 1920. 303 00:32:39.680 --> 00:32:45.480 And so, the central banking of this, of war, World War I, World War II, 304 00:32:45.480 --> 00:32:48.980 has inflicted the same kinds of damage on American society. 305 00:32:48.980 --> 00:32:55.980 Inflation, economic chaos, reduced real wages, price controls, other government interventions, 306 00:32:55.980 --> 00:33:00.080 and ideological attacks on capitalism as the culprit. 307 00:33:00.080 --> 00:33:05.980 And of course, the adoption of a sort of a fascist economy with more and more government controls. 308 00:33:05.980 --> 00:33:16.980 And I'm going to conclude by quoting Adam Smith, who some of us here consider him to be a dangerous left-winger as far as economics goes, but he's good on some things, Adam Smith. 309 00:33:16.980 --> 00:33:21.980 And here's one thing he said, Adam Smith, in his famous book, The Wealth of Nations, he said, 310 00:33:21.980 --> 00:33:30.980 Wars would in general be more speedily concluded and less wantonly undertaken without inflationary finance. 311 00:33:30.980 --> 00:33:45.980 He said, the people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and the government, in order to humor them, would not be under the necessity of carrying it on longer than it was necessary to do so. 312 00:33:45.980 --> 00:33:49.980 This was in 1776, Adam Smith was writing about this. 313 00:33:49.980 --> 00:33:54.140 and of course politicians don't seem to have any incentive whatsoever to pay 314 00:33:54.140 --> 00:33:58.980 attention to this wise advice and I don't have any magic solution as to how 315 00:33:58.980 --> 00:34:03.180 to make the politicians pay attention to this advice but at least educating 316 00:34:03.180 --> 00:34:09.540 ourselves is the first step toward this and so I think that's about all I wanted 317 00:34:09.540 --> 00:34:14.100 to say to you for today about the gloomy picture of the relationship between war 318 00:34:14.100 --> 00:34:19.020 and central banking and central planning and it's something we need to 319 00:34:19.020 --> 00:34:27.020 to avoid, not like the plague, but like Zimbabwe, we don't want to be like Zimbabwe, and thank you very much.