Despite General MacArthur’s warning that there is no substitute for victory, the United States is once again bogged down in an Asian war that it apparently wants neither to win nor to lose. Having learned nothing about how to finance wars from its experiences in two World Wars and Korea, it is again relying on a thinly disguised running of the printing presses. Barron’s for May 16, 1966, in its listing of U.S. Treasury issues, does not show even one offered as high as par, including the May ’66 33/4s. Yields, varying with coupon rate and maturity, range from a low of 4.01 to a high of 4.99 per cent. Such high yields reflect bond specialists’ doubts about the future of the dollar, which in terms of 1939 values is worth about 431/4 cents.
War is clearly waste — waste of the lives of the killed; waste of the physical well-being of the maimed; waste of the time of the men who are fortunate enough to come home safe and sound, despite their loss of productive years; and it is waste of munitions consumed and stockpiled unused as well as the capital goods that are worn out in producing them. It is a wasteful activity from an economic point of view, no matter how successful it may be politically, nor how quick the victory. I am neither a pacifist nor a peace-at any-price man. I deplore the war as a waste of human and material resources.I happen to believe that, given the world in which we live, force does change things and that the purpose of waging war is to win decisively at the least possible cost in order to impose one’s will upon the vanquished. But I deplore war as a waste of human and material resources.
The Present Burden
Since we are engaged in war, we have to face the question of how to finance its cost. If we look behind the veil of money, it is plain to see that the true cost can be met only out of a combination of past savings and current production.
It is as impossible to shift the material costs to the taxpayers of 1996 as it is to shift the burden of combat to the youngsters who will be of military age in 1996. Only men now living and only capital goods and materials now in being can be employed to wage war in Vietnam in 1966. There is no way to borrow them from the future.
Moreover, it is plain that there is no possible way to use the same bit of steel today both in a mortar and a motor. Every ton of steel, every pound of copper, every ounce of silver that goes into war materiel and is consumed or destroyed is lost at least for the present and probably irrevocably. Hence, it follows that every day each man devotes to military service and each machine and each pound of material that is used up for military purposes are completely lost to the civilian economy and to the satisfaction of the wants and needs of the civilian population as consumers.
Since, economically, war is waste, and it wastes existing — not future — manpower, capital goods, and raw materials, it is clear that the real cost of waging war is borne by the living who are deprived of things that in the absence of war could be produced and consumed in ordinary peacetime life. No amount of fiscal hocus pocus can change that reality.
This being the case, it is futile to try to shift the cost of the war in Vietnam to future generations of taxpayers. They will be poorer because of it than they would otherwise have been, if only because they will fail to inherit the capital goods that might otherwise have been produced with the labor, existing capital goods, and materials devoted to Vietnam. Incidentally, this is equally true of all "foreign aid" that consists of outright gifts and loans made on terms that do not cover in full the debt service and repayment of principal in money equal in purchasing power to the sums lent. It is also true of all domestic malinvestments by governments in projects that cannot recover all their open and hidden costs.
Both Methods Tried
The method the United States has used to finance its wars in this century has been mixed. To a limited degree, it has taken purchasing power from the citizenry by taxation and by the noninflationary sale of bonds paid for by genuine saving of funds that otherwise would have been spent on consumers’ goods or invested directly or indirectly in capital goods. This source, however, has been a mere drop in the bucket.
The major source has been a thinly disguised printing of money. There has been nothing as blatant — or as naive — as the printing of Continentals or Greenbacks. There are more subtle ways, especially since the United States abandoned commodity money. When citizens cannot freely exchange bank notes for gold, they can do nothing effective to prevent the Treasury and the "Fed" from forcing the commercial banks to "buy" engraved pieces of paper for which they "pay" with a credit against which the government can write checks. Then, since the "Fed" by law accepts these pieces of paper as collateral for loans, they can create additional "reserves" by depositing them and thus prepare themselves to create more deposits.
Meanwhile, the civilian population, and particularly the portion engaged in the "war effort," enjoys prosperity. This prosperity amount to little but the possession of a lot of unspendable dollars.This prosperity, in fact, amounts to little but the possession of a lot of unspendable dollars, or dollars that can only be spent for certain available items —mostly luxuries. In World War I, bricklayers and foundry workers labored in pure silk shirts, since they were about the only consumers’ good not in short supply. In World War II the "real" money was ration points, and dollars were not good for much except unknown brands of cigarettes, for which people stood in line for hours, plus whatever they could promote in the black market. The real cost of wars is paid for currently as they are fought by going without the normal civilian goods that cannot be produced at all, or at least not in the quantities wanted. Not even General Motors executives could get 1944 Cadillacs or Buicks nor Chrysler employees 1943 Plymouths, no matter the size of their paper dollar pay checks.
The legacy of this mode of financing a war we all know. It is our 431/4 cent current dollar. Granted, war financing is not the sole cause of the loss of purchasing power of the dollar. Other nonproductive, deficit-financed government expenditures have contributed to the erosion; to what extent is uncertain. But if that had been all, and had we not spent more than $110 billion in "foreign aid" since 1945, we might today have a 90 cent or a 75 cent dollar.
