Financing War Summary

  • Last updated on November 11, 2022

Finance can be defined as the way goods or services are funded.

Overview

Finance can be defined as the way goods or services are funded. Historically, financing of war, which is an expensive activity, has been achieved in a number of ways in order to pay for the logistics and the personnel of military forces. Three major ways of financing war are taxation, borrowing, and money management. Today the study of war finance is usually included under the heading “defense economics.”Financing warEconomics;financing warWar economicsFinancing warEconomics;financing warWar economicsDefense economics

Significance

Since war is as old as humanity, the financing of war has varied through the ages. It is also an expensive activity: As Art of War, The (Sunzi) SunziSunzi (Sun Tzu) noted in his book, Sunzi Bingfa (c. fifth-third century b.c.e. ; The Art of War, 1910), written during China’s Warring States period, an army is kept for a thousand days to be used on one day–that is, the army (or navy) must be paid for more than a thousand days, but then all is spent in one day, when it is probably destroyed.

The method for financing war can contribute to the ultimate success of the combatants. The French Army under Napoleon INapoleon I (Bonaparte)[Napoleon 01]Napoleon I traveled on its stomach by foraging, which was simply taking from the local agrarian populations whatever food it could find. During the Iberian campaign, the British practice of paying in gold sovereigns for its supplies bought goodwill among civilian populations.

Many revolutions, civil conflicts, and wars have been won because the victors had superior resources for sustaining war over a long period of time, enabling them to exhaust the vanquished. Ultimately this is how the West defeated the Soviet Union in the fifty-year Cold War (1945-1991)Cold War (1945-1991) between the communist bloc and the West. In the end, President Reagan, RonaldReagan, RonaldRonald Reagan moved the United States into an Arms racesarms race that bankrupted the Soviet Union but caused no special financial damage to the West.

History of Financing WarAncient World

Probably the most basic way in which war has been financed has been through Plunderingplundering. Tribal chiefs, bandit chiefs, or other leaders–who if successful enough came to be called kings–would gather an armed body of men who would Raidsraid their neighbors, their enemies, or even distant victims. The goal was to take what could be found and then return.

Raids are temporary. The BedouinsBedouins of the Arabian, Syrian, and North African deserts, as well as other nomadic groups, would usually steal livestock, women, children, and portable goods in order to trade them at home. However, when raids turned into permanent invasions, then the method of finance changed into demands for tribute. The conquered would be forced to finance their own subjugation, with tribute payments in kind, in precious metals or gems, or even in people.

Armies in ancient times supported themselves by capturing the supplies of other armies. The Greeks, after the Marathon, Battle of (490 b.c.e.)Battle of Marathon (490 b.c.e.), were astounded at the riches they had captured from the Persians. Many armies, especially guerrilla groups, have financed themselves with captured weapons and matériel.

Capturing slaves was another method for financing war, used in both ancient and medieval times. Captured sites would yield not only valuable objects as booty but also soldiers and civilians who could be sold into Slavery;prisonersslavery. The slaves would be exploited as servants, laborers, sacrificial victims, and even sexual objects.

Medieval World

The Feudalism;financing warfeudal system required that kings and their vassals provide protection for the people of their estates. Despite that obligation, kings and vassals turned to those people for military service rather than hiring trained soldiers–hence, service to the lord of the manor in the form of military service was a method for financing war in economies that were essentially agrarian. At times wars were also financed by kings from out of their own personal incomes. The development of the English parliament arose from the need of the kings to secure authority for Taxes (war financing)taxes levied on the “commons”(common people) in order to finance wars. War financing through gifts has been far less common than financing through some form of coerced “taking,” ranging from plundering to taxation.

Modern World

The Battle of Valmy was touted as the first step in the French Revolution and was used in this poster to encourage French citizens to buy war bonds “so that France will be victorious as at Valmy.”

(Library of Congress)

Whenever governments have grown large enough to impose taxes, these taxes have on occasion been used to finance wars. High taxes that have been paid unwillingly in wars that have continued for a long period of time have often caused enough political instability to destroy governments.

