war finance
As Marshal Trivulzio wrote to Louis XII of France in 1499, ‘To carry out war three things are necessary: money, money and yet more money.’ Regrettably we do not know what his majesty replied, but we may safely assume that it was terse. A year earlier he had inherited the throne from Charles VIII but he also took over the French Italian wars, whose financing gave birth to the beginnings of today's omnipresent French bureaucracy. Hoping to avoid the cost of a standing army, he hired the Swiss, only to see them defeated at Cerignola. He had the misfortune to be a contemporary of Ferdinand and Isabella of Spain and Pope Julius II and at one point faced military threats from Spain in Italy and southern France, the Holy Roman Empire in Italy and across the Rhine, and England across the Channel. His need for ‘money, money and yet more money’ made Cardinal George d'Amboise the first of the great French finance ministers who made the French wars of the next three centuries possible.
The cost of the artillery train and professional soldiery was such that even if Louis had been a more skilled diplomat his conquests would not have paid for themselves. He was also up against the Sforzas and the Borgias, people who understood money in a way that he did not, and who to his fury used it to thwart his ambitions. Once war became an enterprise without even the prospect of being self-financing, it became even more of a two-edged sword; a ruler might find his power diminished not only by defeat but even by a successful campaign, in that it increased the degree to which he was beholden to others (see political economy and war). In the case of France, thanks to the skill of successive finance ministers, the day of reckoning was postponed for nearly three centuries. In England, where the monarchy enjoyed a much smaller personal income thanks to the completeness of feudal delegation following the Norman Conquest, a degree of accountability appeared early, in the Magna Charta of 1215. While compacts without the sword are but words, the exception that proves the rule is the compact governing the sword, and after the hiatus that minister Thomas Cromwell won for Henry VIII with the expropriation of the monasteries, parliament enforced the compact against the hapless Charles I in the British civil wars.
The matter was not fully resolved until the 1689 Act of Settlement which enshrined power-sharing in the form of an annual vote by the legislature on the financing requested by the executive. Since the former could be expanded reasonably painlessly to incorporate new sources of power and revenue, the British monarchy sailed through the storms of the following centuries that saw all the more apparently powerful monarchies shipwrecked. The American independence war was less of an exception than the slogan ‘no taxation without representation’ would make it seem. The colonies were being required to pay the cost of their own defence, but with the French and Indian threat contained, the once clamoured-for British troops were perceived as an occupying army—which, since many were German mercenaries, is precisely what they were. This would not have been tolerated anywhere in the British Isles and it was the failure of London to respect the colonists' rights as Britons, along with the desire of Yankee merchants to make money wherever they saw fit and keep it, that caused the English-speaking peoples to part ways.
Although the financial power of Britain had already made itself felt over the wars of the preceding century, it was to be during the French Revolutionary and Napoleonic wars that France was to be reminded of the lesson imperfectly taught to Louis XII by the Sforzas and Borgias: money could be turned into power more easily than power could be monetized. Pitt ‘the Younger’ was able to appropriate a part of the war-fuelled economic and industrial revolution in Britain through the novel income tax, but the real strength of Britain lay in the sale of long-dated government bonds (consuls), which had a threefold benefit. First, by affirming the Hanoverian dynasty against the Jacobites, they tied together the interests of the regime and the financially powerful; second, they created a broad national commitment to prosecuting the wars to a conclusion; third, inflation could be used to reduce the debt (until, that is, people woke up and started demanding compound instead of simple interest, too late for all the patriotic purchasers of war bonds during the two world wars). A century later George Bernard Shaw observed that the taxpayer had ‘to be half cheated, half coerced into paying [taxes]’, and this was Pitt's great legacy, compared to the art of plucking a live goose: the trick was to obtain the maximum of feathers with the minimum of hissing.
Napoleon, in so many other ways a fountain of innovation, did not understand the power of money to the same degree, with the result that the despised nation of shopkeepers gave financial weight to the coalitions that defeated him and went on to a century of prosperity, while France was left cracking the gnawed bones of gloire to retrieve the marrow of psychological compensation for what was a comprehensive defeat. The flexibility of the Pitt-inspired method of financing war meant that principal could be sought from foreign investors and even governments. Thus Lincoln was not only able to use the American civil war to introduce easily devalued paper money, he was also able to counter ‘King Cotton’, the weapon the Confederate States believed would compel foreign diplomatic recognition, by tying European financial interests to the Union. The reverse was to happen during WW I when Woodrow Wilson, previously ‘too proud to fight’, went to war to protect massive US investment on the Allied side. He was also able to institutionalize the income tax that Lincoln had only been able to impose for the duration of his war.
What can be seen as the completion of the 1688 English revolution came after the scandals of the Crimean war and the Indian Mutiny with the 1866 Exchequer and Audit Act, designed to prevent the War Office and the Admiralty from circumventing annuality by selling assets without reference to parliament. The Act established that all income should be paid directly to the Treasury and not accumulated in discrete accounts under departmental control, and that at the end of any year all outstanding cash balances in departmental accounts should revert automatically to the Treasury. That this was a matter of political economy rather than housekeeping will be evident to anyone who has observed departments frantically trying to spend all the money allocated to them before the end of the financial year.
