[R-G] [BillTottenWeblog] How The US Empire Contributed To The Economic Crisis

[Bill Totten]

by Ivan Eland

Mwcnews.net (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).

http://www.countercurrents.org/eland120509.htm


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