Wars have also been financed byLoans for financing warloans. TheAmerican Revolution (1775-1783);financingAmerican Revolution was financed in part by loans obtained from bankers in Europe. The use of loans to finance the revolution also occurred at the local level. Many Revolutionary War soldiers, for example, borrowed against their farms. This activity was to contribute to an uprising of Revolutionary War veterans in Shays’s Rebellion (1786)Shays’s Rebellion in 1786. Some classical economists, such as Smith, AdamWealth of Nations, The (Smith) Adam Smith, author of The Wealth of Nations (1776), opposed financing wars through loans because they believed it masked the costs of wars. Their opposition was not motivated by pacifism but by a practical belief that paying directly for wars would reduce both their occurrence and their duration. Also Mercenaries;American Revolution during the American Revolution, the British used an old method for recruiting armies, the hiring of mercenary troops (in this case, from Germany).

Money management during the revolution also involved Inflationinflationary printing of money. American colonists were accustomed to manufacturing their own money as a way to have enough specie and other forms of cash available for business in economies that suffered from the mercantilist policies of the British Empire. Continental currency was printed and used among the revolting colonists. Eventually the Continentals generated inflation sufficient to earn the expression “not worth a Continental damn.” Inflation, nevertheless, would continue to be used to finance wars.

On the high seas, another form of indirect funding was used until the Paris Declaration Respecting Maritime Law (1856)Paris Declaration Respecting Maritime Law was signed on April 16, 1856. The declaration outlawed Letters of marqueletters of marque and reprisal. Letters of marque had frequently been issued by governments to Privateersprivateers, allowing them to wage war at sea against the merchant and naval vessels of the enemy country or countries. The letters of marque gave the privateers legal authorization for activities that otherwise would have been treated as piracy. The ships that were seized and their cargos could be sold in home ports or neutral ports as prizes of war. The privateers’ ship owner, captain, and crew would share in the profits as well as in the dangers of naval warfare. Hence, letters of marque generated inexpensive ways for governments to finance naval warfare.

During the American Civil War (1861-1865);financingAmerican Civil War (1861-1865), both the North and the South issued currency to finance the war. In the North the currency was popularly known as Greenbacks“greenbacks.” In the South it came to be called Confederate money. Both also instituted taxes, although the South taxed lightly compared to the North. Both also seized the “contraband” of the other’s supporters as well as the public material or money of their respective governments. Bank robberies in raids were used to acquire funds. A raid on St. Albans, Vermont, by Confederate cavalrymen targeted three banks and netted more than $200,000.

With the entry of the United States into World War I (1914-1918)[World War 01];financingWorld War I, the U.S. government again resorted to borrowing in order to finance the war effort. Financing wars grew enormously at this time, when the French and British used the financial services of Morgan, J. P.Morgan, J. P.J. P. Morgan (through the House of Morgan) to provide loans for the purchase of war supplies. In the process, the Morgan bank became a virtual sutler to the Allied effort, letting contract for herds of livestock, food, ammunition, and other war supplies. The Morgan bank also was seen by isolationists, pacifists, and others as an arms merchant that profited from the blood of others.

A poster by Winsor McCay exhorts Americans to support World War I; the American soldier is defended against the threats of “devastation,” “starvation,” “war,” “pestilence,” and “death” by the shield of liberty loans.

(Library of Congress)

Borrowing Borrowing for war financingLoans for financing warto finance war is limited only by the amount of credit that a government can get, and defaulting on war debts is a funding tactic that has been used historically many times. The Fifth AmendmentFifth Amendment to the Constitution of the United States repudiated Confederate War debts, a default upheld by the Supreme Court in Principality of Monaco v. Mississippi (1934) Principality of Monaco v. Mississippi (1934) to the loss of British bond holders and others.

Bank loans were not enough, however, so campaigns to fund the war with War bondsLiberty bonds“liberty bonds” (debt securities) and (in Canada) Victory bonds“victory bonds” were marketed to citizens. Even before the United States entered World War II, it began selling war bonds identified as Series E, F, and G bonds. Canada financed half of its war costs though war bonds. Bonds had three advantages: they financed the war, reduced inflationary pressures, and enlisted patriotic fervor. Germany also used drives to sell the public war bonds, called Kriegsanleihe (German war bonds)Kriegsanleihe. The Nazis financed much of their war effort with bonds, and the Austro-Hungarian Empire conducted nine drives.

