Economic Calculations in Times of War

It takes a lot of  money to wage a war, so much in fact that taxation alone is rarely enough to fund them. That's why almost all wars are financed through monetary inflation. Instead of taxing us directly, we're taxed by inflation. The purchasing power of our money is taken away through an expansion of the money supply. The extra money is used to finance the war at our expense.

Monetary inflation is especially effective when it's done as a sudden shift from sound money, because people don't immediately realize what's going on. This gives the state an advantage in that it can acquire resources at advantageous prices. It's only later that the population at large catches onto the scam. This causes a delay between the money printing and the price inflation caused by money printing.

World War I is an example of a war financed through inflation, where the states involved went from sound money to inflated money. The transition happened around 1913, but it wasn't before 1920 that we started to see run away price inflation, and hyperinflation hit Germany in 1923, almost a decade after the war started, and half a decade after the war had ended.

This meant that the warring states could make economic calculations based on pre-war prices throughout the war. No special attention needed to be given to the effect of monetary inflation because that effect only hit after the war was over. However, had price inflation already been a problem at the start of the war, economic planning would have been a lot harder.

Now that the world is once again at a war footing, we're already on inflation money, and price inflation is already a thing. This means that any further expansion of the money supply is likely to cause higher prices almost immediately. The resources required by the state in order to wage war will become very expensive. They may even become unavailable.

As it turns out, western states do not in fact possess the resources required to wage and win wars. The West is already low on ammunition, and the factories required to replace them aren't nearly as productive as they need to be. A lot of resources will be required to put this right. The West must build factories, man the factories with skilled labour, and feed the factories with raw materials. But none of this is available. This is because the real savings of the West are insufficient to wage a war.

Real saving are the things of value that back up the financial system. Factories are real savings. So are farms, mines, warehouses, ships and trucks. Money is merely a way to represent this. But this representation is only valid if the money is sound. If the money is inflated into existence, the added wealth is only apparent. Real savings don't change because someone prints a lot of new dollar bills.

It appears then that the western elite has made a blunder. They have assumed that inflated money can get them just as much resources as sound money would, and that they are in a position to wage and win wars everywhere due to their ability to print limitless money. But they have failed to incorporate real savings into their calculations, and this is only now starting to dawn on the people in charge of the war machinery.

Mark Esper with Jens Stoltenberg

By U.S. Secretary of Defense - 200212-D-AP390-6107, CC BY 2.0, Link