 When the great British economist, Edwin Cannon, was asked in the early 1920s what he had done in the war to reply simply, I protested. And one of the things that he protested most vigorously was a myth that's even common today among both economists and non-economists that war cannot be financed by other than monetary inflation. That is that there are problems, inherent problems with trying to finance a war via taxation and non-inflationary borrowing. In fact, as Ludwig von Mises has written, and I quote, one can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious, much more quickly and penetratingly. More weariness would set in much earlier. But Cannons and Mises's positions, though they're superficially at odds, really reinforce one another. What Cannon is arguing is that, in fact, war production can certainly and straightforwardly be financed by taxation and by government borrowing from the public. What Mises is saying is that inflation is almost always used, however, though he agrees with Cannon's position, as deliberate policy for distorting monetary calculation and obscuring the true costs of war, okay, hiding the costs of war from the public. One of the few great wars, or the only great war that was financed by non-inflationary means, was Napoleon's adventures. He seemed to have maintained a gold standard. But for the rest, they are generally financed by monetary inflation. So in my paper, what I'll do is to briefly discuss the Cannon-Mises view of how war can be financed by taxation and what it means as far as the public finding out very quickly about the true costs of war. And then I'll show how what process occurs when the state uses the increase in the money supply to finance the war, okay. How in fact it can postpone, or not so much postpone, the cost is real, I'll show you, but obscure the costs of war to the public. Then if I have time, touch briefly upon two alternative views that claim that war is inherently inflationary. That is that it must be financed by monetary inflation. And then I'll conclude with an illustration of the Mises Cannon view that in fact inflation is a deliberate choice. And I'll do that with reference to the Vietnam War, okay. A deliberate choice was made by President Johnson to hide the costs of war from the American public, okay, by resorting to monetary inflation. Right, in a modern economy such as our own, most of laborers involved in production are involved in producing capital goods, okay. A few years ago, Mark Scousen in a book attempted to find the proportion of investment spending on capital goods, okay, machines, computers, raw materials, and so on, as a proportion of total spending in the economy. So if you compare the total spending on consumers goods, okay, to the total spending on what we call in economics the higher stages of production, it turns out that total spending on capital goods is three or four times the total spending on consumers goods. So at any given moment in time, we have the value of capital goods in society is much higher than the value of consumers goods. Now what does that mean for war financing? Very important. What it means for war financing or actually for the real costs of war is that resources must be transferred, okay, not just from consumers goods, okay, it's not only enough for consumers to tighten their belt, to eat less beef, to drive less and use less gasoline and so on, okay. In fact, what must happen is that the capital stock in society must deteriorate. Joseph Schumpeter, great economist, said that war is a substitution of the present for the future, okay. All production must be for the immediate run, tanks, ships, ammunition, rations for the troops. Labor must be pulled away from in some manner the production of capital goods, the repair of machinery, okay, the running of mines and so on. So pretty quickly what we see happening is that there's an increase in the production of war goods and plus consumers goods, all right, and you have many fewer capital goods almost immediately being produced in the economy. Now what that means is that the provision for the future pretty much falls apart or is reduced, okay. The economy takes on a higher time preference, okay, it's much more present-oriented. Now how do we, Mises argues in his book on war, state, and the economy, or nation state, nation state and economy in 1919, he argues that it's simple as a matter of technique to finance a war by increasing taxes, all right, if you increase taxes we know what's going to happen. Citizens will suddenly find, citizens will suddenly find their disposable incomes falling, okay, they'll have less money to spend on consumers goods industries. So almost immediately you find lower prices of consumers goods initially and lower profits in those industries. The same time the government will have these proceeds and will begin to demand tanks and so on. So the laborers that are thrown out of work in the consumer goods industries will be shifted over to the war goods industries, okay. But that's not all that happens. Consumers also cut back on their saving, okay, it's a very important effect. And that drives up the interest rate in the economy. Now if we add to this non-inflationary borrowing which the government also may engage in without causing inflation, that means that the government becomes a borrower competing with private borrowers on the market for savings, on the market for loans, okay. So that further drives up the interest rate. So the interest rate skyrockets. This occurred at the beginning of World War I for example. Now what does that mean? That means that the value of capital goods, okay, suddenly falls. Business has much less funds available because it's been competed away by government on the one hand, on the other hand consumers have cut back on their private saving. So business has much less