Thursday, May 31, 2007

Financing the War

Henry George on financing the US civil war:

[08] As I have before said, the wealth expended in carrying on the war did not come from abroad or from the future, but from the existing wealth in the States under the national flag, and if, when we called on men to die for their country, we had not shrunk from taking, if necessary, nine hundred and ninety-nine thousand dollars from every millionaire, we need not have created any debt. But instead of that, what taxation we did impose was so levied as to fall on the poor more heavily than on the rich, and incidentally to establish monopolies by which the rich could profit at the expense of the poor. And then, when more wealth still was needed, instead of taking it from those who had it, we told the rich that if they would voluntarily let the nation use some of their wealth we would make it profitable to them by guaranteeing the use of the taxing power to pay them back, principal and interest. And we did make it profitable with a vengeance. Not only did we, by the institution of the national banking system, give them back nine-tenths of much of the money thus borrowed while continuing to pay interest on the whole amount, but even where it was required neither by the letter of the bond nor the equity of the circumstances we made debt incurred in depreciated greenbacks payable on its face in gold. The consequence of this method of carrying on the war was to make the rich richer instead of poorer. The era of monstrous fortunes in the United States dates from the war.

Michael Hudson wrote a very interesting book about this subject which I hope people are familiar with: Super Imperialism.

It can be obtained from amazon or the full text is available from Hudson's website at:

There is also an interesting email discussion with Hudson archived at:

Hudson argues that it basically works like this:

* the US imports goods from China and other places but doesn't export anything much in return.

* the US pays for its imports with US dollars.

* China and other countries send the US dollars back to the US in exchange for US treasury notes, ie US debt or promises to pay later (with interest).

* Foreign purchases of US bonds plug the federal budget deficit.

* Going off the global dollar standard is not allowed as this means war with the US.

* this goes on forever. Or does it? Eventually the system has to go bust, basically with huge devaluations of the dollar. This means US treasury notes could be worth half or less of what they were when the Chinese bought them. With a devaluation of the dollar, the US will essentially renege on its promise to pay. In other words, 'we imported all your manufactures, but we aint giving much in return. Sorry.'

Of course, at this point the empire is bust and the global economic system that depends on it.

In recent years there have been fears of an almighty dollar crash. This hasn't happened, instead there has been a steady decline, which is probably safer.

Hudson is arguing that the US is absorbing the economic surpluses of China (and the world) and giving nothing but paper in return. And of course, what the US does with its money and surpluses is invest it in its bloated military (bigger than the rest of the world combined) to maintain the empire including these advantageous financial arrangements.

NB. The official military budget of the US does not include "many military-related items that are outside of the Defense Department budget, such as nuclear weapons research, maintenance and production (which is in the Department of Energy budget), Veterans Affairs or the wars in Iraq and Afghanistan (which are largely funded through extra-budgetary supplements, e.g. $120Bi in 2007)." One would think that this is a rather odd way of counting military spending. Perhaps the US is trying to convince itself and the world that it is not spending that much money on war, really. According to Chalmers Johnson, the real military budget of the US is nearly one trillion dollars per annum.

So yes, as George argues, it is real wealth that is being taken and consumed through debt, but in this case its not the wealth of the US, its the wealth of China and others. They are paying and supporting the US empire.

George's comments on English national debt might just as well apply to the gigantic US national debt of today:

[10] In paying interest upon their enormous national debt, what is it that the people of England are paying? They are paying interest upon sums thrown or given away by profligate tyrants and corrupt oligarchies in generations past -- upon grants made to courtezans, and panders, and sycophants, and traitors to the liberties of their country; upon sums borrowed to corrupt their own legislatures and wage wars against both their own liberties and the liberties of other peoples. For the Hessians hired and the Indians armed and the fleets and armies sent to crush the American colonies into submission, with the effect of splitting into two what might but for that have perhaps yet been one great confederated nation; for the cost of treading down the Irish people and inflicting wounds that yet rankle; for the enormous sums spent in the endeavor to maintain on the continent of Europe the blasphemy of divine right; for expenditures made to carry rapine among unoffending peoples in the four quarters of the globe, Englishmen of to~day are taxed. It is not the case of asking a man to pay a debt contracted by his great-grandfather; it is asking him to pay for the rope with which his great-grandfather was hanged, or the fagots with which he was burned.

In Fiscal Year 2006, the U. S. Government spent $406 Billion on interest payments to the holders of the National Debt. The interest expense paid on the National Debt is the third largest expense in the federal budget. Only Defense and income redistribution are higher.

When the interest on the debt gets to be nearly as big as the official defence spending itself, we're sort of running to stand still, aren't we? I know! Let's run a $500b budget deficit and borrow more money! That squares the circle nicely, and after all, as Dick 'Deficits dont Matter' Cheney said, Deficits Dont Matter. I'll bet you he thinks Defeats Dont Matter either.

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