War Finance

(editor’s introduction, War Finance, (3 volumes), Brookfield, VT: Edward Elgar Publishing, 1994.)

The Gulf War lasted from August 2, 1990, when the Iraqi forces invaded Kuwait, until February 28 1991, when President Bush announced the Allied victory and a cease-fire 100 hours after the ground attack by the U. S. and its coalition partners. The war cost the United States, which bore most of the military burden, $31.5 billion by its method of calculation. Another $30 billion was expected to be spent in the wrapup phase of military operations, mainly in shipping troops and equipment home or back to Europe, so that total expenses would amount to $60 billion. The various allies of the U. S. pledged funds to the U. S. amounting to $54.0 billion in addition to, or in lieu of, committing their military forces to the coalition formed against Iraq. By July 12, 1991 over $44.0 billion of the amount pledged had been paid. Nearly all of the $9.5 billion remaining were owed by Kuwait and Saudi Arabia, the only two countries among those contributing cash whose territories were directly at risk. The other country that came under attack, Israel, actually received military aid in kind from the U. S. so that it would not counterattack.

President Bush hailed the military victory and the way it was achieved as the start of a "New International Order". Skeptics quickly appeared, naturally enough, but there can be no doubt that the means of financing the war effort were novel. They were the first war payments taken by the U. S. in its history for the purpose of waging war on foreign soil. As such they were the clearest, most convincing, evidence that we had in fact embarked upon a new international order, and they remain the most tangible indicators of the nature of the new order that was beginning to emerge after the revolutions of 1989.

As novel as the payments by the German and Japanese governments to the U. S. government were for the twentieth century, the principle was not new. Mercenary troops have long been employed by commercial powers when under military duress. The practice was begun in modern times by the Italian city-states during the Renaissance and the atavistic remnant of this practice remains in the presence of the Swiss guards at Vatican City. The British fought their eighteenth century wars on the Continent by subsidies to their various allies and attempted to quell the American Revolution with Hessian mercenaries. It is understandable why the Gulf State governments would interpret their role in the finance of the Gulf war as a simple matter of hiring specialized help for a particular problem -- they hire geologists to discover oil, drillers to tap it, chemists to refine it, and soldiers to protect it. But it is also clear that the Gulf states were not the prime movers in the war effort, otherwise Saudi Arabia and Kuwait would not have been in arrears while the others were paid up. Much more was involved in the financing of the American military effort in the Gulf war than the hiring of available mercenaries by the aggrieved party.

Predating the rise of mercenaries by the Italian city states, and continuing well into modern times, was the use in times of war of extraordinary levies by a king or emperor upon his (or her) vassals. The vassals paid according to their resources -- military services by the castled barons, provisions by the country estates, money by the cities and religious orders. But all this was according to an explicit, or implicit, social contract and the amounts levied were originally determined in a meeting of representatives of all the propertied classes whose interests were ultimately at stake in any military conflict. The financial contributions for the Gulf War, by contrast, seem to have been determined in an ad hoc manner in a series of bilateral negotiations between the U. S. and each contributor. The United Nations, used as the forum for the formation and ratification of political strategy by the coalition partners, played no role in the financing of the war, much less in determining the relative shares to be paid. The innovation in war finance developed by the U. S. for the Gulf War has not yet been followed up by the necessary institutional changes needed to formalize and legitimize it. Until these occur, we cannot declare that this is the way future wars will be financed or, indeed, how they will be financed, as other ad hoc techniques may well be discovered on a case by case basis before a new institutional framework emerges.

With no clear insight yet available into the institutional nature of the new international order now emerging, it is useful to explore the innovations in finance that have occurred in previous wars and the institutional changes that eventually followed. The purpose of this volume is to collect in one convenient location the most trenchant economic analyses made of previous modes of war finance. It pays special attention to those that seemed to mark permanent changes in the institutional arrangements used by governments to finance their military adventures. This proves to be an especially rewarding exercise for economists concerned with macroeconomics. Many, if not most, of the lasting innovations in the way governments have collected taxes, managed the money supply, controlled wages and prices, serviced their debts and arranged their trade with foreigners have emerged under the duress of war.

The financial innovations in the wars covered here have typically been appraised in terms of whether the war was won or lost. Most authors evaluate the means of finance in terms of their effectiveness for waging the war. Despite the emphasis in all the readings selected here on strengthening the "sinews of war", however, historians usually ascribe military outcomes to the superiority of leadership, troops, weapons, and plain good luck of the winning side. For economists, however, it is not so much the military outcomes but the new fiscal, monetary, and financial arrangements that result from the efforts of war finance that are ultimately most interesting. For example, the development of macroeconomics as a separate sub-discipline within economics can be traced precisely to the efforts of government officials and advisors to determine the economic base available for the logistical support required for a winning military effort. We can think of William Petty in 17th century England, concerned about the appropriate economic policy with respect to a conquered Ireland, writing his Treatise of Taxes and Contributions (1679) which evolved into his Several Essays in Political Arithmetic (1699). In the process, Petty developed the key concept, the circular flow of income, that led eventually to national income accounting. Gregory King, a civil servant in the administration under William III, drew up his social accounts of the national income of England and Wales for the explicit purpose of comparing the tax base available to William III (England and the Netherlands) in waging war against Louis XIV, who had the tax base of France. Patrick Colquhoun's accounts at the end of the Napoleonic Wars are still used as the basis for constructing estimates of British national income in modern categories. It has even been argued that our modern system of national income and product accounts owes its genesis to Lord Keynes' need to illustrate the mechanics of his scheme to enable Britain to pay for World War II. (See the excerpts from his How to Pay for the War and the Economic Journal articles that were the technical basis for his popular treatise that are included in this volume.)

Beyond motivating the development of national income accounting and macroeconomic analysis for purposes of the nation state, however, the issues of war finance undoubtedly constitute the single greatest source of exogenous shocks to the economy of modern nation-states. It has been war, and the financial devices used to wage it, that are the source of the tremendous fluctuations in price levels and rates of unemployment that have characterized industrial economies since the beginning of the nineteenth century. This is obviously true for any country one cares to examine in the twentieth century, due to the world-wide nature of the two great wars that shook the international economic system in the first half of the century. The American financial techniques for fighting the Vietnam War led directly to the demise of the Bretton Woods system and the onset of worldwide inflation when ignited by the two oil shocks of the 1970s (each due in turn to the needs of war finance in the Middle East). So the same argument can easily be extended to the latter half of the twentieth century as well.

The readings included in this volume demonstrate that the fundamental issues of how to pay for war -- preparing for it, waging it, and dealing with the consequences, whether victory or defeat -- have been at the root of macroeconomic policy determination for a very long time indeed. War finance precedes the rise of the nation-state, has dominated the history of the nation-state these past several centuries, and no doubt will play the major role in determining the economic course taken during the transitions now going on around the world from command to market economies. Moreover, despite the enormous changes in the scale and deadliness of wars over the ages, driven primarily by technological advances in weaponry, every war has forced the belligerent states to inovate in predictable ways. Governments prefer to tax rather than borrow, but all prefer to tax foreigners if possible, and then to borrow from foreigners as well. So the innovations of war finance historically have had implications for the evolution of international finance and trade as well as for the development of national economies.