It is important to appreciate that not merely war financing but government revenue raising in general is considered criminal activity if practised by private individuals, resting as it does on the two sturdy legs of extortion and fraud. But like any protection racket, it is vulnerable to external threats to the stability promised in return for regular levies, thus the need to protect what criminal gangs would call their ‘turf’. The canard that the arms manufacturers precipitated WW I is based on a total misunderstanding; the war in fact shattered the extremely profitable cartel they had established and thereafter government became an active partner. When Eisenhower belatedly warned about a ‘military-industrial complex’ in 1961, he knew, but his listeners failed to appreciate, that what he was talking about was the appearance, thanks to the Cold War, of a phenomenon previously observed only during major shooting wars. Because it is not subject to commercial accountability, government procurement has historically been characterized by staggering corruption, and periodic scandals about bribery and overcharging simply serve to remind the semi-plucked geese of this eternal verity.
In modern societies financial support for war, actual or potential, comes from the output of the rest of society. As war moves closer an increasing proportion of productive capacity is devoted to financing it. Eventually this means real resources, men and material, have to be deliberately shifted into the war effort. This decreases the tax base at a time when the state needs more revenue. This problem is compounded by the events that occur before war even begins. The international community relies on trade and this depends on confidence that bills will be settled and the passage of goods unimpeded, both of which are threatened by major wars. The mere prospect of such wars destroys confidence first in the reliability of the combatants as prospective payers, second in their capacity to physically deliver on uncompleted contracts, and finally on the future accessibility of any funds deposited in their financial systems. The threat of war thus disrupts financial markets and non-belligerents will try to move resources away, as will the belligerents' own nationals if they can. Thus governments in anticipation of a war will impose exchange controls and other actions preventing the free movements of both physical and financial assets. Once war is declared they will seize any assets or financial instruments deposited in their country by enemy nationals, while neutral countries may freeze the assets of belligerents. This confirms the worst fears of those involved in trade and commerce and further undermines trust in the continuing integrity of the system.
Since the British were the pioneers and most sophisticated practitioners of modern war financing, it is instructive to examine how the City handled the financial crunch of 1914, when the sterling commercial bills from which most international trade was financed had either fallen due or were being been discounted back into the London market, creating a worldwide liquidity problem. The solution was to issue an increasing number of 90-day Treasury Bills at whatever rate the market would bear. In 1914 the British government and its citizens had destrainable assets outside the immediate area of conflict worth some £4, 000 million. In addition they had a strong reputation for reliability and financial integrity so even in the circumstances of war these bills could be sold. They quickly replaced the liquidity lost as a result of the disappearance of sterling commercial bills. Thus was created a system of UK government financial management that continues to this day: the London Discount Market based on Treasury Bills with the Bank of England as lender of last resort.
None of the wars of national unification fought in Europe in the century after Waterloo could compare either in length, ferocity, or financial demands with the twenty years that preceded it. Likewise the minor 19th-century wars of repressive imperial pacification could be financed out of current revenues or ordinary borrowing. The Russo-Japanese war was a harbinger, stretching both combatants' ability to raise finance at home and abroad to the limit, the only area where the Russians were able to make their greater latent strength felt. But the two world wars represented an order of magnitude change in war financing. WW I bankrupted Russia and the Allies' post-war military interventions had much to do with the Bolsheviks' repudiation of overseas debt. Eighty years later, the issue is still alive: you may expropriate and cheat your own citizens to your heart's content, but woe betide you if you fail at least to genuflect at the altar of sovereign debt. Britain went from being the world's creditor to being one of its larger debtors with £2, 000 million in liabilities. Germany could have renegotiated the demands for financial reparations but chose instead to inflate her way out of her obligations, while the apparent winners in the conflict in financial terms narrowed down to one. The USA had neither the institutions nor the wisdom to handle the responsibilities of her own equally abrupt change from being the world's greatest debtor to greatest creditor, and thanks to her reversion to crude mercantilism what might have been merely a severe recession following the great boom after WW I degenerated into the Great Depression, the culture in which virulent militarism prospered, most notably in Italy, Japan, and Germany, who all felt cheated by the post-war settlement.
After WW II, by then a greater economic power and creditor than the rest of the world combined, the USA had a shrewder appreciation of its interest and the Marshall Plan was in stark contrast to the village banker's mentality of Calvin (‘they hired the money, didn't they?’) Coolidge as the world teetered on the edge of financial collapse in the 1920s. While the French and the British continued to strangle their own economies by retaining wartime economic and financial controls into the 1960s, if indeed they can be said to have relinquished them even then, the Germans and the Japanese turned their backs on autarchy and the primitive imperial mercantilism that had led them to defeat, and prospered. A state at war imposes trade restrictions, exchange controls, and high import duties in order to direct resources to the state by stifling domestic private demand. Meanwhile by injecting cash back into the economy in order to pay for the materials of war, incomes will rise and the inevitable consequence is inflation. For this reason governments are doubly interested in financing the war by borrowing, to soak up excess demand. John Maynard Keynes in a sequence of papers and exchanges with other economists and bankers in 1939 and 1940 even proposed that this reality should be fully recognized and savings made compulsory. The attractiveness of this to governments without the constraints that the Constitution and an independent judiciary imposed on the USA meant that coercive financial devices only previously conceivable in times of dire national emergency continue in force half a century after WW II. Oddly enough, even the natural efforts of the populace to evade these impositions works to increase the power of government. An inevitable consequence of income and price controls is a black market, for the suppression of which governments can vote themselves ever-greater police powers.
— Brian J. Hilton/Hugh Bicheno
