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Friday, June 05, 2009

How The US Empire Contributed To The Economic Crisis

by Ivan Eland (May 12 2009)

A few - and only a few - prescient commentators have questioned whether the US can sustain its informal global empire in the wake of the most severe economic crisis since World War Two. And the simultaneous quagmires in Iraq and Afghanistan are leading more and more opinion leaders and taxpayers to this question. But the US Empire helped cause the meltdown in the first place.

War has a history of causing financial and economic calamities. It does so directly by almost always causing inflation - that is, too much money chasing too few goods. During wartime, governments usually commandeer resources from the private sector into the government realm to fund the fighting. This action leaves shortages of resources to make consumer goods and their components, therefore pushing prices up. Making things worse, governments often times print money to fund the war, thus adding to the amount of money chasing the smaller number of consumer goods. Such "make-believe" wealth has funded many US wars.

For example, the War of 1812 had two negative effects on the US financial system. First, in 1814, the federal government allowed state-chartered banks to suspend payment in gold and silver to their depositors. In other words, according Tom J. DiLorenzo in Hamilton's Curse (2008), the banks did not have to hold sufficient gold and silver reserves to cover their loans. This policy allowed the banks to loan the federal government more money to fight the war. The result was an annual inflation rate of 55 percent in some US cities.

The government took this route of expanding credit during wartime because no US central bank existed at the time. Congress, correctly questioning The Bank of the United States' constitutionality, had not renewed its charter upon expiration in 1811. But the financial turmoil caused by the war led to a second pernicious effect on the financial system - the resurrection of the bank in 1817 in the form of the Second Bank of the United States. Like the first bank and all other government central banks in the future, the second bank flooded the market with new credit. In 1818, this led to excessive real estate speculation and a consequent bubble. The bubble burst during the Panic of 1819, which was the first recession in the nation's history. Sound familiar?

Although President Andrew Jackson got rid of the second bank in the 1830s and the US economy generally flourished with a freer banking system until 1913, at that time yet another central bank - this time the Federal Reserve System - rose from the ashes.

We have seen that war ultimately causes the creation of both economic problems and nefarious government financial institutions that cause those difficulties. And of course, the modern day US Empire also creates such economic maladies and wars that allow those institutions to wreak havoc on the economy.

The Fed caused the current collapse in the real estate credit market, which has led to a more general global financial and economic meltdown, by earlier flooding the market with excess credit. That money went into real estate, thus creating an artificial bubble that eventually came crashing down in 2008. But what caused the Fed to vastly expand credit?

To prevent a potential economic calamity after 9/11 and soothe jitters surrounding the risky and unneeded US invasion of Iraq, Fed Chairman Alan Greenspan began a series of interest rate cuts that vastly increased the money supply. According to Thomas E Woods Jr in Meltdown (2009), the interest rate cuts culminated in the extraordinary policy of lowering the federal funds rate (the rate at which banks lend to one another overnight, which usually determines other interest rates) to only one percent for an entire year (from June 2003 to June 2004). Woods notes that more money was created between 2000 and 2007 than in the rest of US history. Much of this excess money ended up creating the real estate bubble that eventually caused the meltdown. Ben Bernanke, then a Fed governor, was an ardent advocate of this easy money policy, which as Fed Chairman he has continued as his solution to an economic crisis he helped create using the same measures.

Of course, according to Osama bin Laden, the primary reasons for the 9/11 attacks were US occupation of Muslim lands and US propping up of corrupt dictators there. And the invasion of Iraq was totally unnecessary because there was never any connection between al Qaeda or the 9/11 attacks and Saddam Hussein, and even if Saddam had had biological, chemical, or even nuclear weapons, the massive US nuclear arsenal would have likely deterred him from using them on the United States.

So the causal arrow goes from these imperial behaviors - and blowback there from - to increases in the money supply to prevent related economic slowdown, which in turn caused even worse eventual financial and economic calamities. These may be indirect effects of empire, but they cannot be ignored. Get rid of the overseas empire because we can no longer can afford it, especially when it is partly responsible for the economic distress that is making us poorer.


Ivan Eland is Director of the Center on Peace & Liberty at The Independent Institute. Dr Eland is a graduate of Iowa State University and received an MBA in applied economics and PhD in national security policy from George Washington University. He has been Director of Defense Policy Studies at the Cato Institute, and he spent fifteen years working for Congress on national security issues, including stints as an investigator for the House Foreign Affairs Committee and Principal Defense Analyst at the Congressional Budget Office. He is author of the books, The Empire Has No Clothes: US Foreign Policy Exposed (2004, 2008), and Putting "Defense" Back into US Defense Policy (2001).

Bill Totten


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