The Wars of Antiquity

The wars of antiquity are an obvious place to start. We are struck by the contrast of the apparent success of the early Greek empire with the eventual failure of the later Roman empire. A recurrent theme by military historians of this age is the ancients' need to maintain the proper military balance between seapower and landpower, with each drawing its resources from distinctly different types of economic activity. Seapower, characterized by the oared galley in the Mediterranean for two thousand years, drew upon seaborne commerce, which was always especially active in the Aegean Sea. Landpower, projected initially by light infantry and light cavalry armed with bows and slings, drew upon settled and nomadic agriculture respectively. When it was perfected by the addition of heavy infantry (e.g., the Greek hoplites) and heavy cavalry, it had to draw upon cities supported by merchant and craft guilds to bear the expense of specialized weaponry and training. With the advent of coinage by the Lydians in the sixth century B. C. (more accurately, of stamping chunks of metal with symbols of the military ruler), the possibility arose of amassing by taxation and tribute during times of peace the means to finance large forces over long-distances in times of war. The Persian Wars of the 5th century B. C. pitted the combined navy and army of Xerxes against the loose alliance of the Ionian and Phoenician fleets and the Greek city state navies and armies organized by Themistocles of Athens. The defeat of the Persians at the critical naval battle of Salamis in 480 B. C. led to hegemony of Athens and the cultural glory of classical Greece.

The Delian League of Periclean Athens financed their sea-borne military force by occasional levies from the mercantile seaports of the Aegean, with particular weight given to the islands of Chios, Lesbos and Samos. This was successful so long as the Athenian land-base in Attica was kept safe from attack by land forces, and as long as the tribute was light and the protection was secure. The League's financial arrangements failed with the defeat of Athens by Sparta in the Peloponnesian Wars (431-404 B. C.). But that defeat was arguably due to misuse of the Delian tribute in the preceding decades (the Parthenon could not be readily transformed into triremes), a breakdown in the institutional arrangements of the Delian League for raising and allocating the tribute in times of war (who was free-riding, who was most endangered), and Persian revenge taken by financing the enemies of Athens with their gold coins, as much as to the superior deployment of the Spartan army relative to the Athenian navy.

The first selection recounts financial arrangements of both Athens and Sparta and the interplay of taxes, tribute, levies in kind, coinage of the silver mined at Laurium and loans in determining the rise and fall of Athens as a military power. The complications of domestic politics with respect to taxes and of disputes among allies with respect to tribute that he recounts have a very modern ring, and not merely because he is viewing them from the perspective of modern Greece immediately after World War I. War by its very nature is expensive with uncertain outcome. A society's ability to finance for long periods of time a substantial diversion of resources from useful economic activity is obviously a major determinant of its probable success at war, as much as its martial spirit and its command of weaponry, logistics, and personnel. If it can draw upon extra-territorial resources, its chances of success in war are obviously enhanced. This may be accomplished by forced levies or looting from enemy or neutral territory, by tributes from weaker allies, by subsidies from stronger allies, or by foreign loans. All were used by ancient Athens (and all were used in the Gulf War, either by Iraq or by the allies).

Military success could lead as well to financial success, as the next selection indicates. Alexander the Great managed during his short reign (336-323 B. C.) to conquer the known world from the Danube to the Indus. His father, Philip of Macedon, had become the hegemon of the Greek city states by sustaining a standing army of heavy infantry with the silver produced by the Macedonian mines and deploying it effectively against the Greeks and the Persians. Alexander's successes against the Persian armies of Darius (who employed Greek mercenaries for his heavy infantry) culminated with the capture of the Persian gold hoard at Darius' main treasury Persepolis in 330 B. C. Not a single coin or even an object of silver or gold has been found by modern excavators of the site which disgorged 120,000 talents (perhaps the equivalent of 2 million ounces of gold) that Alexander dispersed throughout the western regions of his empire as coins bearing his image. With these huge hoards at his disposal, Alexander's war finances were solved, as were those of his successors who could imitate more easily his recoinages than his military acumen. Exception must be made for the problem of sustaining garrisons in the backward regions of the Indus, whose limited resources could only be obtained by barter if not by force.

Alexander's dispersal of the Persian bullion hoards through the device of recoinage provided the ancient world with a financial innovation that has persisted ever since -- manipulation of a state's money supply for policy purposes. The selection from Bosworth also describes the financial success of Athens under the reforms of Lycurgus after its defeat by Sparta. No longer were the taxes and tribute originally designated for the common defense squandered on public monuments and displays. Rather, fortifications were rebuilt and the fleet restored, but the renewed military and naval power was reserved for the protection of commerce, and no longer hazarded in adventures of conquest. Especially interesting in this regard is the Athenian treatment of Harpalus, Alexander's treasurer at Babylon, who defalcated with 5,000 talents and 6,000 Greek mercenaries and made his way back to civilization. Tempted by the talents of Harpalus, but timorous in view of the likelihood of Alexander's revenge, Athens succeeded in temporizing over the issue of granting asylum to Harpalus and acquiring his military forces. Eventually they allowed him to enter by himself and only 700 talents, then arrested him on Alexander's orders, and then allowed him to escape, but without his money!

While Alexander's military successes brought Persian treasure to the Greek city states by various devices, they also brought Greek mints and coinage policies to Asia Minor. Uniform coinage must have helped solidify the intensive commercial links that bound the eastern Mediterranean to the Black Sea, Asia Minor, and Egypt in the ensuing centuries. As in the wars of the twentieth century, the financial legacy of Alexander was arguably more influential than his military bequests.

The Roman successes built very much on the same military and financial techniques perfected by Alexander. The phalanx formation for deploying heavy infantry as assault forces against fixed enemy positions, with due attention to the logistics of moving rapidly large forces that combined the protective flanks of light infantry and cavalry with the assault cores composed of heavy infantry and cavalry are the same for the Roman successes and Alexander's. The difference lies in the longevity of the Roman empire and its huge extent with control attempted from the administrative center at Rome, as contrasted with Alexander's policy of establishing large numbers of cities and citadels and assigning them to various satraps. Eventually the Romans created a dilemma for themselves. As the empire was enlarged, they faced increasing monitoring costs in the collection of taxes from the ever more distant periphery of the land-based empire. These ultimately exceeded the decreasing demand in the border areas for military support from the center, leading to the equivalent of tax revolts, as analyzed by Leonard Dudley.

The Wars of the Middle Ages

Castles are the enduring monuments of medieval warfare, arising as the logistical base and defensive redoubt for mounted knights, specializing in shock combat. But how much did they cost and how were they financed? The article by J. Goronwy Edwards gives the figures from the best historical sources available for building the best preserved castles in Europe. It wasn't cheap, for large numbers of skilled workmen had to be gathered during the building season of April to November from all over the kingdom and paid and provisioned in a remote and rebellious area. And they had to be brought back again for a total of four to six years before the castle was fully functional. The costs must have been increased by the fact that April to November was also the season for military campaigns as well as for building. The financing issue is largely skirted by Edwards -- tax levies outside Wales were increased substantially and especially in Ireland, which accounted for half the total outlays. The historian Richard Kaueper, however, sheds more light on the issue of finance of castles in his book about the reliance of Edward I on the financial resources mobilized by the Italian bankers, the Riccardi of Lucca. In particular, the continued efforts of Edward I to put down the Welsh guerillas required not merely the construction of the eight magnificent castles in Wales, but also the expensive hiring of mercenaries equipped with cross-bows and ample ammunition from Gascony. Time and again, Edward was able to mobilize his military forces in a timely fashion thanks to advances by his Italian bankers. On their behalf, he assigned feudal obligations to them, including the farm of the customs, and in his most brazen act, the accumulated treasure collected on behalf of the pope for the next crusade.

