War Finance: Theory and History
by H.A. Scott Trask

That war is not productive may seem self-evident to Misesians but it is not
to the "educated" public who have been taught that World War II ended the
Depression and that deficit spending (of whatever kind it doesn't matter)
spurs economic growth. Americans show not the slightest awareness that every
dollar spent on the ongoing Afghan and Iraqi wars, the continuing
occupations, and the rebuilding of those failed societies is one less dollar
that can be spent at home, and that the whole adventure represents a giant
transfer of American capital to the sweltering deserts and sun-baked slums
of the Middle East. If they were aware of these economic realities would
they not be more skeptical about administration claims that the terror war
is enhancing our security?
http://i.am/jah/greeneco.htm

The Sinking of Capital

Thus it bears repeating that warfare, whether victorious or not, retards the
accumulation of productive and livable capital. It does this either by
destroying capital outright or sinking it in logistics and war production,
thereby rendering it incapable of reproducing itself or adding to the
complex infrastructure and amenities of civilization. During peace, capital
is expended to sustain life, to provide comforts and entertainment, and to
create new capital (houses, furniture, autos, machine tools, office
building, factories, etc.). During war, capital is squandered building the
implements of war and sustaining armies in the field. After the war, capital
and labor must be expended in reconstruction and repair. War can give the
appearance of prosperity (full employment, busy factories, high prices), but
it is not real. During the War Between the States, "the mills, forges, and
factories were active in working for the government, while the men who ate
the grain and wore the clothing were active in destroying, and not in
creating capital. This, to be sure, was war. It is what war means, but it
cannot bring prosperity." So wrote Sumner.

Taxation

From the standpoint of productivity, it matters not whether a war is paid
for by borrowing, taxing, or inflating. In all three cases, resources are
diverted from the productive economy of wealth creation to the destructive
economy of war-fighting. From other standpoints, it makes a great
difference. Let us take the political. When government resorts to taxation,
it confiscates a portion of the capital and labor of the population. Except
for government contractors and officials, everyone is immediately poorer,
and they know it. This is why Jefferson insisted that a heavy redemption tax
be laid to pay interest and principal of the war debt. He wanted the people
to know how much the war was costing them, and he wanted to dampen the
spirit of militarism and navalism with a heady dose of reality-enhancing
taxation.

Borrowing

When the government borrows, the case is altogether different. Instead of
confiscating resources, the government pays for them, but it does so
belatedly. As a result, the sacrifice is deferred, but not for everyone.
Capitalists lend their capital to the government for the promise of annual
interest and eventual principal. They make no sacrifice at all. On the
contrary, they have a secure, interest-bearing investment (that is, if the
government is not overthrown or defeated). Those who can afford to buy bonds
do so, knowing that it is as secure as the prospect of victory and the
efficiency and potential lethality of the government's tax-collecting and
enforcing apparatus. Those who cannot afford to buy bonds, or who prefer to
invest in productive endeavors, must pay in future taxes for the reprieve of
not being taxed in the present. The political benefit for the government is
obvious. When the state sells bonds, the public hardly notices. As they do
not grasp that they must pay the interest and principal of the borrowed
funds, they offer no opposition to the bond issue.
http://i.am/jah/politics.htm

The economic significance is less obvious but no less important. The
interest payment represents pure wealth redistribution. The accumulation of
government debt renders productive labor tributary to the government's
creditors. The inequality of wealth and the formation of distinctive classes
might be the natural result of the differentiation of intelligence, the
specialization of labor, the accumulation of capital, the protection of
property, and family inheritance. It might also be the result of political
privilege and power, and fiscal extravagance supported by the funding
system.

Inflation

Inflationary finance combines the political and economic advantages of
borrowing with the immediate rewards of confiscatory taxation. It is a
disguised form of confiscation, redistributive, and allows government to
command immediate resources. When governments finance a war by printing
money and using it to buy supplies and pay troops, the resulting
depreciation acts as a tax, the amount of which is exactly equivalent to the
depreciation. It is taxation by the back door, but it is an unequal and
largely regressive tax. The decline in the purchasing power of the money
does not impoverish all equally. It plunders the wage-earner and soldier
because their wages always lag behind the rise in prices resulting from
monetary inflation. It harms the small producer or trader because they
receive the new money after it has already circulated and depreciated in
value. However, two groups usually benefit from the inflation. Government
contractors receive orders that they would not in peacetime, and enjoy the
first use of the newly printed money. Large capitalists can invest in
government bonds, or they can speculate in stocks and commodities whose
price is soaring due to the inflation.

Read the whole artice at : http://www.mises.org/fullarticle.asp?control=1428
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Source: http://www.mises.org/fullarticle.asp?control=1428