Yglesias vs. Mises on War Inflation Finance
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.”
Bob Roddis: This is a time when you are fully justified in complaining that our opponents don’t understand the first thing about economic calculation!
If they don’t know now, then it’s reasonable to assume they never did.
If they never did, then isn’t it justified for Roddis to say it at any time?
MF all I meant is that he brings it up all the time, regardless of the particular dispute. So yes it’s always relevant, but I’m saying this time it’s front and center.
I’m just being churlish in order to give myself an excuse to say they don’t understand it.
Off topic:
1. I appreciated the post you made a while back about inflation still not eliminating real goods scarcity. That post is related to this one.
2. The argument that recessions are caused by “insufficient money spending” is at the same time an argument that recessions are caused by “insufficient goods sales.” For every dollar that is exchanged for goods, there are goods exchanged for those dollars. Thus, a claim to a lack of money spending is also a claim of lack of goods spending. When money hoarding increases, so does goods hoarding, and vice versa, ceteris paribus.
A solution comprised only of “more spending” implies that exchanges are one-dimensional. A proper solution has to have both dimensions. It has to have spending and goods as integral parts, equally important. Yet we know that during recessions money and goods don’t just disappear (real money, not fiduciary credit). So we don’t need more money nor do we need more goods. The problem of a recession is not insufficient spending nor insufficient goods after all. The problem is the wrong kind of money and the wrong kind of goods having already been produced. Going forward, a change to the type of money and real goods has to occur.
I define “type” as subjective value judgments concerning location, time used, in addition to physical make-up.
A solution to a recession requires a change to both the type of money production and the types of goods production.
Imagine we woke up tomorrow morning and found that every real good was made of chocolate. A recession would ensue. Imagine we woke up tomorrow morning and found that every dollar was made of cheese. A recession would also ensue. Clearly the solution here would not be more chocolate nor more cheese, but a different type of money and different types of real goods.
Recalculation and restructuring applies to both real goods and money, not just real goods. Recalculation requires private property and prices, for both real goods and money.
“The recurrent laryngeal nerve is hard to explain in term of intelligent design.”
“That just shows LK doesn’t understand the fundamental concept of economic calculation.”
1. I was thinking more in terms of war being the sneaky Cantillon Effect of stolen purchasing power to fund war. How un-democratic is that?
2. On DK’s blog I wrote awhile back:
Kuehn’s paper is consistent with the Rothbardian narrative that the Fed was created by the elite for the elite and to allow them to fund wars without real time taxation of the public.
DK agreed..
http://factsandotherstubbornthings.blogspot.com/2013/01/poor-kid-was-just-couple-years-too.html?showComment=1358998365568#c2813953362544372035
3. I think we should ALWAYS mention to and about our opponents that their policies are nothing but proposals to steal purchasing power from oblivious victims AND that our opponents do not understand the first thing about economic calculation (and really do not want to understand it). Then you can start your debate with them on the minutiae of the moment.
(1) If you had read Human Action, you would have noticed this passage:
“A good case can be made out for short-term government debts under special conditions. Of course, the popular justification of war loans is nonsensical. All the materials needed for the conduct of a war must be provided by restriction of civilian consumption, by using up a part of the capital available and by working harder. The whole burden of warring falls upon the living generation. The coming generations are only affected to the extent to which, on account of the war expenditure, they will inherit less from those now living than they would have if no war had been fought. Financing a war through loans does not shift the burden to the sons and grandsons. It is merely a method of distributing the burden among the citizens. If the whole expenditure had to be provided by taxes, only those who have liquid funds could be approached. The rest of the people would not contribute adequately. Short-term loans can be instrumental in removing such inequalities, as they allow for a fair assessment on the owners of fixed capital.”
(Mises, L. 1998. Human Action: A Treatise on Economics. The Scholar’s Edition. Mises Institute, Auburn, Ala. p. 213).
That is to say, the real burden of required real resources for the war “falls upon the living generation” and is “a method of distributing the burden among the citizens” — precisely what Ferguson and Yglesias are implying.
(2) ” An increase in the quantity of money does not create war materials.”
Your opponents agree with that. Rather, money supply allows “capacity to mobilize those real resources” — overcoming financial constraints imposed by the gold standard. Precisely as MMTers say.
Your opponents agree with that. Rather, money supply allows “capacity to mobilize those real resources” — overcoming financial constraints imposed by the gold standard. Precisely as MMTers say.