The reliance upon Italian bankers to bring the most advanced military techniques to bear on behalf of the rulers of England was continued by Edward III at the outset of the Hundred Years War. By this time, the Italian bankers were the firms of the Bardi and the Peruzzi, now famed for being the first of many merchant bankers in late medieval and early modern Europe to be ruined by the defaults of rulers on their war loans. The war continued, of course, even though the Italian firms did not, and Edward III had to turn to English substitutes for his banking services. Edmund Fryde's account of the rise and fall of William de la Pole, the most eminent of the English merchant bankers who replaced the Bardi and Peruzzi, illustrates well the kind of benefits a warlord could confer on a merchant subject in return for war loans, as well as the risks such a merchant ran in case of default. The account also shows the importance of foreign loans and the nurture of a substantial export trade which could be made the basis of collateral for such loans. While the king was above the law in England in terms of the bargains he struck with his creditors, he was at the mercy of merchant law in foreign lands for the payment of the sums he needed.

The Hundred Years War has a special place in the history of war finance as it required, for both England and France, the development of regularly collected taxes in money in order to pay the continued costs of erecting defensive fortifications and maintaining specialized mercenary troops in the field. This replaced the reliance upon feudal obligations of short-term military service by the nobility of the sword and the armigerous gentry, which had characterized the military efforts of both sides in the 14th century phases of the war. Edward III's strategy was to conduct occasional raids across disputed territories in France in order to undermine the legitimacy of French rule by Philip IV. Henry V, after his victory at Agincourt, replaced this strategy with one of seizing and holding key ports and cities, which then had to pay taxes for fortifications to defend them against recapture or be resettled by English adventurers who were wiling to pay the taxes in order to maintain their new holdings. So the basis for the modern revenue state was in the course of being laid in each country. To prevent the tithes collected by monasteries in England from being remitted to their affiliated houses in France, moreover, the successive Edwards regularly seized the property of Cluniac houses and other alien priories. They thereby laid the basis for the eventual dissolution of all remaining monasteries by Henry VIII in the 16th century.

K. B. McFarlane's essay argues, in fact, that because the bulk of the Hundred Years' War was fought on French soil, usually to the military advantage of the English forces, this greatest of medieval conflicts provided an economic advantage to England as a nation, if not to the English monarchy. He pays especial attention to the huge ransom paid to Edward III for the return of King John II of France and the indemnities paid by the French for the return of occupied towns and castles, but argues these are but the most visible and spectacular examples of the general benefits that victorious feudal lords were able to distribute to their vassals. Michael Postan indignantly disputes this interpretation, which comes dangerously close to giving war a good name. Basing his argument more on conjecture than on solid fact, he notes the logistical costs imposed on England by fighting overseas, the physical absence of large numbers of the male labor force for indefinite, sometimes permanent, lengths of time, and the transaction costs incurred in transferring ransom and indemnity sums back to England. He also notes with relish the embarrassing number of times that English knights had to be ransomed back from the French. Whatever the net balance might have been, the two articles summarize nicely the complexities of feudal finance, especially when complicated by transfers of sums over long distances. Ultimately, the loss of French territory meant that the transfer problem would become paramount in future English wars fought on the European continent or in more distant parts of the globe.

The Eighty Years War (1567 - 1648) and the Thirty Years War (1618 - 1648)

A "military revolution" occurred in Europe during the 16th and 17th centuries, the most warlike in terms of the number of years when a war was underway somewhere in Europe (90 and 96 respectively) and in terms of the frequency and severity of wars. The adoption of gunpowder in the technology of European weaponry was the key. In response to this technological shock, Europeans developed modern military tactics (coordinating first archers and then musketeers in creating fields of fire), constructed new defensive works which encompassed entire cities (replacing stone curtain walls and towers with brick and rubble ramparts and bastions), created modern military strategy (projecting both naval and land power against both enemy forces and their sources of supply), and experimented with new forms of war finance (the size of armies, cost of weapons, scale of defensive works, and extent of military operations all increased enormously the expenses of war). It is quite possible that the historians specializing on these topics in this period are correct in their conceit that they are analyzing the very source of the modern nation-state, with all its current attributes: emphasis upon the exercise of sovereignty, collection of regular taxes from the entire domain, concern over the size and welfare of the citizen population, and promotion of technological advance. In short, it can be argued that this is the period when all the policy issues of modern macro-economics emerge -- from retaining a minimum level of monetary reserves relative to other nations, to maintaining full employment, continuing economic growth, and controlling the rate of inflation. They all stemmed from the demands of war finance upon the nascent nation-states of Europe.

The leader in this development was Spain. Ferdinand of Aragon and Isabella of Castile deserve credit for the events of 1492, which began with the completion of the Christian reconquest of Spain from the Moors, continued with the expulsion of the Jews in southern Spain who refused to convert to Christianity, and ended with Columbus' voyage of discovery. But it was their grandson, Carlos V, ruler of the Netherlands, Luxembourg, Artois, and Franche-Comte in 1506, king of a united Spain in 1516 with its holdings in Sicily, Sardinia, and Naples and colonies in Spanish America, and (thanks to timely financing by the Fugger merchant house of Augsburg), Holy Roman Emperor in 1519, who deserves credit for energizing the spread of the technology of modern warfare throughout Europe as well as experimenting with new institutions of war finance. These were perfected and exploited by his son, Philip II (King of Spain 1556-98). However, Philip II also provoked the rise of an independent and Protestant Netherlands, which revolted in 1567 and completed its rise to commercial supremacy in Europe by the end of the Eighty Years War in 1648. The Treaty of Westphalia signed that year in Muenster also ended the Thirty Years War that had exhausted most of Germany.

The scale of the Spanish war machine and the diversity of military threats it faced are brought out by Geoffrey Parker. The Battle of Lepanto in which the Turkish fleet was destroyed off the coast of Asia Minor (much as in the glorious days of ancient Athens against Xerxes) is considered a turning point in the ascendancy of the naval power of western Europe in the Mediterranean. The net expense of it, however, was remarkably small according to Parker's evidence. This result, however, like the low net cost of the Desert Storm exercise by the U. S. and its allies in 1991, is due to taking as fixed the costs of maintaining a large strategic force before and after the battle itself. So the contributions by the Venetians and the Papacy made Lepanto appear as a "profit center" for Philip II, especially since the Papal taxes collected in Spain that were ceded to him for the purpose of fighting the Turks exceeded in any one year the total expense of Spain for the Battle of Lepanto.

For the much greater challenge of suppressing the Dutch revolt, Parker describes how Philip II used the bill of exchange, backed ultimately by tax receipts either in Spain or in Flanders, to maintain the Army of Flanders, a standing professional army, in the field to maintain his possessions in the Low Countries. As tax receipts lagged behind the bills falling due, recourse was made to transshipments from Spain of Peruvian silver. As the expenses of ever larger scale warfare increased and were prolonged by the successful imitations of the Army of Flanders by the Dutch military leader, Maurice of Nassau, and eventually by the Swedish ruler, Gustavus Adolphus, Philip II and his successors Philip III and Philip IV were forced into repeated bankruptcies. These amounted, in fact, to forced refundings of the accumulated masses of short term debt, asientos, based on assigning specific extraordinary revenues available for a specified war to their repayment, into longer term debt, juros, based on ordinary revenues which continued whether a state of war existed or not. This stratagem eased the immediate liquidity problem of the Spanish ruler and recovered for him use of the extraordinary revenues for the next round of war expenses. But used repeatedly -- 1560, 1575, 1596, 1607, 1627, 1647 and 1653 -- it inhibited foreign merchants near the theaters of war from giving credit again. In fact, the possessions of the Kings of Spain in Europe were so far-flung and the battlefields so ubiquitous that they were able to move from one financial center to another -- Augsburg to Bruges to Milan to Antwerp to Genoa -- before exhausting the credulity of Catholic Europe.

