Monday, June 23, 2008

War and Inflation

Few people can get to the point in a simple and persuasive way as well as Lew Rockwell of the Mises Institute. Here's a link to a piece he did, based on a talk he delivered, on the connections, many of them that few people think about, between war and inflation. It is also a more detailed explanation of something that mystified many observers of the Ron Paul campaign: Why he kept talking about eliminating the Federal Reserve, which few people saw as related at all to his desire to get out of Iraq and have a considerably humbler, non-interventionist foreign policy, but as some sort of gold-bug crank issue.

As Lew demonstrates, however, a central bank with a monopoly over producing currency, however the keepers of the conventional wisdom may proclaim that it's role is to fight inflation, is precisely a mechanism for creating inflation. Thus governments can achieve spending power through inflation of a much greater magnitude than through taxes, because at some point people will resist taxation. That spending power has made possible the U.S.'s aggressive foreign policy -- which began, it's worth noting a few years after the Fed was created in 1913. The government couldn't finance endless wars through taxes; people would revolt. So it finances them through deficits and inflation.

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