The Price of Liberty

March 19, 2007
Exploring the idea that the need to pay for wars often drives financial innovation, Goldman, Sachs & Co. managing director Hormats traces the fiscal decisions made in American wars from the revolution to today's war on terror. Customs duties often fall off with hostilities, he observes, leading to increased reliance on excise and other consumption taxes. These cut civilian demand, freeing up resources for war, but may be unduly burdensome on the poor, who also do most of the dying. Taxes on businesses and the rich are more popular, he notes, but don't reduce consumption and may discourage energetic investment in war industries. Printing money is easy, but stimulates demand and inflation. Borrowing requires faith in the ability of the government to prosecute the war and its willingness to honor the debt afterwards. If broad-based, debt can cement support for the war, but if not, it can create a class of creditors with excessive political power. Hormats shows that, despite their differences, each treasury secretary seems to pick up where his predecessor left off, refining the old ideas and adding new wrinkles. Moving from history to current events, the author strongly criticizes the Bush administration for failing to adhere to the principles that have paid for 230 years of American liberty.