The sinews of war provided to Gustavus Adolphus during his brief but glorious intervention in the Thirty Years War are described in Michael Roberts definitive work on the military feats of the Swedish national hero. Basically, however, Gustavus simply re-directed to his troops the kind of war financing that German military enterprisers had already established as a regular practice among north German towns. The formalized Kontribution, raised by threat of destruction of a town's wooden structures by fire and calibrated to the replacement value of the buildings, is described in Fritz Redlich's classic article on the subject.

In another essay, Geoffrey Parker summarizes the expenses of the Eighty Years War on all sides. Parker argues that both Spain and the Netherlands lost in real terms, while the occasional participants on the periphery -- England, Sweden, and Germany -- benefited from the redirection of trade that resulted. By contrast, Jonathan Israel's work has argued that the war effort of the Netherlands actually caused its rise to shipping supremacy by the middle of the 17th century, mainly because the Spanish blockades were so successful in disrupting Dutch fishing activity in the North Sea and bulk commerce with the Baltic that they turned in large numbers to long-distance trade. Their success in both the West Indies trade, at least initially, and the East Indies trade, which was to endure for nearly two centuries, laid the basis for an enormously successful re-entry into the North Sea fishery as well as the Baltic and Mediterranean trades when the war ended in 1648. Israel's article is also interesting for the revisionism it proposes in our appraisal of the effectiveness of economic blockades as an instrument of warfare in the capitalist age. Counter to the prevailing wisdom that the Spanish attempts at exerting economic pressure on the Dutch through naval blockades were as futile as their military efforts to attack on land, Israel argues that the Spanish did divert Dutch trade away from the lucrative Baltic trade and diminished enormously their fishing fleet in the North Sea. His revisionism is echoed in later readings dealing with the Continental Blockade in the Napoleonic Wars at the beginning of the 19th century.

Fritz Redlich's 1964 work, The German Military Enterpriser and His Work Force, remains one of the classic studies of the Thirty Years War. Redlich's previous interests had focused on entrepreneurs and financial history. In this research he found numerous examples of military entrepreneurs in Germany who rose to fame and fortune (as well as execution, bankruptcy and death on the battlefield) over the course of the Thirty Years War. His chapter on the finances of the military enterpriser explains how troops were raised and then kept in service by direct payments in coin and provisions in kind. These, in turn, were provided through an elaborate network of credit that linked field commanders with enterprisers, contractors, warlords, and merchant bankers. Redlich contrasts the innovative techniques of Wallenstein, the greatest of the enterprisers and the most successful imperialist general until his death in 1634, with the standard techniques employed by other enterprisers on both sides. The standard form of finance required the colonels of the regiments to finance the initial mobilization of their forces and to be repaid later. By contrast, Wallenstein extended only short term loans to the colonels and then had these repaid from Kontributionen raised on the cities in which the mustering of troops took place. The result was to leave accumulated debt on the shoulders of the cities who paid successive Kontributionen to the various regiments fighting in their vicinity over the three decades of the conflict. Unlike the generals and warlords whose debts were extinguished with defeat or death, or offset by conquests and grants of estates, the cities bore their responsibilities indefinitely from their local tax base. This laid the basis for far-reaching innovations in public finance throughout Europe in the second half of the 17th century.

The English Civil War (1643-48)

In the last years of the Eighty Years War between Spain and the Netherlands and the Thirty Years War between Protestant and Catholic Germany, England engaged itself in a Civil War. During this travail, it imported both the military and the financial techniques that had been perfected on the Continent. The excerpt from Pennington and Roots describes the makeshift efforts of the Parliamentary committee at Stafford in the initial phases of the English Civil War. The war effort required constant administrative effort at the local level, which is described in detail for this representative county. Notable is the institution of the Weekly Pay, a tax collected regularly at the local level and disbursed, for the most part, at the local level. This laid the basis for the monthly assessment used by Cromwell to support his standing army -- the New Model Army -- and continued under Restoration rule as the basis for a steady cash flow from tax revenues, which could eventually could be used as the basis for irregular but substantial loans from the merchant community. The expedients resorted to on the Royalist side, by contrast, are described in Ronald Hutton's work. While Hutton ends by emphasizing the similarities between Royalist and Parliamentarian administration of local taxes and forced loans, especially in border counties such as Staffordshire, overall he contrasts the two in vivid terms. The Royalist finance effort reveals all the idiosyncrasies and foibles that arose in medieval wars organized on the basis of personal fealties. By contrast, the Parliamentarian effort foreshadows the modern revenue-state with its centralized, impersonal committees directing the regular collection of uniform taxes from everywhere within its jurisdiction. The yield of these efforts necessarily varied with local conditions; but the tax base was assessed uniformly without regard to the traditional privileges that supported monarchical dynasties.

While the New Model Army was disbanded with the Restoration of monarchy and the reign of Charles II in 1660, much of the Cromwellian tax innovations were retained and legitimized under the later Stuarts (1660-1688). But it was not until the Glorious Revolution of 1688 and the import of Dutch financial advisors with William III, that the English state was able to complete its revolution in public finance. As usual, the primary impetus for the financial innovations was the exigencies of war finance. An authoritative overview of the transition process during the wars of William III and Queen Anne is given by P. G. M. Dickson and John Sperling, which also compares the less effective techniques employed by the Netherlands, Austria, and France. An elaboration of the "military-fiscal state" that resulted in England and its consequences over the rest of the eighteenth century is given by John Brewer. Included in this volume are two chapters excerpted from the work of D. W. Jones, which describes in detail the relationship between the English economy and its exercise of military and naval power during the wars of the League of Augsburg (1689-1698) and the Spanish Succession (1702-1713). The first excerpt describes the problems faced by England in each war of providing supplies for armies operating on the Continent as well as projecting naval forces in both the West Indies and the Mediterranean while maintaining a lucrative trade in the East Indies, given the financial facilities available at the time. As British merchants established trade links with more diverse regions of the emerging world economy, so did the British government tap into the enlarged network of trade credit to transfer funds where needed. Finding a market for bills of exchange drawn against British export merchants in the various theaters of war, or a market for bills of exchange in London drawn against merchants in the location of the troops or ships was vital to the success of the English war effort. The market failed in the first war, leading to the export of specie, the supply of which could only be generated by clipping British silver coins, leading to the recoinage crisis of 1696. (Dickson and Jones credit the Bank of England's intervention in this crisis with solidifying its future role as the anchor institution in the new financial order that had emerged by the middle of the eighteenth century.) It succeeded brilliantly in the second war, largely due to the military successes of the first war, which enlarged greatly the trade arena overseas for British merchants.

The profligate use of short-term credit through the trade network of British merchants, however, created a vastly enlarged national debt. The origins of the English national debt, as well as that of the major European powers participating in the War of the Spanish Succession was described by Earl J. Hamilton.

The success of the British financial revolution in enabling the rise of maritime Britain relative to continental France during the remainder of the 18th century is contrasted in the articles on the finance of the Seven Years War. I dealt with the mysterious lack of apparent opportunity cost for the British economy in fighting the Seven Years War, arguing that Britain was able to impress foreign sailors from ships of other European nations to man its navy and to export consumer goods to Dutch merchants to maintain Continental demand for bills of exchange drawn on London. James Riley describes, by contrast, the increasing problems faced by the French monarchy in raising resources domestically as they pursued their side of the Seven Years War.

