Fiat Currency: The Invisible Engine Behind Prolonged Wars
Throughout history, long-term wars have necessitated extensive financial resources. The mechanisms by which these resources are obtained and utilized are pivotal in understanding the nature and duration of these conflicts.
Analyzing the American Civil War and the War in Afghanistan reveals a critical insight: fiat currency has played a fundamental role in funding these prolonged wars, facilitated by institutions like the Federal Reserve.
The American Civil War: A Prelude to Modern Financing
The American Civil War (1861–1865) stands as a significant example of how fiat currency can be used to fund extensive military campaigns. During this conflict, both the Union and the Confederacy faced immense financial challenges. Initially, the Union government relied on traditional methods such as taxation and borrowing. However, the escalating costs of war soon surpassed these revenues.
To address this, the Union government introduced “greenbacks,” a form of fiat currency not backed by gold or silver. This move effectively allowed the government to print money at will, funding the war effort without immediate fiscal restraint. “By the end of the war, the Union had issued approximately $450 million in greenbacks, leading to significant inflation.”
Similarly, the Confederacy issued “greybacks,” its own form of fiat currency. The Confederacy faced even more severe inflation due to less effective economic management and blockade-induced scarcity. “The total amount of Confederate notes outstanding rose to more than $1.5 billion by the end of 1864, exacerbating inflation and economic instability.”
In the post-war period, the National Banking Acts of 1863 and 1864 further centralized financial power by prohibiting states and private companies from minting their own coins or printing their own dollars. This legislation laid the groundwork for a more unified and controlled national currency system, essential for future large-scale government financing needs, including war.
The Federal Reserve and Modern Warfare
Fast forward to the 20th and 21st centuries, the creation of the Federal Reserve in 1913 marked a significant evolution in the financial system. The Federal Reserve, as a central bank, gained the authority to issue fiat currency, manage interest rates, and regulate the money supply. This institution became instrumental in facilitating government spending, especially during times of war.
The War in Afghanistan (2001–2021) serves as a modern illustration of this dynamic. In the wake of the September 11 attacks, the U.S. government embarked on an extensive military campaign. The Federal Reserve played a crucial role by ensuring that the government had access to virtually unlimited funds. Through mechanisms such as quantitative easing and maintaining low interest rates, the Federal Reserve enabled the continuous issuance of fiat dollars to finance military operations.
This capacity to print money allowed the U.S. government to bypass the immediate need for higher taxes or significant borrowing from external sources. Instead, the war was financed through the creation of new money, contributing to an ever-increasing national debt. The ability to sustain long-term military engagements without facing immediate fiscal constraints underscores the power of fiat currency in modern warfare.
The Implications of Fiat Currency Financing
The use of fiat currency to fund wars has profound implications. On the one hand, it provides governments with the flexibility to respond swiftly to military needs without the delays associated with traditional revenue-raising methods. However, this approach also comes with significant economic risks.
Inflation is a primary concern. The creation of large amounts of fiat currency can erode the value of money, leading to higher prices for goods and services. This diminishes the purchasing power of citizens, effectively acting as a hidden tax. Additionally, reliance on fiat currency to fund wars contributes to the accumulation of national debt, posing long-term economic challenges. Some economists have stressed that since 1913, the U.S. dollar has lost about 97% of its purchasing power. This decline is largely due to continuous inflation driven by the issuance of fiat currency.
Moreover, the ability to finance wars through fiat currency can lead to prolonged conflicts. Without the immediate pressure of fiscal constraints, governments may be less incentivized to seek diplomatic solutions or conclude wars swiftly. This dynamic can perpetuate cycles of violence and instability, with significant human and economic costs.
Major Wars Before the Federal Reserve (pre-1913)
- American Revolutionary War (1775–1783; funded by fiat)
- War of 1812 (1812–1815)
- Mexican-American War (1846–1848)
- American Civil War (1861–1865; funded by fiat)
- Spanish-American War (1898)
Major Wars and Conflicts After the Federal Reserve (post-1913)
- World War I (1914–1918)
- World War II (1939–1945)
- Korean War (1950–1953)
- Vietnam War (1955–1975)
- Gulf War (1990–1991)
- War on Drugs (1971-present)
- Afghanistan War (2001-present)
- Iraq War (2003–2011)
- Various other conflicts and military interventions (e.g., Kosovo, Libya, Syria)
Analysis
- Pre-1913: The U.S. was involved in about 5 major wars over a span of roughly 138 years.
- Post-1913: The U.S. has been involved in at least 9 major wars and numerous smaller conflicts and initiatives over a span of about 111 years.