funds with which to purchase capital goods for private production. So the value of these things fall and stock market which is basically titles to capital goods begins to collapse, okay. At the same time then firms cannot pay their debts, capital goods firms, those that are going out of business. Those that are producing goods that are not adaptable for war purposes, suffer losses, lay off their employees and begin to default on their bonds. It wouldn't be an economist without a recourse to the board. In any case, a crisis ensues. So without inflation you have the crisis almost immediately, okay. Not only that but with monetary calculation people see almost immediately that their standards of living have fallen. Stockholders find that the price of their stocks have fallen. Businesses find that the values of their capital has decreased. The values of their firms have decreased tremendously. So wealth and income falls immediately with taxation and borrowing to reflect the fact that there is capital consumption in the economy. That the economy is living on the future now. That it has shifted a tremendous amount of resources into the production of the present war goods. And as Mises points out, people are suddenly hit with this cost and they don't like it. And in fact, as I'll mention in a little while, economists that defend the recourse to inflation as necessary when pushed argue that taxes can't be raised to cover the full cost of war, especially a major war because the people wouldn't stand it. But what does that mean? That means that war's too costly when it's not obscured, okay. So the state then resorts to inflationary financing. Basically what occurs is that the government begins, or rather the central bank in the United States, the Federal Reserve System will buy up bonds from the public, okay. It will create new money out of thin air to buy government bonds. Now it doesn't have to buy directly from the Treasury that are issuing these bonds in order to borrow, okay. It's enough that it buys the bonds from the public and in turn creates bank reserves. The public take these checks which are written out, okay, drawn on the bank itself, the central bank, deposits them into the banking system and you have a multiplication of money and credit. So the bank or rather the Treasury gets control over this newly created money, okay, indirectly but no less effectively. It then can go out in the market and it can begin to bid for war goods. Now the difference between this case and the case of financing through taxation and non-inflationary borrowing is that the interest rate doesn't shoot up. The interest rate is pushed down. There's what Keynesians like to call a coordination between monetary and fiscal policy, basically creating money out of thin air to finance the government's deficits. So you don't get the crisis right away, okay. You do get rising prices, when prices begin to rise and profits begin to increase, the government can then blame war profit peers, okay, it's not clear that now that what they're doing, okay. That's the war policy in and of itself that is creating the cutting standard of living through the rise and the cost of living. So we get an inflationary boom, okay, as a way of financing the war. Now that boom can go on for a number of years and then during the Vietnam War, it began in 1965. It paused in 1969, 1970 and then it came to an end in 1973, okay. So the full effects of financing this war, which wasn't as though it is in money terms. It was the second most expensive war in the United States if the World War II, okay. It cost on a full cost basis and not really counting the post-war cost in terms of veterans benefits. It cost about $140 billion, okay. In the years of highest spending, 1968, 69, the amount spent, which was about $25 billion in those years, on defense for the Vietnam War was seven times the GNP of North Vietnam, okay. Just the cost overruns on two Pentagon projects during that war exceeded one year's GNP for both North and South Vietnam. Just the cost overruns. So it was a fairly expensive war, but in terms of US GNP, it certainly didn't approach the 45% or whatever of GNP that was being taken for the war effort during World War II, okay. I'll get to that. Now there's very briefly, let me just mention before getting on more in a little bit more detail, the two other theories. One other approach to war financing was put forward by Lionel Robbins, who was a follower of Mises, up until about the mid-30s or so. And a few other British economists, AC Degut Pagu and Ralph Fortry. Basically what they argued was that inflation was inherent. You could not finance war production completely out of taxes and non-inflationary borrowing. Robbins basically argued that government demand for the war is unlimited, okay, which doesn't make sense. I mean, they're limited by tax revenues. But he claimed that the war producers could exact almost infinite prices. It's a total lapse in his economic analysis, almost infinite prices from government. He also argued that when the government borrowed, interest rates would shoot up, which was true, but they wouldn't go up fast enough, he claimed. So that the banking system would accidentally create new money, okay? And he had a number of other very weak arguments in favor of his view that you always needed inflation and controls, he's in favor of price controls and so on. During wartime, where as Mises showed that none of this is necessary, okay? We then come to the Keynesian view, and I'll come back to that when I'm talking about the Vietnam War. The Keynesian approach really muddles things up. After World War II, we began to get Keynesian economists arguing, one was Albert Hart, that if we don't have full employment, if there is what they call an output gap, that we have unemployed resources, and the economy is producing