The success of Britain and the failure of France in the Seven Years War, in terms both of military outcomes and financial results, led to the American War of Independence. The eventual American success was clearly due to the helpful injections of financial support from the French and the Dutch as well as to the difficulties faced by the British in sustaining payment of their naval forces and their Hessian mercenaries in the face of the disruption of normal trade with the rebellious colonies.

But the vital injections of foreign credit did not occur until late in the war, about 1780. Until then, the separate states had to raise troops and supply them from their own, limited, resources or cede some tax authority to the fledgling Continental Congress. Necessarily then, paper money had to be issued in denominations chosen independently by each state (British pounds or Spanish dollars) and just as necessarily the value of each state's currency depreciated relative to specie. Inevitably, each state resorted to legal tender acts and price controls to offset the depreciation by statute. The process is described by Ralph Harlow in an article published in 1930 during concerns in the United States over the direction of Federal Reserve policy in response to the start of the Great Depression. Harlow's perspective is very much that of a monetarist, attributing the resulting inflation in each state to the extent of currency issued by its government. Ann Bezanson, by contrast, analyzed the course of prices by commodities in Philadelphia in the early stages of the war, attributing their fluctuations to the exogenous disruptions of supplies due to the British navy and to the demands imposed by military exigencies. In response to price shocks and inadequate taxes, then, paper currency was issued and price controls imposed.

The combined lessons of war finance for all concerned find their expression in Hamilton's concern to establish the credit of the central government in the terms of the new Constitution, as well as in the assumption by the new Federal government of the war debts incurred by the individual states. He clearly wished to maintain the creditworthiness of the new state with respect to foreign investors, giving them preference in a variety of ways. The details of his refinancing scheme are analyzed by Swanson and Trout. The reader should recall, however, Harlow's point that postwar inflation was eliminated most of the state debt incurred over the course of the Revolution. The result was that Hamilton's task was much smaller than assuming the entire cost of the war for the new Federal government.

Meanwhile, the strains of aiding the American war effort without the benefit of a trade network nearby, placed new strains upon the French financial structure, described by Eugene White. The culmination of these strains led directly to the French Revolution. Seen in our perspective of war finance, the essential feature of that historic event was to mobilize the entire tax base of the largest, richest country in Europe for the purpose of financing military conquest. The fiscal privileges of the nobility were removed while all the properties of the church and its affiliated religious orders were simply expropriated (following the earlier, and similarly successful, examples of Henry VIII in England and Gustavus Adolphus in Sweden). Moreover, the innovation of the levée en masse enabled French generals to increase the size of their armies and to maintain them at full strength for extended periods of warfare. When Britain was drawn into war with revolutionary France in 1793, it attempted to finance the war effort in the way that had proven so successful in the Seven Years War and the earlier wars of the 18th century. But as its subsidized German armies on the continent wilted in the face of French revolutionary fervor, it was forced to sue for peace and to re-formulate both its war strategy and its financial practices.

The standard sources on British finance in this period are the articles by Silberling and Clapham. An early piece on the French understanding of the financial techniques of the British and their importance for the military success of the British allies against Napoleon was written by Henri LaSalle, the Chevalier Le Guer, in 1803 and reprinted by Audrey Cunningham in her work published on the eve of World War I. Cunningham's discussion of Le Guer's analysis of British war finance demonstrates clearly that the motivation for Napoleon's most famous innovation in war finance, the Continental Blockade, was to undermine the British credit system on the Continent.

Basically, Le Guer's idea was to disrupt the trade network of British merchants on the continent and thereby destroy the market for the bills of exchange drawn on London which were the basis of British financial support of German mercenary armies arrayed against the French. François Crouzet's article summarized the results of the Continental Blockade. Crouzet's argument is that the Blockade, combined with the British embargo on trade with France, hurt France and its network of trade more than it did Britain and its trade, mainly because British merchants had a much wider array of alternative trade routes and contacts to substitute for those closed off by enemy action. By contrast, Jeffrey Frankel, argued that the Continental Blockade probably had serious adverse effects on the British economy. Certainly, the Jefferson Embargo imposed against trade with Britain, effective from 1808 through the end of the War of 1812, was effective in turning the terms of trade against Britain. If the Continental Blockade was a well-conceived strategy against British war finance, and if it worked reasonably well, as Crouzet admits it did at times, why was the British war effort nevertheless successful?

I argue that the answer lies in the international capital flows initiated by the shocks of French revolutionary conquests on the continent. These stimulated capital flight, most importantly of the merchants engaged in overseas trade located in the Atlantic seaports of Europe. Their preferred destination, regardless of place of origin (and recall that eventually Napoleon's forces imposed the changed property rights of the French revolution everywhere in Europe) was London and its secure, and liquid, capital market. This is still a controversial claim among the community of scholars actively engaged in research on the topic. But more evidence is being uncovered on international capital flows in this early period by today's researchers, motivated as they are by awareness of the global economy that has emerged at the end of the 20th century, and they are applying more sophisticated, open-economy, theory to the evidence as they uncover it. Given the importance of extra-territorial finance in all the European wars from the Middle Ages to the present, moreover, it seems unlikely that this research effort will simply re-affirm the traditional story that Britain's tax effort and rising debt burden managed on its own, if just barely, to stave off the military might of the Corsican monster. More likely, researchers will find evidence of new channels of finance formed between Britain and the rest of the world as Napoleon and Jefferson imposed their check dams on the existing courses of trade credit.

The Crimean War

Emerging from the Napoleonic Wars as the dominant naval power of the world and with London as the financial center, Britain had little difficulty in projecting its maritime power over the next century, called the Pax Britannica. The only major war in that period that involved both British forces and European forces on the European continent was the Crimean War (1853-1856). This occurred immediately after Britain had initiated the era of free trade in Europe by abolishing its Corn Laws and its Navigation Acts. In the Treaty of Paris, which ended the Crimean War in 1856, the warring parties also outlawed the use of privateering in future wars. By 1856, in other words, all the vestiges of early modern warfare had been discarded formally by Great Britain. O. Anderson discusses how the issue of whether to rely upon loans or taxes in financing the Crimean War was debated and decided in Great Britain. This was destined to be the issue in every war fought with modern technology for the next century. But at the time, there was no experience with the costs, duration, and pure slaughter implied by modern warfare technique. It turned out that foreign loans were not available, even for a war fought on foreign soil, and that taxes could not be raised domestically in support of a war effort seen as merely marginal to the interests of Britain by a public still smarting from the increase in taxes imposed to compensate for the decline in tariff revenues anticipated by the abolition of the Corn laws and the Navigation Acts. However, domestic loans could be raised easily, leading to a shift in government attitudes toward war finance that was to continue to the present day.

The American Civil War (1861-1865)

The bloodiest and most expensive war in the history of the United States, and of the 19th century, was the American Civil War. The financial aspects of it actually anticipated the outbreak of war, for southern banks began withdrawing their deposits in New York banks, demanding payment in specie, immediately upon news of Lincoln's election to the presidency in November 1860. The outcome of the war seemed in little doubt to modern analysts, or to contemporary outside observers (e.g., Walter Bagehot writing in the Economist magazine in 1861). The North was twice the size of the South in total population and much larger than that in terms of industrial production. For the governments of the respective belligerents, however, the outcome seemed less clear. The North was concerned about its constitutionally weak source of taxes and absence of a central bank, to the extent that it feared it would not be able to wage an effective campaign. The South, by contrast, was confident that its staple crop of cotton would provide both the basis for foreign finance and possibly foreign military intervention on its side. Both proved very wrong in the end, but at the outset the fears of the North and the hopes of the South were not unrealistic. In the North, outlays for mobilization increased enormously while revenues, mainly from customs revenues and land sales, fell sharply. Secretary of the Treasury Salmon P. Chase was responsible for the Union's various experiments in war finance (until Lincoln surprised him in 1864 by accepting his threat of resignation). Chase seemed to do everything wrong according to both economists (Wesley Clair Mitchell) and historians (Henry C. Adams) of the late nineteenth century. The negative opinion of his various maneuvers has held up to the present with only a moderate defense of him by Bray Hammond. But while Chases's various efforts to sell long term debt on the New York market at unrealistically high prices all came to nought until inflation and military success made his prices reasonable by 1863, by default he had to issue fiat currency in large amounts and then devise strategems to encourage people to hold it rather than try to spend it as quickly as possible and thereby speed up the rate of inflation. Out of his many attempts came a large supply of central government long term debt widely held across the country, a fiat currency with quantitative restrictions on its issue, and the National Banking System -- although this did not really become effective until after the war.

