A War on Capital
The reopening of the U.S. stock market was an operation tinged with the same anxieties as grips a delinquent student on opening his exam results, or a driver with a criminal record being pulled over by the State’s most feared tax-gatherers, the traffic cops. Whatever direction the market may take in the future, its opening day was a time for honest assessment of how the recent terrorist attacks and their aftermath may affect our economic future.
Perhaps the most ominous signal of all was that despite a series of rate-cut announcements from a range of central banks throughout the trading day (and extended on through the next morning), stocks closed on their lows, and, furthermore, nothing in the credit markets beyond a year in maturity closed higher.
Had stocks done better, had volatilities subsided, had the yield differentials between government and other credits narrowed, we could have written the bond market’s reaction off as a simple reallocation, as risks were perceived to have subsided. But that was clearly not the case.
What we may have been witnessing was the glimmerings of realization of the scale of the demands that the latter-day Athenian Empire, its allies, and its satellites will make upon their peoples, when they gird their loins for war. For war has always been destructive, and modern wars are always inflationary, to boot.
Ancient war was financed by taxation (ultimately finite as Clausewitz came into collision with the Laffer Curve), by borrowing specie (if the previous, frequent repudiations of warmongering princes had not scared off such funds), by debasement (the method which finally came to be triumphantly institutionalized), by tribute (which tended to strain coalitions), or by rapine (which served either to limit the concentration of forces able to subsist on mere plunder, or to protract the conflict into sporadic, indecisive skirmishes between underweight detachments).
Modern war has been much more prolonged, much more violent, much more industrial in scope than the worst excesses of the Ancients, and there is a reason for this multiplication of savagery.
Modern war has largely risen out of the gradual development of the Anglo-American financial system and its two main elements: a centralized bank of discount granted a full or near monopoly of note issuance privileges, and a Treasury that, in turn, consolidated and regularized its debt issues, largely by selling them to the aforementioned bank and using its resulting IOUs in place of money.
To begin to explain our contention, it should first be noted that most major wars of the Industrial Age led to a suspension of the solid constraints imposed by the gold standard, either as a preemptive act of policy, or by force majeure—a rule that has held good from the American Revolution and the Napoleonic Wars, through the War between the States, both World Wars, and, ultimately, the Cold War and Vietnam.
War—total war, that is—soon exhausts the funds that can be visibly and honestly raised from an electorate in the form of nonmonetized borrowings or taxes, however given to raptures of patriotic frenzy it initially was. Swiftly thereafter, it comes to rely on inflationary lines of policy.
Even without the full State apparatus of coercion, more paper money, more credit, more promises made against future taxpayers’ output begin to force the economy into wasteful channels of activity where the self-sustaining regeneration of the means of production is of little regard and where the all-important price mechanism of the free market no longer functions.
Wars destroy capital. If you doubt this, you must believe that if we labored each day, even in peacetime, to build missiles to fire harmlessly out over the oceans each night in some great, pyrotechnic display of pomp, we would all be richer than if we worked at making what we, free individuals, want most in our lives.
Keynesians may affirm this doctrine of consumption as the route to recording higher short-run, macro-economic scores on such measures as GDP (but, then, Keynesians are the court philosophers of the State). But the destruction of value—which is how J.B. Say tellingly defined consumption, whether voluntary or compulsive—is antithetical to wealth, not conducive to it.
If capital is abused, neglected, or destroyed, less will be provided in future for the same amount of effort; why else do we end up with rationing in wartime? Furthermore, more monetary substitutes will be chasing this relative dearth—hence we end up with price controls, too. Whatever your methodology, that cannot be anything but harmful.
The turmoil in Western finance caused by the inevitable breakdown of the flawed Bretton Woods system thirty years ago led to the supposed impossibility of recessions amid rising prices and threw Keynes at last from his pedestal.
Unfortunately, neither the monetarists, like Milton Friedman, nor the pragmatic dilettantes, like Greenspan, who were passed the baton then, have drawn the right conclusions from this, for they, too, are always interfering with honest exchange. The monetarists set arbitrary targets for aggregate money growth, while the latter act as benevolent underwriters for all manner of financial buccaneering on the part of their constituents.
Effectively, we have already had an undeclared war for the past thirty years of fiat money and deregulation underpinned by bailout—a war against capital, conducted through the very same inflationary means as once were the sole prerogative of kings and consuls. This last week, that missing declaration at length came from the leaders of the West, though many have questioned on whom the war has been declared.
The answer is simple: no less than the avowed foes among the Islamic extremists, our governments, too, are effectively waging this war, like they have waged all previous wars, on private capital—on our private capital.
Sean Corrigan is a principal of capitalinsight.co.uk, a London-based economic consultancy. See his Mises.org archive. He can be reached at firstname.lastname@example.org. The chart is courtesy of www.dismal.com.