This illusory "war prosperity" is popular. It enables politicians and union officials to tell their followers, "You never had it so good," when the clear fact is that they are not able to buy unrestricted quantities of coffee, beef, shoes, and automobiles and other consumers’ durables. All they have —and only the savers have that much—is a claim on a problematic supply of goods when those goods are actually produced in the future and sold against diluted dollars. Unfortunately, not everybody shares equally and simultaneously in this "war prosperity." Those who live on fixed or virtually fixed incomes are hurt at once and forever after. Those whose skills are little wanted, and who share a trickle of the newly created money only after it has passed through many other hands, certainly lose relatively and usually absolutely, since their incomes lag while prices both officially and on the black market soar. Debtors, who nowadays are mostly the rich who are smart enough to get as much leverage as they can for their own equity by working as much as they can with borrowed funds, and those whose skills make them eagerly sought and highly paid by firms engaged in war production do gain relatively and perhaps absolutely.
Economically, the financing of war by inflation is as unfair as the process by which John Brown is assigned to combat duty and gets killed or maimed and James Smith spends his service time running a computer in the Pentagon; though, of course, the outcome is much more serious for the families of the killed and the individuals who are maimed and their dependents.
Facing the Problem
Enough has been said to indicate the politically courageous and morally correct way to finance wars. That is to impose, insofar as possible and that is quite far, the money costs where the real costs fall anyhow. That is to tax away substantially all the incremental earnings of the civilian population as these earnings accrue. To write an equitable tax law that would accomplish this would tax the ingenuity of economists and tax lawyers, but with sufficient ingenuity and intelligence, it might be done. Rightly or wrongly, people are accustomed to and accept progressive taxation. Business has accepted an 82 per cent combined income and excess profits tax. While entrepreneurial executives have no monopoly of patriotism, they are at least as patriotic as the general population. Hence, they could be expected to go along with seeing practically all their increased profits taxed away, provided other individuals also were deprived of their income gains by a tax that took substantially all the increase in earned incomes.
Additional Money Causes Prices to Rise
By a combination of persuasion, veiled threats of coercion... the government can get what it wants in the market.Obviously, no businessman in his right mind prefers war orders to normal orders from his regular customers, for he knows that they are temporary and largely illusory and that reconversion to peacetime activities is time consuming and expensive and carries the risk of losing position in the market. Yet, by a combination of persuasion, appeals to patriotism, veiled threats of coercion, and bidding a high enough price, government can get what it wants in the market. Furthermore, many businessmen (and many other people) are careless or sloppy thinkers. Many executives think of x per cent being a "fair return" on sales or y per cent as a "fair return" on invested capital. If they know that neither themselves and their competitors nor their employees and the general population are going to be allowed to keep much, if any, of their increased cash flow, they are under no unusual pressure to raise prices.
True, there may be some diehards who will not take or at least not seek war orders; but they can be handled. Since they would be forewarned that their normal customers are going to be taxed to pay for the current cost of the war out of current income, they would see that their normal market would shrink and their normal production would be partly unsold, for lack of customers with money to spend for normal use of the goods in question. Hence, they could not afford to bid for strategic commodities against firms taking war orders since their customers would lack the means to pay even customary prices, let alone increased prices; nor could they match wage increases (even though virtually all the increases be taxed away). Hence, to avoid idle plant, they would be obliged to fall in line.
If substantially as much money would be taken out of the economy by the tax collector as is put in by the purchasing agent of the Defense Department, then regardless of the money prices paid for the goods consumed in the war, there need be no war-induced increase in the money supply or rise in prices generally. This is not to say that the war would be without effect. It would affect everybody to some extent and it would involve waste of capital goods and war materiel. Everybody would be poorer because of the wasteful demands of war. However, the postwar hangover of a lot of newly created money chasing after a reduced stock of goods would be largely or entirely avoided. The money cost and the real cost would both be met during the period of hostilities.
It now appears that the Vietnamese war may be prolonged, since the United States does not seek victory and, presumably, does not want defeat. There is also a possibility that a miscalculation in Hanoi, Peking, Moscow, or Washington might bring China and possibly Russia into the war. Should such a disaster occur, the cost would multiply enormously, and the real costs would still have to come out of savings plus current production. It would be naive, indeed, to suppose that any government, particularly a government strongly influenced by union leadership and economists sympathetic to the welfare state, would have the moral courage and intellectual integrity to tell its people that war, however necessary politically, is economic waste that must be paid for out of current production and that it would be wise and fair to collect the money cost at the same time that men are being sent to death or permanent injury. Individuals have to discover these harsh facts for themselves.
When Bonaparte took the consulship, the condition of fiscal affairs was appalling. The government was bankrupt; an immense debt was unpaid. The further collection of taxes seemed impossible; the assessments were in hopeless confusion…. At the first cabinet council, Bonaparte was asked what he intended to do. He replied, "I will pay cash or pay nothing." From this time he conducted all his operations on this basis….
When the first great European coalition was formed against the Empire, Napoleon was hard pressed financially, and it was proposed to resort to paper money; but he wrote to his minister, "While I live, I will never resort to irredeemable paper." He never did, and France, under this determination, commanded all the gold she needed. When Waterloo came, with the invasion of the Allies, with war on her own soil, with a change of dynasty, and with heavy expenses for war and indemnities, France, on a specie basis, experienced no severe financial distress.