On the Confederate side, Secretary of the Treasury Christopher Gustavus Memminger was equally incompetent in conceptualizing the scale of finance required for a successful military effort. He cannot, however, be accused of the same ineptitude as Chase, but only because he was simply inactive when it came to finding short-run expedients to compensate for his failures at raising taxes or selling long-term debt. By default, inflationary finance followed, driven at first by the expansion of debt by each of the southern states and then by expansion of state bank money supply and finally by the increase of inconvertible Confederate currency (the notes issued in February 1864 in Richmond, Virginia were redeemable "Two years after the Ratification of a Treaty of Peace between the Confederate States and the United States.") The causes and the effects of the hyperinflation that eventually resulted are described by Eugene M. Lerner. From 90› on the gold dollar in 1861, the Confederate dollar had dropped to 1.7› in 1865. (However, by 1979 numismatists were willing to pay $8.00 for a Confederate dollar -- the result of a much more restrictive monetary policy practiced by the Confederacy over the intervening century!) An unusual feature of the hyperinflation occurred late in the war, however, due to the lack of centralized control by the Confederate government and to the splitting of the Confederacy's territory by Union control of the Mississippi by the middle of 1863. Gary Pecquet describes the expedients used in the Trans-Mississippi South after it was cut off from the rest of the South physically, but under the same monetary regime.

The role of foreign finance was initially more important and more successful for the Confederacy than for the Union, but it is clear that as the fortunes of war turned in favor of the North so did the weight of foreign investment in Union debt. Ellis Oberholtzer, the biographer of Jay Cooke, the investment banker who invented mass marketing of government bonds in the United States, quoted contemporary estimates that foreigners held $150 million of Federal debt in March 1864, rising to $320 million in March 1865, while the Economist suggested a total of $486 million was held abroad in 1867. This compares to total of interest-bearing debt of $1,816 million in 1864 and $2,681 million in 1865. Although the percentage share of foreign held debt may seem relatively small by any absolute standard, its weight was sufficient to bear on the Congressional decision made in 1873 to resume convertibility of the dollar on a de facto gold standard by 1879. The wisdom of this decision was debated fiercely for the next quarter-century until put to rest by the defeat of Bryan by McKinley in the Presidential election of 1896, the beginnings of gold inflation in 1897, and the passage of the Gold Standard Act in 1900.

The lessons of Civil War finance, however, continue to be hotly debated to the present day. Each generation of economists seems able to find in the diverse experiments carried out in both the North and South something that is particularly relevant to the current monetary and financial issues of their day. Especial attention was paid, of course, during both World War I and World War II.

World War I (1914 - 1918)

By the eve of World War I, all the industrial trading nations of the world had adopted a gold standard. The resulting framework of fixed exchange rates encouraged the rapid growth of foreign trade among them and was especially important in facilitating the large-scale capital flows that occurred. As a result, bankers' deposits from around the world were held in large accounts with the London banks. There, access to the London money market facilitated multilateral transfers of trade credit, extension of short-term credit, and the placement of long-term investment securities. The article by the young Keynes describes how the outbreak of the hostilities disrupted the flows of credit between Germany and the London money market, leading to the full suspension of trading activity in the London Stock Exchange and, anticipating the eventualities of the Napoleonic Wars, resuming it only with the imposition of capital controls and the suspension of specie payments by the Bank of England.

The article by the British economic historian John Clapham attempts to draw analogies between the aftermath of the Napoleonic Wars and the Great War from the British perspective while the American economic historian Ernest Bogart compares the sale of Liberty Bonds and the broad scale raising of taxes in the U. S. during the war with the techniques developed for war finance during the Civil War. The perspectives varied by nation and this is brought out in the articles on German war finance, on Canadian banks, on British debt policy, and on the good fortune of the Americans.

In each country, World War I brought irreversible changes in the role of government, including but going well beyond its control of the domestic money supply, and in the structure of the financial sector. Most dramatic, perhaps, was the experience of the United States as its newly legislated semi-central bank, the Federal Reserve System, became immediately a full-blown central bank subject to the political pressures of the Federal government. Over the course of the war the United States became a mature creditor nation in place of being the world's largest debtor nation. In contrast to the Civil War, which eventually put over 13 per cent of the population into the armed forces, World War I required only 5 percent of the population. While eventually the war was financed primarily by borrowing (less than 1/3 of American war costs were covered by tax revenues), once again a variety of expedients were tried. Secretary of the Treasury William G. McAdoo began by issuing large sums of new paper currency in the first three months of the war, under the terms of the Aldrich-Vreeland Act. Then the newly formed Federal Reserve System came quickly into full stature by member banks purchasing government bonds. Yet, only 20% of the debt was taken by banks, as the public responded enthusiastically to the mass-marketing of Liberty bonds, even at below market interest rates.

As in the great contests of the past, the belligerents prevailed who were best able to mobilize funds from foreign sources. This enabled them to bring fresh troops and supplies to the strategic points of attack. In every part of the international economy the effects of war finance were felt in the form of rising commodity prices and an increased volume of production, either to compensate for the loss of imports from industrial Europe or to provide exports of war-related materiel to help the European powers continue their mutual annihilation. Previous wars had spread disease to the areas invaded by troops -- plague, small pox, and syphilis. The global logistical net mobilized to sustain World War I in Europe managed to spread the swine flu imported from Asia through American troops in encampments on the East Coast, in transit by ocean steamer, by rail within Europe, and on to reach Asia again. The flu epidemic of 1918 remains the great demographic shock from disease experienced in the twentieth century, killing perhaps 40 million people in Europe, the Americas, and Asia. Its devastation was due mainly to its global reach, surely the result of the international logistics impelled by the finances of the Great War.

The problems of reparations and inter-allied war debts remained insuperable obstacles to the resumption of a growing international economy after the war. Whatever the explanations favored by economic historians for the Great Depression of 1929-33 -- unreasonable reparations on Germany, irresponsible American political leadership, destabilizing monetary initiatives by the French, imperial overreach by the British, or simply untenable attachments to the prewar gold standard -- they all originate in the war finance of World War I. Out of the Great Depression, of course, came the origins of World War II, and a chance to put into practice the lessons learned so painfully by the results of World War I.

World War II

The lessons of World War I were fresh in the minds of the government officials and their economic advisers on the outbreak of World War II. As usual, however, the desperate predicaments imposed by the outcomes of attacks, battles, and invasions in the rapidly widening theaters of war overrode all calm, rational policy making, and any efforts to draw judiciously upon the lessons of the past. Once again, the divergences in war finance among the belligerents during World War I were revealed and now widened. Nazi Germany resorted to domestic loans placed with the Reichsbank, Nazi-controlled since the forced resignation of Schacht in 1938, and countered the potential for domestic inflation with stringent price and wage controls. (The prices set by the time war began in September 1939 became so solidified in the structure of the Germany economy that they were still the basis for East German prices in 1989!) Moreover, Nazi monetary practice, with an occupation tax levied upon the central bank and rigidly enforced price and wage controls, was extended in each country occupied and integrated into the "New Order" they imposed upon unified Europe. This left a legacy readily adapted by Communist regimes in Central and Eastern Europe to maintain their command economies, and only painfully undone by democratic regimes in Western Europe.