How does a gold standard put ‘fiinancial constraints’ on funding a war? If we are not talking about an ‘AD’ problem here it seems to me the only ‘financial constraint’ under either a gold standard or fiat money system are the voters. This is why Mises calls using inflation to fund a war ‘undemocratic’.
Lord Keynes wrote:
If you had read Human Action, you would have noticed this passage…
It’s on my To Do list, right after Fifty Shades of Grey.
I didn’t mean to imply you have never read HA.
If you had bothered to properly read and consider the *relevant* section, the one relevant to this post.
But LK, I wasn’t interpreting Mises; I was merely quoting him. So you actually think Mises himself should have familiarized himself with his views in HA?
(Actually he wrote the quotation in this post before Human Action came out, so my witty barb doesn’t quite work.)
Anyway, this passage you’ve shown us LK poses problems for my stance in the debt debate–because believe it or not, it was precisely this passage you’ve gotten from Mises that originally made me think the way I did about it–but it has nothing to do with Yglesias and war finance with inflation. The point is, the present generation wouldn’t let the government spend so much on a war if it realized the full cost, so by paying for it via inflation the government is thwarting the wishes of the public.
Last point: I’m not saying Mises is saying anything wrong with the quote about the present generation paying for a war, I’m just saying it leads you to draw the wrong inference if you’re not careful.
“The point is, the present generation wouldn’t let the government spend so much on a war if it realized the full cost, so by paying for it via inflation the government is thwarting the wishes of the public.”
The public of all belligerents in WWI and WWII endured varying inflation, reduced consumption, rationing and all sorts of other restrictions, as well as — at the same time — buying up government bonds.
You grossly underestimate the patriotism and nationalism of wartime populations.
For the record, I do not underestimate the bloodthirsty “patriotism and nationalism of wartime populations” or the bloodthirsty ethnic and religious loyalties of voting blocs under social democracy.
http://www.flickr.com/photos/bob_roddis/8525140770/
Thus, I support the NAP.
If you haven’t done already read Adam Tooze and his pop-history of WWII called “The Wages of Destruction”.
It’s a tough book but really interesting, and what struck me immediately was that most of the decisions made by the Nazi Party were superficially rational and plausible, if you try to force yourself to see their point of view at the time, and if you don’t cheat by using the benefit of hindsight.
Take away lesson here: it is very, very easy to get to Hell in many small steps each of which locally doesn’t seem all that bad.
Challenge for the reader: pick the exact spot where Hitler made the critical decision that irrevocably scrunted him. I have my pick for that one, but it’s in a sealed envelope for the time being.
You grossly underestimate the patriotism and nationalism of wartime populations.
But you don’t when you claim that such populations need fiat money to “mobilize those real resources” for war?
“Anyway, this passage you’ve shown us LK poses problems for my stance in the debt debate..”
I thought so too…
This passage in my view is in contradiction with this passage of Mises:
http://consultingbyrpm.com/blog/2012/01/ludwig-von-mises-1-abba-lerner-0.html
This passage in my view is in contradiction with this passage of Mises
I really don’t see how. In the passage above Mises says the current generation is made poorer because resources are diverted to fighting a war rather than producing consumer goods. That future generations pay off the loans to fund the war doesn’t change this.
In the passage you link to he does not argue future generations are impoverished because resources are diverted away from producing consumer goods today.
These parts that are in contrast in my view:
“The government’s IOU is a check drawn upon the future taxpayers. In 1970 a certain Peter may have to fulfill the government’s promise although he himself does not derive any benefit from the fact that Paul in 1940 saved one hundred dollars.”
And:
“All the materials needed for the conduct of a war must be provided by restriction of civilian consumption, by using up a part of the capital available and by working harder. The whole burden of warring falls upon the living generation. The coming generations are only affected to the extent to which, on account of the war expenditure, they will inherit less from those now living than they would have if no war had been fought. Financing a war through loans does not shift the burden to the sons and grandsons.”
In the first view he claims the burden falls on Paul in 1970, since the check was drawn upon him, even though the goods and services need to be provided by Paul in 1940. (In this respect there is no difference than in the war scenario). However the point here is that Paul is compensated later in 1970, hence the check and therefore the real burden is drawn upon Peter who won’t be compensated with any benifit.
