It is certainly odd how Lebanon was living in the Golden age (the 1950s and 60s) and was the main hub for social and economic Liberty in the Middle East and North Africa as it was once labelled as the Switzerland of the East entered into a civil war which has been described as sectarian conflicts ensued by geopolitical tensions. The truth is that it was never called a “civil war” (Harb Ahliya) rather the locals always referred to it as “Ahdath” (the events). The diversity of the Lebanese people was never an issue during the Golden age 1950s and 1960s rather people lived together peacefully. If you had asked anyone who participated in the civil war, they would not even know how to answer the simple question of why it even happened in the first place. But the civil war did happen and the consequence of it was at least 100,000 deaths, more than 800,000 people fleeing the country, and another half a million people displaced.
During the civil war the Lebanese Lira completely lost its stability. At the early stages of the war although the GDP halved in 1975–1978 the currency was relatively stable to what was going to come next, at an average of 17 percent inflation per annum. From 1983 to 1987 the Lebanese lira went down from 4 to 477 U.S. dollars, inflation soared to more than 100 percent per annum. Many reasons for this, including increasing government spending. As the destruction of infrastructure was inevitable during the war, the Lebanese government had to step in to rebuild. Since taxes were mostly confiscated by the militias of the civil war, the Lebanese government did not have any source of income. Here it is important to note the war lords of the Lebanese civil war were themselves the people in rule. Therefore, using their positions in the government and having access to tax money, it was their strategy to use that money in financing military activity and finally resort to printing money to rebuild the infrastructure and pay government employees. In the case of the civil war in Lebanon, printing fiat did not directly finance the necessities of war, but it gave the government personnel the possibility of not going bankrupt for participating in this specific war.
As shown in Dr. Nasser H. Saidi’s paper “Economic Consequences of the War in Lebanon” issued in September 1986, the significant differences between tax revenue and real tax revenue started to show in 1982. As in that year specifically, tax revenue amounted to 2,926 million Lebanese pounds while real tax revenue was the quarter of that at the amount of 725 million Lebanese pounds. In other words, three quarters of the Lebanese taxes were confiscated by the militia or better by the ruling class to satisfy their war needs. Now under a sound monetary system, the confiscation of taxes would have meant the end of the government and its complete bankruptcy and therefore such confiscations of tax revenue would have been put to an end. However, under the fiat monetary system the government can never go bankrupt. Any government expenditure could be paid using their printing machines. Moreover, referring to Dr. Saidi’s paper, the money growth hit its peak during the civil war in 1985 at the rate of 45.2 percent. This happens to be the same year when tax revenue was at 4,585 million Lebanese pounds while real tax revenue was at 562 million Lebanese pounds. In 1985 the Lebanese government was only able to collect 12% of its revenue, therefore increasing the growth of the money supply was its only option to pay for its increasing government expenditures.
During the civil war, money growth had been driven by the financing of the government public deficit, directly through the central bank. Fiat money completely lost its core rules and whatever made it a trustworthy store of value. All the decrees made in the bureaucratic conventions become meaningless during times of war. As the government either feels the need to finance their military activity which almost all the time fails to happen through taxation because no war benefits the ordinary, individual taxpayer or to finance their increasing government expenditures caused by war. This brings us to the issue of trust. Trust is the most important factor to determine the feasibility of a fiat monetary system. However, trust is extremely hard to acquire. Therefore, a fiat monetary system is only still alive because governments all around the world force their people to use whatever monetary system, they think is suitable. This is why most of us resort to other means to store value. Whether it is gold, real estate, the stock market, foreign currency or better yet Bitcoin (post 2008).
One of the strategies used by the Lebanese people was giving up the Lebanese pounds and investing in foreign currencies including the U.S. dollars. After all, the U.S. dollars supply was stable during that period and Lebanese banks had access to it. And this strategy further aggravated the problem of currency devaluation and created a dual currency system, where dollars were used for savings as a store of value and the Lebanese pound was just used for spending. This is yet another example of hard money beating softer money. Moreover, also during the civil war, Real Estate prices increased in an unprecedented manner. Anyone with savings in Lebanese pounds would much rather invest that money in buying any piece of real estate to save his or her wealth even if that person did not currently need a land or home. Same scenario happened with the Ottoman coin clipping of the 19th century. (I talk about this in my article: ‘‘Fiat Money: Ottoman Money, Feudalism and Mount Lebanon Famine’’) People of Mount Lebanon would first sell off their land to obtain wealth in form of liquid cash and the big wealthy individuals of the Mountain (the feudalists) would buy the land to hold the value of their wealth. Mostly this act was done by companies like the Khawajat of Amchit among other crony lending companies and The Maronite church. Up to this day, the Lebanese Maronite church owns much of the lands in Mount Lebanon and North Lebanon and most of that land was originally owned by individuals who had to sell it to obtain liquid cash to survive. Therefore, when you adopt a sound monetary system, houses for example, become solely for people to live in them and not an investment or value storing tool. It still could be an investment tool if you actually work in real estate, but the bottom line is that prices would drop significantly and would be based on the natural supply and demand mechanism derived by need.
I will not conclude this by saying that a fiat monetary system is the reason behind the civil war in Lebanon, I admit it was much more complicated than that, I will leave this analysis for historians and political experts. However, I can surely conclude that a fiat monetary system allowed the civil war to last for as long as 15 years! And the hyperinflation proved fiat's untrustworthiness.