Great Britain acted largely on the recommendations of Keynes, acting as economic advisor to the Treasury (he was still heartily loathed by Norman Montagu, Governor of the Bank of England, for his attacks on the return to the gold standard in 1925 at pre-war parity with the dollar). Keynes basically proposed forced loans from labor, repayable after the war was won, and he made rough evaluations of the domestic and foreign resources of Great Britain that could be mobilized by the central government to provide the necessary military force. His estimations, incidentally, led into the formal development of the System of National Accounts by Richard Stone, adopted by the United Nations after the war as the basis for national income accounting which persists to this day. In the event, Britain again raised much of the finance by heavy domestic taxes, and foreign borrowing. Only now in addition to accumulating indebtedness to the United States, it also built up a huge indebtedness in sterling balances to the Commonwealth and Empire countries. These were to be a major constraint upon British economic policy for at least two decades after the war. Finally, price and wage controls were imposed as in all the belligerent nations, and were effectively enforced thanks to total mobilization of the economy for the war effort and the control of products available to consumers through control over imports.

For the Soviet Union, the finance of World War II required unusual measures even for a totalitarian state already structured to exercise a complete command economy. The articles by Millar and Linz bring these out in stark detail. Workers were forced to accept payments in already inconvertible rubles and pay state determined prices for whatever goods where allotted to the civilian sector by the state. So by raising prices and keeping wages low, the state automatically increased its revenues. Even the increased state revenues and the increasing diversion of them toward the military budget, however, proved inadequate. In 1942, the issuance of bonds to the Soviet public and to Gosbank accounted for almost 20% of the total war budget in that year. But this was the highest point reached by non-financial sources of funds. The average over the entire war was only 12.5% and in 1946 the Soviet government rapidly reduced new debt to only 1.2% of total expenditures. Unlike the other belligerents, whose wartime financial practices left permanent imprints upon their financial sector and their future monetary policy, the Soviets rapidly reverted to their prewar budgetary practices. Perhaps this was because Stalin was the only wartime leader to continue in power in the peace that followed.

The lack of loans in the war finances of the Soviet Union implies that the burdens of the war were met, more than in any other country, by the current generation, and indeed gross inefficiencies of the Soviet system combined with the devastation wrought by Nazi armies inflicted heavier losses upon the Russian people than upon any other nation involved. But even in the absence of loans to be serviced there were heavy costs of the war that still had to be borne by the Soviet people after the war. These "carryover costs" of World War II are analyzed and their relative burden calculated in the article by Susan Linz.

In the United States, Secretary of the Treasury Morgenthau cursorily examined the techniques employed by McAdoo for World War I, argued for huge increases in taxes much as had McAdoo, and ended by resorting to loan finance for most of the expenditures, as had McAdoo. Nevertheless, a full 46% of expenditures were covered by taxes, so as in World War I, much of the Allied military success over the Axis in World War II can be attributed to stronger financial bases. In the U. S., unlike the other belligerents, war production could be expanded without curtailing consumer expenditures. This was due in the early years of the war to the continued depression and in the later years to the enormous increases in total output, the combined result of improved technology, construction of new capital facilities, and the much higher participation rate of the population in the labor force. More women entered the labor force than the number of men diverted into the armed forces.

The government debt was now mass marketed more effectively than in World War I, with smaller denominations and different series offered on a nation-wide scale. Nevertheless, the banking system absorbed 40 percent of the increased debt compared to only 20 percent in World War I. The Treasury was successful in maintaining very low interest rates on the mainly long-term debt it issued. The result was an unprecedented increase in the nation's money supply as well as a major change in the structure of the nation's financial sector. In 1939 there were 81 banks with deposits over $100 million and 25 of these were in New York and Chicago; by 1946 there were 180 such banks and only 34 or them were in the two cities. A nationwide banking system had emerged for the first time in U. S. history. The lasting contribution to U. S. monetary policy was the emphasis on control of interest rates on government debt, as this had major consequences for the Treasury's expenditures, both in servicing the existing debt and rolling over extinguished debt. Ironically, the large government debt enabled the Federal Reserve System to employ open-market operations in fine-tuning the nation's money supply much more effectively than before the war.

Financing the Wars of the Post-Modern Age

Following the war, the United States created a new financial system both domestically and internationally. On the domestic front, the regulatory measures of the New Deal could now be exercised by the Comptroller of the Currency independently of war demands and the Federal Reserve System re-asserted its independence from the Treasury in the Fed-Treasury Accord of March 1951. On the international front, the Bretton Woods system of fixed, but adjustable, exchange rates with the gold based dollar as their common anchor, became operational after the wholesale realignments in September 1949. The first test of the new financial system came with the Korean War (June 1950 - July 1953).

Despite the equivocal outcome of the war, it has to be said that the financial system worked well. Thanks in large part to to the overseas military outlays by the U. S. government, the huge gold reserves the U. S. had accumulated over the previous two decades began to be re-cycled into the multilateral payments system re-established by the Bretton Woods system. This process was institutionalized with the establishment of a world-wide network of military bases maintained by the U. S. government. Not all of the cost of these transfers abroad was borne by U. S. taxpayers, however. American dollars, as well as gold, were eagerly sought by foreign central banks to build up their foreign reserves. To the extent that dollars spent overseas for whatever purpose were held by foreigners instead of being returned for gold or goods or services from the U. S., the American government received seigniorage on the reserve currency it had created for others. First Germany, then Italy and finally Japan began to exploit the trading opportunities created by U. S. hegemony, building up export surpluses invested primarily in holdings of U. S. dollars. France and Great Britain, by contrast, tried through the 1950s to maintain their own military bases in the overseas colonies they were attempting to regain or sustain after World War II. Under the Bretton Woods system, they too lost foreign reserves, whether dollars or gold, as long as they persisted in playing the Great Power game under the new rules. By the end of the 1950s, both France and Britain had recoiled from an extensive overseas military presence, and had begun to concentrate their reduced levels of spending on their own national defense, which became defined more and more narrowly.

The articles on the economics of alliances reflect attempts to analyze the new pattern of military strategy and its implications for cost-sharing. As with the Delian League, it made economic sense for the governments of the states with most to lose in case of military defeat to put up most of the funds needed to mobilize and project the forces of the state with the superior military technology and equipment. And as in the evolution of the Delian League, the states with most to lose gradually changed from those closest to the potential enemy (whether Persia or Russia) to those with the most prosperous commerce (whether Athens or the United States).

The military and financial implications of the economic dynamics of the NATO alliance in the 1950s and early 1960s were revealed in the Vietnam War. Not only did President Lyndon Johnson refuse to raise taxes to cover the increasing expenses of this long-distance military exercise, most of the U. S. allies, whether in Asia or Europe, refused to contribute either. The result was domestic inflationary pressures, translated under the Bretton Woods system, which used the dollar as its nominal exchange rate anchor, into international inflationary pressures. Dudley and Passell investigate specifically the pressures of Vietnam war expenditures on the U. S. balance of payments in the last years of the Bretton Woods system, which collapsed in August 1971, partly due to these pressures.

