War and Government Debt

by Bob Poteat

The founding of the Bank of England in 1694 is a landmark event in the practice of indebting a government to private interests by financing war.  To obtain a loan of twelve hundred thousand pounds from private investors, William III granted the charter for the Bank of England to private financiers.  Parliament granted an annual interest payment of one hundred thousand pounds, and the Bank was entitled to issue banknotes.[i]  This began the pernicious practice of “monetizing government debt” and began exponential growth of the English public debt.[ii]

Borrowing from private sources avoided the time consuming and unpopular problem of raising revenue by taxation and seigniorage which had been surrendered by Charles II in 1666.

The fledgling United States government at the insistence of Alexander Hamilton, primarily, and over the objections of Thomas Jefferson, chartered the First Bank of the United States in 1791 ostensibly to deal with the Revolutionary War debt of $75 million. The debt was not reduced until the administration of Thomas Jefferson who also prevented the renewal of the charter of the First Bank of the United States.  Almost immediately, the War of 1812 was initiated which, again, ballooned[iii] the public debt and enabled a political climate to charter the Second Bank of the United States.  Andrew Jackson, like Jefferson, prevented the renewal of the Second Bank of the United States charter and nearly paid down the public debt.

Apparently, neither Jefferson nor Jackson understood the public economic reliance on bank credit and provided no replacement monetary liquidity.  Recessions followed each of their actions.  It was a serious depression after Jackson’s efforts.

Congress attempted to establish a Third Bank of the United States in 1841, but President John Tyler vetoed the bill.

The next named war to significantly impact the national debt was the Mexican American War of 1846 to 1848.  It tripled the U. S. public debt.[iv]

The American Civil War provides enough monetary history for a magnum opus, and much has been written that is misinterpretation or specious.  Only brief notes will be offered here.  The Congress did authorize the issue of United States non-interest bearing notes[v] that became known as “greenbacks” and later circulated at par as debt and interest free United States Notes backed only by the full faith and credit of the United States.  Congress permitted non-circulation in 1970 and destruction of the notes in 1994.  The total issue of non-interest bearing notes, greenbacks, postal notes, and fractional notes never exceeded $500 million during the Civil War.[vi]  The national debt increased from $64,842,287.88 on July 1, 1860 to $2,773,236,173.69 on July 1, 1866.[vii]  This is a forty-two times increase.

Another critical note that must not be omitted was the National Bank Act of 1864[viii] that re-instituted the pernicious practice of monetizing government debt that disguised the function of a private central bank through diversification of many “national” banks.

From the Civil War until the Spanish American War the war making activity of the United States was confined to the continued genocide of indigenous Americans and incursions into Central and South America to protect U. S. banking and corporate business.  The public debt trended downward until 1899.  The Spanish American War, financially, was mainly a shift from domestic genocide to a small foreign war with no large debt bubble.

The banking complex continuously expanded and contracted credit through the entire time period from the founding of the First Bank of the United States causing recessions and depressions to the Panic of 1907.  That panic provided a climate for the further consolidation of banking power manifested in the Federal Reserve Act of 1913. Credit expansions and contractions have continued to the current depression.

The first major credit expansion of the private Federal Reserve System was WWI which multiplied the public debt nine times.  This was followed by contraction in 1920 and the Great Depression of the 1930s.

The Great Depression motivated many proposals for dealing with the economic condition.  The proposal adopted by Franklin Roosevelt and the U. S. Congress was put forward by Sir John Maynard Keynes, a charismatic British economist.  The proposal was that the government should deficit spend to stimulate the economy, and has become known as Keynesianism.  Hypothetically, the stimulated economy would provide means to liquidate the debt caused by deficit spending.  It should be obvious that one cannot borrow one’s self out of debt.

Some deficit stimulus was tried through a number of programs and a slow recovery began.  Deficit hawks achieved power in the Congress to reverse policy, and the economy recessed, again, in 1937.[ix]  The economy began to recover, again, in 1939 with increased deficit spending for WWII preparation.  WWII increased the U. S. public debt six times, and the economic stimulus ostensibly proved the effectiveness of Keynesianism.

Demobilization of war industry and millions of troops along with decreased deficit spending caused the economy to recess.  The Cold War and Korean War justified more deficit spending.  The United States economy has been sustained since then with war spending.[x]

It was known that the capitalistic economic paradigm based on private credit used as money is not self liquidating.  Demand is always less than supply for technical reasons that will not be addressed here, but Keynesianism was a policy to alleviate the symptoms.  War spending is an especially effective form of Keynesian stimulus because it increases circulating money/credit that represents demand without any increase in supply.  All war production is waste.

Power of the lender over the borrower has been a constant of human culture for as long as there are written records.  The first written records are cuneiform written on clay tablets from the Sumerian culture.  What is intended, here, is to provide documentation of the way war has been used to indebt and subjugate “representative” government by private financial interests.

The phrase “military-industrial complex” has been repeated ad infinitum since its original utterance in the “Farewell Address” of President Dwight Eisenhower in 1961.  I do not know if Eisenhower was ignorant or disingenuous.  The phrase indicates a half-truth.  Closer to the whole truth is financial-military-industrial complex.  Perhaps, financial-military-industrial-congressional complex is closer to the whole truth.  The financial complex owns or controls industry through leverage and debt.  The financial complex profits first from lending for war as well as profit from war production.  The financial complex is the prime motivator of war.  The accumulation of debt has given the financial complex power over all sectors of the economy including government and, especially, information media.

The “guns versus butter” argument has moral appeal, but deficit spending for guns or butter is unnecessary.  The deficit paradigm relies on and supports the intellectual and moral fraud of backing privately issued credit/debt with the full faith and credit of the nation in Orwellian denial of the issue of national debt free currency backed by the same full faith and credit of the nation.

A solution to this debacle has been introduced into Congress.  It is the NEED Act, HR 2990.  It is a first step in freeing the nation from the plague of debt power