Inflation during war. | How To Invest in Gold and Other Hard Assets

Inflation during War (This time it will be hyperinflation)

Wars almost by definition are inflationary. This has been true since almost the beginning of time.

Inflation is determined by the quantity of goods vs. the available money supply.
See The Definition of Inflation

The very nature of War results in the destruction of goods. But in normal times money is spent to produce goods which makes the world a richer place.

During a war, however, things are produced but… they are not productive things but destructive. The money is spent to destroy things. Often this is combined with an increase in the money supply in order to pay for the destruction.

This increase in the money supply combined with a decrease in goods is classic inflation.

More Money + Less Goods = Inflation

Less Money + More Goods = Deflation

More Money + More Goods = Flat Prices

In ancient times the money supply was expanded by adding base metals to the coin of the realm. Perhaps lead or copper to the Gold.

One of the earliest civilizations to debase its coins was Ancient Persia as it financed its war against Greece.

In this case, it didn’t work and Alexander the Great used the riches he captured to finance his own war on Asia.

At its peak Alexander was paying his Greek army half a ton of silver per day.

Later Rome debased its money fighting against Carthage – and eventually suffered so much inflation, it weakened its defenses against barbarian attacks.

The Anglo-Saxons used debased coins to buy mercenaries…

William the Conqueror (the Duke of Normandy) used the same tactics to launch the Norman Invasion. Which resulted in Norman control of England.

Then the British used debt to fight Napoleon…

The American Colonies lacked coinage and decided to print Continental Currency to pay for the war against Britain (instead of raising money through taxes). Congress authorized the printing of 2 Million Dollars worth of Continental Currency.

Interestingly, the currency was easily counterfeited so Britain fought back by printing more of the currency (counterfeits). Not to spend but simply to destroy the value of the currency. They actually gave them away to anyone traveling to other colonies for the price of the paper involved in printing them.

The combination of counterfeits and increased currency resulted in “continentals” being worth 1/1,000th of their original face value at the end of the war. Talk about inflation! Out of that came the long lasting saying, “Not worth a Continental”.

This inflation plunged the colonies into a deep recession after the war, which almost destroyed them.

One of the best known hyperinflations occurred during the Civil War, as the South went broke printing Confederate dollars. See Confederate inflation to see the chart of values.

Interestingly, the North wasn’t much better off. As they sold over $853 million in war bonds. All of this combined inflation once again almost destroyed the country as “Carpet baggers” flooded the South looking to earn money any way possible.

The British financed World War I by taking out the biggest loan in banking history.

During World War II, the U.S. National Debt rocketed from $16 billion to over $260 billion resulting in inflation rates in 1946 and 1947 of 18.13% and 8.84% respectively.

So we can see war and inflation go hand in hand.

The major fighting in the Korean War lasted from 1950-1953 and resulted in approximately 6% inflation in each of the first two years.

The Vietnam War lasted from 1969-1973. Inflation rates in 1973 through 1975 were as follows:

8.71%	1973
12.34%	1974
6.94%	1975

Glyn Davies spoke of War as a major factor in creating inflation in his book “A History of Money: From Ancient Times to the Present Day”

He said…

“The military ratchet is the most important single influence in raising prices and reducing the value of money in the past 1,000 years, and for most of that time, debasement was the most common, but not the only, way of strengthening the ‘sinews of war.’”

The typical progression has been, First the war. Then the financing crisis to pay for it.

This usually resulted in weaker currencies, raging inflation, and a massive reduction in the personal wealth of the warring country.

It has happened over and over again for the last three thousand years (many of which occurred in what is now Iraq) And it’s happening now, again…

Throughout the Years Iraq has been the seat of Battles with everyone from Mesopotamia and the “Fertile Crescent” to the Sumerians to Assyria, Babylonia, Persia and the Turks just to name a few.

So the US led “War on Terror” is nothing new.

But wars are expensive and have to be paid for one way or another. The war of 1812 raised US debt from $57 million to $127 Million in just seven years. It then took 20 years to pay the National debt down to pre war levels.

The Mexican war in 1846 and 1847 quadrupled the National Debt from $16 million to $63 million by 1848.

The Civil War was even worse multiplying the federal debt by 37 times, from $75 million in 1861 to $2.8 billion four years later!

From 1861 to the beginning of World War I (53 Years), the nation’s debt had only increased from $2.8 to $3 billion. But it rose more than eight times, to $26 billion, over the next 24 months!

Over the next 20+ years, from the end of WWI to the beginning of WWII Roosevelt’s “New Deal” pumped up the National Debt to $72 billion in addition to stealing 1/3 of the value of all the Gold held by private citizens in the U.S. (see Is Gold really a good Inflation Hedge?)

But during the brief span of World War II, it had multiplied almost 4 times to $260 billion!

Although not a real “war” the Cold War was expensive enough raising the debt to $2.7 trillion by 1988.

But now we owe over $13 trillion. Thanks largely to the War on Terror and hurricane Katrina.

Is it possible that after three thousand years of history this war won’t result in massive inflation? I don’t think so!

U.S. spending is out of control… war costs are rising… and American consumers are overextended. The government is borrowing and creating money out of thin air by inflating the money supply.

So where is all the money coming from?

We are borrowing massive amounts from China in order to buy her goods. Goods incidentally that are depreciating assets.

In other words, we give them valuable money and they give us stuff that will be destined for the scrap heap in a few years. This is the biggest transfer of wealth in history. We are selling our country for a handful of trinkets just like the Indians sold Manhattan.

Some have argued that the number of dollars of debt is not the most important factor but the ratio of debt to gross domestic product. This is an important point and currently our debt is at 100% of Gross Domestic Product.

The only time in history when the ratio was higher was at the end of WWII. Even at the peaks at the end of the Civil War and the end of WWI we were at less than 40%. So current levels are extreme.

Inflation is already baked into the cake. It is just a matter of time until it reveals itself. Now is the time to begin protecting yourself.

45 Responses to “Inflation during War (This time it will be hyperinflation)”

Dorine Goney Says:
27. July 2010 at 12:50 am

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How To Invest in Gold and Other Hard Assets

Inflation during War (This time it will be hyperinflation)

45 Responses to “Inflation during War (This time it will be hyperinflation)”

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