The lessons of Vietnam were learned in the financial sphere as well as in the military domain for the Gulf War in 1990-91. Instead of raising domestic taxes or floating additional debt, the U. S. enlisted the support in kind and in cash from the potential allies most concerned. The front-line states of Kuwait and Saudi Arabia, the commercially involved states of Germany and Japan (cash or supplies only) and France and Great Britain (military units and supplies) were all solicited for substantial sums and all responded. The net result was a slight profit in financial terms for the U. S. military at the end of the reconquest of Kuwait. Most of the ammunition and equipment lost in the conflict was not due for replacement in any event, due to its obsolescence on technical (replacement by modern smart weaponry) or strategic grounds (reduction of the Soviet threat in Europe).

Conclusion

Some analysts, endowed with an ability to extrapolate trends from a single event, have proclaimed that this is the way the U. S. will have to finance its wars in the future, and moreover that only the U. S. among the rich industrial nations of the world has the capacity to fight wars. The readings collected here, covering the gamut of "civilized" warfare from antiquity to the present and the means used to finance wars, should make the reader doubt the plausibility of such extrapolation. No doubt the western military alliances will have to find a new financial equilibrium, but this will rest upon military comparative advantage as well as economic resources, which define the strategic principles of any military alliance. The process of achieving a new equilibrium will also have to deal with the omnipresent urges to establish national sovereignty by whatever means. Along the way, we will certainly see attempts to raise military assets without resort to domestic taxation. These will again take the form of issuing government debt, held both domestically and abroad, and of seeking protection by established military powers.

The financial aspects of The Gulf War may have established a precedent for famine relief in Somalia; but this was not a military exercise properly speaking. For the much more violent and devastating civil war currently raging in the former Yugoslavia, the Gulf War gives no guide, only warning signs, for the means of either military intervention or of its finance. From the viewpoint of the United States and its NATO allies in Europe, the strategic asset at stake would seem to be no more than sustaining the navigability of the Danube from the Black Sea to the Rhine-Danube canal. But the stretch of the Danube running through the territory of the former Yugoslavia lies entirely within the provinces always recognized as Serbia proper. So the intent of the West has to be to confine the civil war to as small an area as possible within the mixed ethnic areas. On the other hand, the warring parties -- Croats, Serbs, Moslims -- will all want to draw upon outside sources from wherever and in whatever form. This is an interesting challenge for a former Marxist economy that ever since World War II has largely confined its economic relations with the outside world to emigrant remittances from abroad and tourist expenditure in cheap resorts. Whatever the result, the outcome of the civil war in Yugoslavia will define the New International Order; the Gulf War was only the first step (or misstep) toward that goal.

War Finance Footnotes:

Most of the residual debt of roughly one-third billion dollars arose due to the strengthening of the U. S. dollar relative to the currencies of Germany, Japan, and South Korea. These countries had paid the amount of domestic currency they had originally pledged, but U. S. costs had been in dollars and it was dollar pledges that the U. S. had accepted in the Fall of 1990. The unexpected quickness and totality of the victory had raised expectations for the strength of the dollar on the foreign exchanges according to journalists. Economists could not help wondering if the quick and substantial payments of the amounts pledged by the various allies had not raised the value of the dollar on the exchanges.

See, for example, any of John Keegan's masterful books, The Face of Battle, The Mask of Command, The Price of Admiralty, The Nature of War, Six Armies in Normandy, The Second World War.

Andreas Andreades, A History of Greek Public Finance, tr by Carroll N. Brown, repr. New York: Arno Press, 1979. Pp. 58-71, 306-349.

A. B. Bosworth, Conquest and Empire: The Reign of Alexander the Great, Cambridge: Cambridge University Press, 1988. Pp. 204-220, 229-245.

Leonard Dudley, "Structural Change in Interdependent Bureaucracies: Was Rome's Failure Economic or Military?" Explorations in Economic History, 27 (April 1990), pp. 232-48.

J. G. Edwards, "Edward I's Castle-Building in Wales," Proceedings of the British Academy, 32, 1946. Pp. 15-19; 52-73

Richard W. Kaeuper, Bankers to the Crown, The Riccardi of Lucca and Edward I, Princeton, NJ: Princeton University Press, 1973. (Ch. 4, "The Welsh Wars.")

E. B. Fryde, William de la Pole: Merchant and King's Banker, London: The Hambledon Press, 1988. Chs. 8, 9, 13.

K. B. McFarlane, "England and the Hundred Years' War," Past and Present, 22 (July 1962), pp. 3-13.

M. M. Postan, "The costs of the Hundred Years' War," Past and Present, 27 (1964), pp. 34-53.

Geoffrey Parker, Military Revolution: Military innovation and the rise of the West, 1500-1800, Cambridge: at the University Press, 1989, p. 1.

Geoffrey Parker, "Lepanto (1571): The Cost of Victory," Spain and the Netherlands, 1559-1659, (1979), pp. 122-133.

The reading on "Financial Resources" from Geoffrey Parker's classic study of Spanish war finance, The Army of Flanders and the Spanish Road, 1567-1659; the logistics of Spanish victory and defeat in the Low Countries' Wars, Cambridge: University Press, 1972. Chapter "Financial Resources."

Michael Roberts, Gustavus Adolphus, 2nd ed., New York: Longman, 1992, pp. 109-126.

Fritz Redlich, "Contributions in the Thirty Years' War," Economic History Review, 12 (December 1959), 247-54.

Geoffrey Parker, Spain and the Netherlands, (1979), pp. 178-203. "War and Economic Change: the Economic Costs of the Dutch Revolt."

Jonathan Israel, Empires and Entrepots. The Dutch, the Spanish Monarchy and the Jews, 1585-1713, London: The Hambledon Press, 1990., Ch. 7, "Spain, the Spanish Embargoes, and the Struggle for Mastery of World Trade, 1585-1660."

D. Pennington and I. Roots, eds., The Committee at Stafford (1643-1645), (Manchester, 1957), pp. xxvi-lv.

R. Hutton, The royalist war effort 1642-46, (London, 1982). Ch. 3.

P. G. M. Dickson and John Sperling, "War Finance, 1689-1714," in J. Bromley (ed.), New Cambridge Modern History, VI, The Rise of Great Britain and Russia (1688 - 1715/25), Cambridge: at the University Press, 1970.

John Brewer, The Sinews of Power: War, Money and the English State, 1688 - 1783, New York: Alfred A. Knopf, 1989.

D. W. Jones, War and Economy in the Age of William III and Marlborough, Oxford: Basil Blackwell, 1988. Chs. 3 & 7.

Earl J. Hamilton, "Origin and Growth of the National Debt in Western Europe," American Economic Review, 37 (May 1947), pp. 118-30.

Larry Neal, "Interpreting Power and Profit in Economic History: A Case Study of the Seven Years War," Journal of Economic History, 37 (March 1977), pp. 20-35.

James C. Riley, The Seven Years War and the Old Regime in France, The Economic and Financial Toll, Cambridge: Cambridge University Press, 1986. Ch. 5, "Financing the war."

Ralph V. Harlow, "Aspects of Revolutionary Finance, 1775-1783," American Historical Review, 35 (October 1930), pp. 46-68

Ann Bezanson, "Inflation and Controls, Pennsylvania, 1774-1779," Journal of Economic History, 8 (1948), 1-20.

Donald F. Swanson and Andrew P. Trout, "Alexander Hamilton, Conversion, and Debt Reduction," Explorations in Economic History 29 (October 1992), pp. 417-429.

Eugene N. White, "Was There a Solution to the Ancien Regime's Financial Dilemma?" Journal of Economic History, 49 (September 1989), 545-568.

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