A war economy is characterized, above all, by an extremely high time preference (i.e., a focus on the present). The conduct of war requires that scarce resources—previously allocated to the production of capital or consumer goods—be reallocated to the mobilization and operational readiness of the nation’s fighting forces. As Mises said, “War can be waged only with present goods.”

The economy, therefore, rearranges and “shortens” the overall structure of capital to favor the immediate production of finished goods. Capital is then consumed in great haste to satisfy the war effort. Labor, resources and capital goods are directed towards the production of consumer goods, instead of the more distant stages of the capital structure, which, as stated before, are oriented towards the future and the perfection of the production structure. The whole capitalist structure is turned upside down. Joseph Schumpeter explained,

Our poverty will be brought home to us to its full extent only after the war. Only then will the worn-out machines, the run-down buildings, the neglected land, the decimated livestock, the devastated forests, bear witness to the full depth of the effects of the war.

Globalistan: How the G... Pepe Escobar Best Price: $17.22 Buy New $20.83 (as of 07:20 UTC - Details) The transition to a present-oriented war economy leads to what Salerno calls a regressive economy, no longer building for future prosperity but for the present destruction of capital. War is synonymous with lost opportunities, wasted time, and the abandonment of the use of resources in genuinely productive alternative enterprises. Since the state has privileged access to stocks of resources, it also destroys all incentives for individuals and private companies to renew these stocks.

The general decumulation of capital is, therefore, the logical conclusion of any war economy. It is impossible not to think of Frédéric Bastiat—what we see and what we don’t see—and of all the opportunities and wealth lost forever. It is also impossible not to point out the enormous hypocrisy of Keynesian economics which believe that war and material destruction can generate wealth if they lead to production and full employment.

Financing War through Taxation

From the point of view of economic theory, it is perfectly possible for a state to raise the funds needed to achieve its war aims by raising taxes and borrowing from its population. On paper, there is no need for monetary inflation.

Taxation—which amounts to a seizure of the disposable income of a population—takes two forms: a reduction in consumption by individuals or a reduction in the income they save. These choices reflect a change in the time preference of consumers: where the former maintain a low time preference, the latter adopt a higher one. During wartime, the second option tends to be the norm, as individuals are naturally reluctant to sacrifice their usual standard of living in order to preserve their ability to save. This leads to higher interest rates in the economy, as available savings in the form of time deposits are reduced.

It is also important to note that because taxation reduces the disposable income of individuals, it also limits their ability to spend or save as they see fit. This, in turn, limits the market’s ability to allocate resources efficiently on the basis of consumer demand. Taxes make poor use of capital because the government has little incentive to allocate resources efficiently and because the government’s priorities do not necessarily coincide with those of individuals. This misallocation of capital damages the productive structure of society as a whole, even more so in times of war when the government decides to raise taxes to reallocate capital for the purpose of destruction.

Salerno also mentions an alternative to taxation to finance the war effort: the confiscation of non-reproducible goods other than money. We are thinking here of animals, vehicles, food, clothing, etc., which the state might confiscate from its population. In essence, this technique is very similar to taxation, but much less effective. Proof of this is the way it was used by the Bolsheviks during the Russian Civil War (1917-1923), the results of which were, not surprisingly, absolutely disastrous.

Finally, in wartime, the oppressive nature of taxation is all too visible to a population that can see first hand the damaging effects of war on society as a whole. A war that is too visible quickly becomes unpopular, draining the enthusiasm of both civilians and workers. This can lead to unrest and a dangerous defeatism for the state. The state cannot allow this to happen as it is engaged in a fight to the death against its rival, as total war dictates. Other financing techniques must be found.

Financing the War through Monetary Inflation

With inflation, the government decides to “monetize” its debt by selling bonds to the central bank. Since it has no money of its own, the central bank simply prints new money to buy these bonds. It can do this on the primary market, with the government, or on the secondary market, directly with commercial banks. This way, the central bankers inject money created ex nihilo into the economy and, at the same time, become the main financiers of total war.

As already mentioned in connection with the theories of capital and monetary calculation dear to Austrian economists, money is the most marketable commodity in an economy. As the basis of monetary calculation, it is the “guiding star of action,” the compass that guides the exchanges made by entrepreneurs and other individuals and makes it possible to lengthen the capitalist structure of society as a whole. By opting for monetary inflation, the state seeks, above all, to conceal from the population the all-too-visible signs of war. In other words, to hide the rise in interest rates, the bankruptcies, and the real cost to the economy of a massive increase in time preference.

Monetary inflation completely distorts the nature of money and falsifies economic calculation. Money is weaponized by the state, which channels it directly into military industries instead of the rest of the economy. The imbalance resulting from this monetary injection gradually spreads throughout society in the form of an uneven rise in prices. As Mises rightly explained, the first beneficiaries of the newly-printed money can still buy consumer goods at previous market prices (i.e., before they have had time to rise due to inflation).

This situation of economic disorder is not necessarily easy to identify in wartime, because of the false economic boom created by the massive injection of liquidity into the economy. While inflation may temporarily stimulate economic activity, it actually leads to accelerated capital consumption. Over time, it destroys the very capacity to create wealth, as the real value of savings and investments no longer matches the economic reality of the market. Inflation turns money into a “veil,” a “device for concealing costs,” as Salerno so aptly describes it.

The War Economy: The Road to Economic Fascism

War thus implies massive state intervention in the economy, justified by the exigencies of war. In many cases, however, this intervention continues after the war. The monetary inflation used to finance wars can thus lead to what Salerno calls “economic fascism” (i.e., total state control of the economy). Innate Vitality Vitami... Buy New $9.99 ($0.11 / Count) (as of 10:16 UTC - Details)

In times of war, the state has arrogated to itself the power to make all crucial decisions, not only on monetary matters, but also on taxation and production. The global war economy eventually became a fully planned economy, a “fascist economy” in its original definition: it was no longer private companies that decided what to produce, but the state that decided for them. This transformation into a fascist economy often goes hand-in-hand with the establishment of an all-powerful state, often in the form of a police state, necessary to suck up, confiscate, and redirect to the war effort all the disposable capital and income of a society.

There’s no shortage of historical examples: one of the most famous is the German Empire’s infamous Hindenburg Plan of World War I. The plan called for total economic mobilization to optimize Germany’s limited resources. The increase in military production was logically achieved at the expense of civilian consumption and by introducing rationing for the population. The author Günter Reiman describes such a system as a “vampire economy,” which—in permanent and total war—inevitably consumes all the capital of a society.

And that’s the point of this rich chapter from Money: Sound and Unsound Money: a war economy, geared to total war, with only one outcome in sight—the total annihilation of the enemy—has no choice but to vampirize its own economy and destroy the capital of its own citizens.

To achieve this, the central authorities can rely on fiat currency, the perfect tool for hiding the true cost of war from the individual, while at the same time draining the nation’s entire capital in order to condemn it to destruction. In short, war is always a negative-sum game: everyone loses, including the victorious nation. It loses not only its freedom, but also its capitalist structure, the only guarantee of its future prosperity.