In this intriguing post (since he mostly heaped praise on Ferguson in spite of the latter’s attack on him) Matt Yglesias writes:
[T]he moral of [Ferguson’s book discussion of World War I] here is that when it comes to major sovereign states, strict considerations of public finance and the government deficit are not so important. All major belligerants dealt with wartime financial issues in part by leaving the gold standard. The shift to fiat money meant that the contest was one of real resources (men, bullets, food, steel) rather than cash, which could be printed in unlimited quantities. Notwithstanding allied casualties, Britain and France were not running out of able-bodied people. On the contrary, they were managing to recruit new allies (Italy and then more importantly the USA) into the battle. Germany, by contrast, was running out of food due to the effect of conscription on the agricultural workforce and the efficacy of the Entente blockade of fertilizer imports. Just as control of the Western food supply makes House Tyrell more powerful than House Lannister, Germany’s notionally sounder budget posture was of little practical value in light of Anglo-American control of the seas.
I’ve carried this Fergusonian view over into peacetime. What matters for national prosperity is a) the availability and distribution of real resouces and b) the capacity to mobilize those real resources. Public finance—the joint conduct of fiscal and monetary policy—is best seen as a tool of mobilization, rather than something to sweat in its own right.
At the time I really didn’t like this “moral,” but I let it go because it detracted from the more important catfight between Krugman and Ferguson. However, in my other work I just ran across this quotation from Mises, which takes a decidedly different approach to these issues:
It is maintained that inflation is unavoidable in times of war. This, too, is an error. An increase in the quantity of money does not create war materials—either directly or indirectly. Rather we should say, if a government does not dare to disclose to the people the bill for the war expenditures and does not dare impose the restrictions on consumption which cannot be avoided, it will prefer inflation to the other two means of financing, namely taxation and borrowing. In any case, increased armaments and war must be paid for by people through restriction of other consumption. But it is politically expedient—even though fundamentally undemocratic—to tell the people that increased armaments and war create boom conditions and increase wealth.
I especially like how Mises refers to inflationary finance during wartime as “fundamentally undemocratic.”