Correlation with Fiat Currency and the Military-Industrial Complex
The establishment of the Federal Reserve and the adoption of fiat currency (Federal Reserve Notes) allowed for greater flexibility in monetary policy, including the ability to finance large-scale and prolonged military engagements. Here are some key points to consider:
- Fiat Currency and War Financing: The shift to fiat currency enables governments to print money to finance wars without immediate fiscal constraints. This can lead to prolonged conflicts as there is less immediate pressure to raise taxes or cut spending.
- Military-Industrial Complex: The term, popularized by President Dwight D. Eisenhower in his 1961 farewell address, refers to the relationship between the government, the military, and defense contractors. The availability of fiat currency has arguably facilitated the growth of the military-industrial complex, allowing for sustained military spending and long-term contracts with defense companies.
- Economic Impacts: Prolonged wars and military engagements have significant economic impacts, including increased national debt and inflation, which are more easily managed in a fiat currency system than under a gold standard.
U.S. Military Aid, NATO Contributions, and Major Arms Deals
The United States provides substantial military aid to various countries around the world to purchase weapons and equipment. This military aid is part of the broader U.S. foreign assistance strategy, which also includes economic and humanitarian aid. In recent years, significant portions of U.S. military aid have been directed to countries such as Israel, Ukraine, and others.
Key Figures:
- Israel: The U.S. provides about $3.8 billion annually in military aid to Israel, along with an additional $500 million for joint U.S.-Israeli missile defense programs.
- Ukraine: Since the beginning of the Biden administration, the U.S. has committed more than $56.1 billion in security assistance to Ukraine, including significant contributions since the start of Russia’s invasion in 2022.
- General Military Aid: In 2022, military aid accounted for approximately 14% of the total U.S. foreign aid budget. This includes assistance to numerous countries for purchasing American-made weapons and military equipment.
Overall Spending
The total U.S. foreign aid budget, which includes military aid, varies each year but generally encompasses billions of dollars allocated to various countries and programs globally. For instance, the fiscal year 2024 budget request included $63.1 billion for foreign assistance and diplomatic engagement.
This substantial financial support underscores the U.S.’s strategic interests in maintaining and strengthening alliances, promoting regional stability, and supporting defense initiatives globally.
U.S. Contributions to NATO
The United States funds a significant portion of NATO’s defense budget. As of recent data, the U.S. accounts for approximately 68% of NATO’s total defense expenditures. In dollar terms, this equates to about $860 billion in 2023, a figure that is more than ten times the contribution of the second-largest spender, Germany.
This substantial financial contribution underscores the dominant role the U.S. plays within NATO, both in terms of funding and military capabilities. The high percentage of U.S. funding is reflective of the country’s extensive defense budget and its strategic interest in maintaining a strong military alliance to support European allies and deter potential adversaries.
Largest Arms Deal in U.S. History
The largest arms deal in U.S. history is the 2017 agreement between the United States and Saudi Arabia. This deal, signed during President Donald Trump’s visit to Riyadh, totaled $110 billion immediately, with potential purchases amounting to $350 billion over ten years.
The deal included a wide array of military equipment such as tanks, combat ships, missile defense systems, radar, communications, and cybersecurity technology. This agreement was seen as a significant expansion of the U.S.-Saudi security relationship and aimed to counterbalance Iran’s influence in the region.
The strategic allocation of military aid, substantial contributions to NATO, and historic arms deals highlight the U.S.’s commitment to global security and defense partnerships. These efforts ensure stability and address emerging threats through cooperative defense initiatives and robust financial support.
Conclusion
The historical and contemporary analysis of wars like the American Civil War and the War in Afghanistan highlights the crucial role of fiat currency in funding prolonged military engagements.
By leveraging the mechanisms of fiat money, particularly through institutions like the Federal Reserve, governments have sustained extensive and costly wars without immediate financial repercussions.
While this provides short-term flexibility, it also brings significant long-term economic risks and ethical considerations. Understanding this relationship is key to comprehending the broader impacts of fiat currency on society and global stability.
For a deeper exploration of these themes, Joshua D. Glawson’s work on the value of gold as sound money provides valuable insights into the contrast between fiat currency and commodity-backed currency systems.
Glawson’s perspectives on monetary policy underscore the long-term economic stability that sound money can offer compared to the inflationary tendencies of fiat currency systems. As Glawson notes, “the federal fiat currency system propped up by laws and enforcement mechanisms led to the destruction of sound money in America.”
Written by ChatGPT. Directed & Edited by Joshua D. Glawson
Originally Published on LinkedIn.
