The Online Library of Liberty

A project of Liberty Fund, Inc.

• Associate Editors
• Editorial
• Bibliographic Essay: Forrest Mcdonald, a Founding Father's Library
• Bibliographic Essay: Murray N. Rothbard, Modern Historians Confront the American Revolution
• I: Paradigms of Freedom
• Conflicting Paradigms
• Paradigms As Procrustes' Bed
• Interest and Ambition
• Thesis and Antithesis
• Freedom and Authority
• Sin and Society
• Autonomy and Authority
• Virtue and Status
• Utility and Progress
• Diversity and Equality
• II: Nonspontaneous Order
• State Vs Society
• The Therapeutic State
• Order and Elites
• Order and Virtue
• Self-perfection
• Socialism and Freedom
• Market Socialism
• Centralism Vs Decentralism
• Voluntary Servitude
• Authority and Obedience
• Social Control
• Power and Ideology
• Hegemony
• III: Spontaneous Order
• Freedom and Knowledge
• The Case For Government
• The Case Against Government
• Community Vs. State
• State and Morality
• Freedom and Creativity
• Order Without State
• IV: Individual and Social Good
• The Right to Privacy
• Autonomy and Psychiatry
• Personal Choice
• Individuals, Groups, and States
• Social Dynamics
• Social Engineering
• Individuals and Groups
• Personal Vs. Social Goods
• Individual Rationality
• Self-interest and Social Good
• Self-interest Vs. Slavery
• Art and Autonomy
• Radical Individualism
• V: Ethics, Rights, and Freedom
• Objective Values
• Natural Law
• Preambles to Freedom
• Social Sciences and Values
• Reason and Change
• Reason and Choice
• Economics and Values
• Legal Naturalism
• Justice As Restitution
• Justice As Punishment
• Rights and Contract
• Virtue In the Market
• Justice Under Capitalism
• Profits and Choice
• Social Framework and Prosperity
• Ecology and Rights
• Business' Social Ethics
• VI: Equality
• Problems With Inequality
• Equality, Power, and Values
• Unequal Income
• Equal Opportunity
• Equal Liberty
• Equality of Condition
• The Egalitarian State
• Sexual Equality
• VII: Power
• Empire, Equality, and Envy
• Imperial Presidency
• Empire and Inflation
• Watergate As a Symptom of Empire
• The Pragmatic Presidency
• “absolute Power” and Corruption
• VIII: Planning Vs. Choice
• Origins of Planning
• Bureaucratic Growth
• Prediction and Control
• Government Planning
• Government Experts
• Useless Usury Laws
• Wartime Regulation
• Government Inflation
• Neomercantilism
• Compulsory Schooling
• Planning In Nonprofit Agencies
• Private Capital and Education
• Choice and Spontaneous Order

Empire and Inflation

Hamilton, Earl J.

• University of Chicago

“The Role of War in Modern Inflation.” Journal of Economic History (USA), 37 (1977): 13–19.

Clear causal connections link wars and consequent inflations from the seventeenth through the twentieth centuries.

Although wars occurred more frequently in the seventeenth and eighteenth centuries than in the nineteenth and twentieth, earlier conflicts generated lees price inflation because of the comparative dearth of real resources consumed in earlier wars.

Inflationary finance supplied significant resources for both the American Revolution and the French Revolution. During the Revolution, Americans so detested and resisted direct taxation to support the war that Congress failed during some years to extract tax revenues from many colonies. In lieu of taxes, the only way Congress could finance the Revolution was through paper money inflation. As a result, the country suffered one of the worst inflations in modern times.

Stemming from war financing, France suffered its only hyperinflation during the French Revolution. The French financed their Revolution. The French financed their Revolution by issuing fiat money in the form of assignats. The inevitable hyperinflation that followed led the authorities to another fruitless experiment in agricultural price controls. Farmers then withheld their produce and near starvation set in. Finally, the government removed price controls and from 1790 to 1796 the assignat dropped to less than 1/1000 of its original par value. Napolean, on the other hand, relied mainly on direct taxation rather than money creation to finance his wars.

Likewise, the famous British price inflation of this period was slight compared to modern examples; prices rose only 15-20% more than they would have if tied to gold from 1797 (Bank Restriction Act) to 1815 (Waterloo).

During the nineteenth century in America, the War of 1812 and the Civil War both led to painful price inflations (for both wars, around 120% price rise spread over several years). But World War I produced price rises in the belligerent countries that made previous price inflations (whether generated by war or specie discoveries) pale in comparison. American prices over several years again rose 120%; whereas German prices from 1919 to 1923 skyrocketed in terms of the worthless mark.

World War II sent commodity prices soaring. A large portion of recent U.S. inflation, along with much of Western Europe's, was caused by American military involvement in Vietnam. Political leaders in both major American parties were unwilling to pay the costs of that war through current taxes.

Thus during the past two centuries, wars and revolutions (in which citizens show reluctance to pay “costs” directly) serve as the principal causes of hyperinflation in industrial countries. From a purely economic point of view, some see current taxation as the best way to finance wars. Bookkeeping and administrative costs would amount to less. Government and private sectors would be spared the headache of accounting, in both nominal and real terms, for prices and costs. Also ruinous war debts would not mount, and we would see the “costs” of wars more clearly.

This last consideration also explains why political leaders do not adopt current taxation. Educated people would quickly perceive that the cost of the war outweighed any possible benefits and would demand peace. Inflation as a hidden tax is far easier for politicians to levy, rather than resorting to straightforward direct taxes.