The Triumvirate of Modern Warfare

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by Gary North Tea Party Economist

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Three factors have made possible the modern world’s wars: graduated taxation, the central bank, and the abolition of the gold coin standard.

The relationship between central banking and war has been known for at least 400 years. The ability of the Dutch Republic to wage what was in effect a revolutionary war against the Spanish Empire from the 1580s until 1647 was due in large part to the creation of the bank of Amsterdam in 1609. The bank was not inflationary. It operated on the basis of the gold standard. Stable money became the backbone of the revolution.

The creation of the Bank of England in 1694 enabled Britain to fight a series of wars to build its empire in the 18th century. The loss of the American colonies in the 1780s had not been expected by British leaders. They understood that the Bank of England provided an advantage in terms of raising capital for the sale of war bonds. The Americans had nothing like this. What the Americans had was a system of militias. The Americans fought what was essentially a guerrilla war against the British.

The British were successful against France between 1793 and 1815, and again it was stable finances that gave them the edge. It has long been understood that the sinews of war come from stable finances.

With the demise of the gold standard shortly after the breakout of World War I in 1914, central banks have no longer been restrained in their expansion of credit. The arrival of the income tax, and especially the graduated income tax, immediately before World War I, also enabled the mass warfare of World War I. The British got the income tax in 1911, because Asquith, the Prime Minister, along with Lloyd George and Winston Churchill, threatened to add so many peers to the House of Lords, that the Lords buckled and accepted the income tax, as well as the loss of being able to veto money bills. Two years later, the United States also ratified the income tax, or at least the Attorney General said the states had ratified it. There is considerable doubt they did. But that did not matter, since the public believed that the 16th amendment had been ratified. Also in 1913, in late December, the Federal Reserve was created. It went into operation in 1914.

The top tax bracket in 1913 was 6%, on incomes over $500,000, the equivalent today of over $11,500,000. The bottom rate was 3% incomes over $20,000, the equivalent of $469,000 today. There was no tax below $20,000. In 1916, the top rate was 13%. Then the USA entered World War I in 1917. In 1918, the top rate was 77%: 12% plus a 65% surtax.

TRIUMVIRATE OF WAR

So, in both Great Britain and the United States, the basis for mass warfare came just before World War I. The income tax, when coupled with central banking, and followed by the abolition of gold coin redeemability of the banking system, all combined to create the worst war in man’s history, World War I. It was followed by World War II. Then came the Cold War, with its massive military expenditures by the USA.

There has been an unbreakable relationship over the past century that combined the graduated income tax, central banking, the abolition of the gold standard, and the rise of empire. If the national governments had not been able to impose the income tax, they could not have borrowed as much as they did from the general public. The investors would not have believed that the central government could repay the debt. Without the abolition of the gold standard, the central banks could not have expanded money at the rate that they did. The inflation tax was imposed on the public, which was in addition to the income tax. This was true throughout Western Europe and the USA.

(For the rest of my article, click the link.)

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Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 31-volume series, An Economic Commentary on the Bible.

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