below its potential, then in that case, war is free, okay? The government creates, let's say we have a $150 billion output gap. The government creates $10 billion in war expenditures. It's free because then the people who would pay that $10 billion turn around and spend more money and it generates, let's say, $50 billion new dollars of spending and therefore output in the economy, right? So war is free if there's no, in fact, war spending is beneficial if we have an output gap or if we're in a recession. But if we're at full employment, the Keynesians then argue, spending on any type of spending, including war spending, isn't here in the inflationary. The government has to spend $100 billion new dollars, but yet the GNP is being purchased, the potential GNP is being purchased at non-inflationary prices. So basically what they argue is that you have too much spending in the economy. So that they take the focus off of this tremendous transfer of resources from capital goods to immediate production and they focus on total spending. It's just a matter of technique, okay? There's too much spending, but we can handle that. We can prevent inflation by raising taxes, okay? So they break the link between taxes and spending. Increasing taxes is just one method by which we cool off an overheated economy, okay? Or we can restrict the growth of the money supply and drive interest rates up, which will make business spend less, allowing the government to spend more without inflation. Okay, I'll come back to that point. It's important to keep that crazy theory in mind. All right, let's look at the Vietnam War inflation. My argument is that, in fact, it was involved a deliberate decision to inflate the money supply to hide the costs of the Vietnam War from the American public, okay? We can date the beginning of the war, I mean, in February 1965, we had Eric Cax on North Vietnam. In April 1965, President Johnson made this a secret decision to commit 300,000 troops of South Vietnam. During those months, during the following months, Johnson administration deliberately downplayed the involvement in the war, okay? Because it didn't want its great society programs to be held up in Congress. The Johnson administration was fearful that if it related the true cost of war to Congress, they would force increase in taxes and cutbacks in spending on domestic programs. Robert McNamara was right in the middle of this whole deception. He told Congress it would only cost, the whole war cost $10 billion. I remember round up costing $140 billion. But by assuming that it would end arbitrarily on June 30th, 1967, okay? So he underestimated, just in the first calendar year, a cost outran the original estimates by $14 billion in 1966. And then in 1967, it outran by about $9 billion, the original estimate. Now, let me mention that the part played by the Keynesian new economists who came into advise the Kennedy administration and then later served under Johnson. They included James Tobin, Walter Heller, okay, Arthur Oaken, Paul Sanderson, Gardner-Ackley, a real roads gallery of economic ignorance. They advocated from 1961 to 1964, they advocated expansionary monetary and fiscal policy, basically deficit spending and inflation because they believed there was an output gap that the US economy was running below potential, okay? They counted as one of their greatest victories in 1962, when we had the build up in defense in response to the Berlin crisis. They successfully convinced President Kennedy not to ask for higher taxes, okay? So there was a small inflation there or an impetus towards inflation there, okay? And this was to be important for later on in financing the Vietnam War. As I mentioned, the budgetary cost of the war on a full-cost base was about $140 billion. It reached 3.2% of GNP in 1968 and 1969. So spending in Vietnam War was absorbing 3.2% of our gross national product. Now, if we look at the federal government outlays, okay? In 1965, they absorbed about 18% overall federal government outlays. By 1968, they absorbed about 21%, okay? 3.4% increase. Much of that was due to the increased spending of the Vietnam War, okay? Yet there was not an increase in tax rates until mid-1968. So tax receipts did not go up as a percentage of GNP, okay? So there wasn't that immediate feedback to the American public. It went up from 17.7% to about 18%. So the Vietnam War was, at least in its early years, primarily financed by tax increases. Okay, how was it financed? By deficits and what economists call seniority, okay? The seizing or confiscating of resources through the creation of new money and spending of that new money in the economy. That is, by the Federal Reserve creating checks written on itself and creating reserves with those checks out of thin air by buying up government bonds. Let's look at the cumulative federal budget deficits in the nine years prior to the Vietnam War. From 1956 to 1964, the accumulated deficits were equal to about $11 billion. The increase in what we call the monetary base, okay? The amount of spending by the Fed on government securities, okay? Which is the way by which it creates new money. It was about $3.8 billion, okay? So the Fed did not create much new money for the Treasury to spend during those years. From 1965 to 1973, the nine years of the Vietnam War, federal budget deficits, again accumulated over those years, went from $11.1 billion to $68.9 billion, okay? So about half of the war was financed by federal budget deficits. And of that, about $40 billion was financed by creating new money, okay? That's the amount of the increase, about $40 billion of the Fed's stock of government securities, okay? It created this new money to purchase the Treasury bonds. Now, that $38 billion new dollars, or rather new reserves in the economy, okay, the bank has now had $38 billion new dollars of