In the second quote, Mises makes it sound as if (let’s keep the names the same) Paul of 1940 who of course has to restrict his consumption temporarily to provide the goods for the war is not compensated for it later when Peter pays him back the principal + interest. This doesn’t fit. If there was no war (and let’s assume for the sake of the argument that there is the same amount of capital inherited than with war) Peter wouldn’t have to restrict his consumption in 1970, so there is clearly a burden on him for which he will not be compensated later.
The only way to reconcile this was if you would view winning the war as just compensation for Peter to pay off Paul. But I think Mises would have stated that if this was his point. And if that was the case there was no one really burdened with the war, since Peter doesn’t have to live in a country oppressed by whoever was the enemy, and Paul who shares the same benefit was additionally compensated for his efforts in 1940.
By the way: The critical point for me is that someone is not burdened if he gets enough compensation at some point and if he is free to decide if the compensation is high enough, which must be taken for granted if he buys a government bond out of free will. The case is different of course if the bonds are forced onto the people.
I am not sure I followed everything you said, but it seems to me you are conflating to distinct scenarios.
In scenario 1, capital is being diverted to prepare for war, making current consumers worse off. W/ reference to Bob’s OLG model, there are fewer apples produced in year 1 making everyone worse off.
In scenario 2, there is no capital being diverted, there is only a transfer of consumer goods brought about by the debt. Again, w/ reference to the OLG model, the same number of goods are being produced for all of ‘society’ year after year – but at some point the debt makes one generation w/in that society worse off than the others.
So I don’t think there is any tension between the two scenarios; in the first fewer goods are being produced overall, in the second the same number of goods are being produced. Therefore the results are different.
Ok, I think I got it now. I think you are right it is no contradiction, but only if you account for how Mises thinks about both scenarios. Mises concentrates in both cases in what way government interferes with the natural way of saving and investment.
In the social security example the government disrupts this process because it diverts funds which the private market would have been better used and created more capital which would enrich the future generation. However the political system works on the short run principle abusing people’s nature to save to increase their old age live style by promising them enough interest to pay for pet projects, votes, special interest etc…
In the war scenario government isn’t diverting resources in Mises’ eyes because first, he thinks only a government can defend the country (fight a defensive wars), and second in such a case there is no choice if you want to wage war or not. You need to provide those resources else it is game over for the future anyway. So resources are not diverted from their best use because their best use is war. Now it makes sense why he only speaks of short term loans.
So viewed from the perspective of Mises and in how far government interferes with the natural process of saving and investment it is really not a contradiction.
However he does not take into account the effects talked about in the OLG debate by Nick and Bob, because these effects still take place in both scenarios. And because of this effect I’d still argue that through bonds you can compensate the war waging generation by burdening a future generation with paying those bonds off. I mean it should be clear that the war waging generation would be even more burdened if there was no bond financing, or if the government defaulted on the bonds after the war.
1) What does Mises talking about war LOANS have to do with “cash, which could be printed in unlimited quantities”. Inflationary money printing and the selling of war bonds are not the same thing.
“Financing a war through loans does not shift the burden to the sons and grandsons.”
This is only true if (a) the loans are short-term (say, 5 years), (b) the debt is repaid by the end of the loan term, and so forth. Even then, it’s not *strictly* true if you consider that some of the payment will be taken from young individuals that could not work or vote when the loan was made – those individuals will indeed have less. (Or are we only counting those not yet alive at all? Seems unfair.)
2) “Rather, money supply allows “capacity to mobilize those real resources””
Only in the sense that if I counterfeit a lot of money, I can “mobilize real resources” by using my fake money to get them before someone else can buy them, or outbid them with my fake money.
“Precisely as MMTers say.”
I’ve tried to explain to the MMTers that we basically agree on the FACTS of this situation. I’m horrified by the government being able to commandeer those resources while the statists/Keynesians/authoritarians are ecstatic.
This analyais is, in fact, my “Keynesianism is nothing but unseen theft by Cantillon Effects” theory that everyone is sick of hearing about.
Depending on one’s moral character, you either think the commandeering is good or bad.
As the MMTers say, housing (and jobs) are basic “rights” to be supplied at the point of a gun by the government. This is not just a “monetary theory”.
http://www.modernmoneynetwork.org/1/post/2013/10/an-economic-bill-of-rights-for-the-21st-century.html
With all that healthy money printing and fat government spending, it’s astounding that so many fools kept imagining “wartime austerity”.
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.
What does Yglesias mean by this? Isn’t war always a battle of real resources rather than cash? This sentence threw me off because I expected a phrase like “although there was a shift to fiat money, the contest was still one of real resources…”