The method used by the United States to raise the more than $300 billion it spent fighting the Axis powers in World War II combined borrowing and Taxes (war financing)taxation with Federal Reserve management of the money supply to increase war finance while keeping inflation low. The taxation transferred spending from individuals to the government. However, its spending put money into the bank accounts of millions of military personnel, war production personnel, and others, thereby raising the bank reserves of the nation’s banks. By managing the reserve requirements, the Federal Reserve was able to provide banks with liquidity for war loans to industry, to the government, and to individuals. In all, about a third of the funding came from borrowing, a third from taxation, and a third from expansion of the money supply, which allowed for more borrowing and taxation. Such methods would be used later to finance the Cold War (1945-1991);financingCold War as well as the wars in Korean War (1950-1953);financingKorea (1950-1953) and Vietnam (1961-1975);financingVietnam (1961-1975).

Clandestine Ghost warsClandestine warswarfare has at times been funded from both legal and illegal sources. The Central Intelligence AgencyCentral Intelligence Agency (CIA) laundered money through the Pakistani Inter-Service Intelligence (ISI) to fund a ghost war against the Soviets in Afghanistan (1979-1989). Purely illegal funds have been generated by “blood diamonds,” drugs, smuggling, and other black-market commodities. The ill-gotten gains have been used to fund terrorist groups.

In modern times, defeated nations occasionally have been compelled to pay reparations, such as those imposed on Germany after World War I, thereby paying the victors’ war costs. This is another form of tribute–which can prove counterproductive in the long run, as demonstrated by German resentment after World War I, when the 1919 Treaty of Paris, which proved punitive to Germany, actually helped sow the seeds of World War II. A representative to the Paris Peace Conference (1919)Paris Peace Conference of 1919, economist Keynes, John MaynardKeynes, John MaynardJohn Maynard Keynes, resigned in protest over the imposition of reparations upon Germany. It was a failure, he believed, to finance the peace with reparations. Financing of war recovery is a war cost, one that is necessary to establish a prosperous peace.

During the Cold War, the use of Mercenaries;Cold Warmercenaries was transformed into proxy wars between Communismcommunists (mainly the Soviet Union) and the West (primarily the United States and Western Europe). In a number of places, the manpower for the war was local, but the combantants’ equipment and wages were supplied by the Soviet Union or the United States in the form of military aid funded by tax monies from the two superpowers. The U.S. policy of Containment policy“containment” mandated support for local wars against communist-backed aggressors, theoretically to stave off the worldwide spread of communism. Such an approach was cheaper than a larger power struggle between the main Cold War opponents and, given the advent of nuclear weapons, perceived to be safer as well.Financing warEconomics;financing warWar economicsDefense economics

Books and Articles
  • Gilbert, Charles. American Financing of World War I. Westport, Conn.: Greenwood, 1970. Looks at World War I finance as an example of government pursuing policies that are expedient in the short run rather than beneficial in the long run.
  • Keynes, John Maynard. The Economic Consequences of the Peace. New York: Skyhorse, 2007. The foremost economist of the early twentieth century, Keynes takes the Western allies to task for their imposition of heavy reparations on Germany at the end of World War I, as counterproductive to the recovery and long-term peace of Europe.
  • Murphy, Henry Clifford. The National Debt in War and Transition. New York: McGraw-Hill, 1950. Gives an analysis of the use of savings bonds to finance the war effort in the United States shortly before, during, and after World War II.
  • Samuel, Lawrence R. Pledging Allegiance: American Identity and the Bond Drive of World War II. Washington, D.C.: Smithsonian Institution Press, 1997. Examines how different groups of Americans, defined by race and class, participated in the war effort through the purchasing of war bonds, and how that played into their racial, class, and national identities.
  • Steil, Benn, and Robert E. Litan. Financial Statecraft: The Role of Financial Markets in American Foreign Policy. New Haven, Conn.: Yale University Press, 2006. Outlines, in a thorough and systematic way, how international capital has been and still is used by Western nations as a tool to implement foreign policy.
  • Taylor, Leonard B. Financial Management of the Vietnam Conflict, 1962-1972. Washington, D.C.: Department of the Army, 1974. Lays out the various aspects of the financial management of Army operations during the Vietnam War.

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