reserves, was multiplied, okay? And the banks lent those new reserves out after they were deposited, okay, by the people who sold the bonds to the Fed. That $38 billion was multiplied, as it was lent out, into a $100 billion increase in M1. So there was $100 billion new dollars created in the economy in those nine years. Now, let me give you some figures on the dimensions of the inflation. From 1955 to 1964, the year before the war, the change in the money supply was about $21 billion, okay? Now, that represented about 1.75%, a little less than 2% increase per year in the money supply, which was fairly moderate. As a result of that, we had an increase, oh, I'm sorry, that worked out to be an increase in the CPI of about 1.6%. Again, inflation in those nine years was running below 2%, as was the increase in the money supply. So both money inflation and price inflation was fairly moderate. In fact, some economists claim that that 1% to 2% price inflation that we had up until 1964 was actually consistent with a stable price level. That is that through statistical errors, you couldn't get it any more exact than that. We may very well have had a stable price level. I would be much more happy if it was falling by 1.6% per year. So let's now jump to the Vietnam era, okay? There, the increase in the money supply was $104 billion, which was about a 64% increase in the money supply over those years, and which represented 7% increase per year in the money supply. As a result, the CPI, the consumer price index, increased by about 5% per year. So it was inflationary finance of the war that brought about the inflation of prices that we experienced, the much larger inflation of prices that we experienced over the nine years of the war. One other point that I might quickly make. Due to what is called a Bretton Woods system in which the US tied its dollar to gold, stood ready to redeem foreign dollars, dollars held by foreign central banks for gold at the rate of $35 per ounce of gold. They were willing to sell gold to foreign banks at that price. We were able to export part of the cost of the war onto foreign countries. As a result of the inflation, the US began to run a perennial balance of payments deficit. The total, excuse me, the total deficits, the total balance of payments deficits in the years of the war are approximately $66 billion, actually $50 billion. Now what that meant was that the US was sending out dollars, foreign government were willing to hold these dollars because initially they had confidence that the US would redeem them in gold. In exchange for the dollars, these $50 billion worth of paper that the rest of the industrial countries were getting from us, they sent us real goods and services. So the cost of the war was cushioned by the fact that we imported real wealth, assets and goods and services from the rest of the world. So the rest of the world was then financing our war effort, giving us real resources to the tune of $50 billion over those years in exchange, as I said, for our paper. Let me just talk briefly about the legacy of the Vietnam War inflation. First of all, President Nixon, as a result of the inflation and the effect on our gold stocks, we had something like $28 billion worth of gold in the late 50s. By 1971, we had no more than $9 billion, gold was flowing out, some of those paper dollars had in fact been redeemed, and at the rate at which gold was leaving the country during the August of 1971, we would have lost our gold stock within two weeks. So President Nixon closed the gold window. Now what that did was to cause us to lose the opportunity for a very long period of time of ever restoring the gold standard. In the late 60s, before that had occurred, there were some economists that were arguing that it would have been easy to go back to a full international gold standard, Rueff and Halperin, by simply raising the price of gold and ensuring that no government ever again accepted dollars in payments for balance of payments deficits. So those plans did not have a big chance. However, any chance of going back to a gold standard was ended with Nixon closing the gold window in response to the Vietnam War inflation. The inflation was brought to an end in 1973, yet we continued to have inflationary expectations. People didn't expect or didn't believe that the government was truly going to end inflation. So we continued to get price increases during the recession that we had, which was a very deep recession from 73 to 75. The deepest post-war recession up to that point. So we were stopped then, one of the other legacies with what we might call state inflation, inflationary recession. That's another legacy. In the late 60s or up until the late 60s, Americans were not possessed of inflationary expectations. We were stopped with wage and price controls in 1971 that went on in various phases through early 1974. But we're not all removed. In fact, they were left on oil and gas, which led to a restriction of productive oil and gas here in the United States and the propping up of the old pet cartel. And the result in gas crisis. Finally, in fourth point and last point, economists have long been puzzled by a sudden drop in productivity of labor that occurred in 1973. That's events today by the fact that real wages in 1994 are still less than they were at their height in 1972. They've never recovered. And economists are puzzled by this. There's no standard answer to it. But I suggest that in fact, it was a result of the tremendous capital consumption that occurred during Vietnam War. Not just due to the war expenditures, but due to the inflationary distortions that caused distortion of monetary calculation. And to the wage and price controls that existed from 1971 to 1974 that distorted entrepreneurial decisions to invest in capital goods. I'll end there. Thank you.