The following is the prepared version of a speech delivered at the Ron Paul Institute Conference in Sterling, VA.
I am here today to talk about one of the most important, but also most overlooked, issues of our day: the relationship between central banking and total war. When you focus on central banking and the problems that result from it, it’s very easy to see how central banks enable larger, more centralized, and more pervasive governments. But it isn’t always easy for those who oppose war to see how central banks enable war. So I’ll go ahead and give you kind of the 10,000 foot view of the symbiotic relationship between central banking and war.
One of the primary activities that states engage in is fighting wars. But wars cost money. Armies march on their stomachs, and someone has to buy the necessary food and transport it. Weapons and armament cost money too, all of which has to be paid for. So where have kings and governments historically gotten that money from, particularly when their own treasuries ran out? As Willie Sutton could have told them – banks.
Banks developed initially as a means for merchants to store their funds safely and securely. But eventually those banks took in so much money that they got the idea to loan out some of those funds, hoping that they could juggle loans and receive enough payment on outstanding loans to satisfy demands for redemption by depositors. Thus was born fractional reserve banking and the recourse to banks as lenders of money. Sure, kings could expropriate money from banks, but that only went so far. If you continued to rob banks outright, they would eventually either hide their money or disappear from the kingdom and the king was left with no money to fight his wars. So what developed was a relationship that has developed over time and become ever closer and more symbiotic over the course of time between banks and governments.
It’s a classic “I’ll scratch your back if you scratch mine” type of relationship. In exchange for providing funds to governments, banks got special privileges in return. One need look no further than the Bank of England, the first really modern central bank and the model for numerous other central banks, to see this principle in action. The Bank of England was founded in 1694 with the purpose of providing funding to the English government to rebuild its navy. The Royal Navy had lost badly to the French Navy and the British sought to rebuild and rearm. The Bank took in money from investors, provided it to the government in exchange for government bonds, and was then given the privilege of issuing banknotes against those bonds.
Over the bank’s history it continued to receive additional privileges from the English government, eventually culminating in gaining a monopoly over banknote issuance in 1844. There were various other barriers to entry that were put in place to keep people from competing against the Bank of England. Smaller, private banks just could not compete with the government privileges given to the Bank of England. And as it got larger and larger it got too big to fail and every time it was going bankrupt the government would bail it out and in exchange the Bank of England would give the English government a lot more money to fight wars.
One of the first casualties of wartime is fiscal and monetary discipline. No matter how little spending a government did before it goes to war, once it engages in war there is no limit to how much money it wants to spend. National debts increase, borrowing increases, taxation increases, all in an attempt to win the war. In particular, under a specie standard, specie redemption is one of the first things to go. This means that depositors can no longer take their banknotes to the bank and redeem them for gold and silver. The Bank of England was the beneficiary of many government measures over the years to suspend specie redemption at many points throughout its history, particularly during the period of 1797 to 1821 when the gold standard was suspended in order to fight against Napoleon.
But suspending specie redemption is not just limited to England. It has happened in the United States on numerous occasions. During the War of 1812 specie redemptions were suspended. Throughout the various financial panics of the 19th century, specie redemption was suspended. During the Civil War specie redemption was suspended. And the Civil War is very important in understanding the relationship between central banking and war in the United States.
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