Warfare and Financial History

Warfare, with its appalling humanitarian consequences and vast economic costs, has stimulated financial innovations from the spread of coinage to the creation of the national debt. Conversely, economic weakness and the inability to properly utilize financial resources have been causes of military defeats.

The relationship between economics and warfare is one of the themes treated in some detail in an 800 page book on the history of money. For the historical context of the conflicts listed below see also the annotated chronology which includes references to the page numbers of the book.

The source of the information is:

A History of Money by Glyn Davies, 4th ed revised by Duncan Connors, Cardiff: University of Wales Press, 2016. 784 pages. Paperback: ISBN 9781783163090. E-Books; Amazon Kindle (Mobi) 9781783163120, epub - 9781783163113,

During the Second World War Glyn Davies served in the British 8th Army in North Africa, Sicily and Italy, and the British 2nd Army in northern Europe, before resuming his studies of economics, and consequently he experienced the reality of war at first hand.

See also Money in Fiction

Violence and the Origin of Money

Many societies had laws requiring compensation in some form for crimes of violence, instead of the Old Testament approach of "an eye for an eye". The author notes that the word to "pay" is derived from the Latin "pacare" meaning originally to pacify, appease, or make peace with - through the appropriate unit of value customarily acceptable to both sides. Objects originally accepted for one purpose were often found to be useful for others and, because of their growing acceptability began to be used for general trading also. Thus the practice of paying compensation for certain crimes was one of the factors that played a role in the origins of money.

Ever since the invention of coins monetary and military history have been inter-related to a degree that is both depressing and surprising. Glyn Davies goes so far as to paraphrase Clausewitz's famous dictum and refer to war as the continuation of monetary policy by other means, and quotes a remark by an eighteenth century writer (Davenant) that "nowadays that prince who can best find money to pay his army is surest of success."

Wars between Ancient Greece and Persia

Among the earliest and most popular of the Persian coins was a series known as archers because on the obverse they depicted the emperor armed with spear, bow and arrows (page 67). The mainland route from Asia to Greece lay through Thrace and Macedon, kingdoms of such minor importance that they were simply bought off by the Persian archers. Hence the boast of the Persian emperor "I will conquer Greece with my archers" was something of a pun - intentional or otherwise.

The Persian boast was not fulfilled and part of the reason for this is that around 490 BC a particularly rich seam of silver was struck in the Laurion mines some 25 miles south of Athens and some of the proceeds from this were saved by the Athenians, after powerful persuasion from Themistocles, and used to build the fleet which destroyed the Persians under Xerxes at the battle of Salamis in 480 BC. Thus Greek civilization was saved from being strangled on the eve of its greatest triumphs.

Later the Macedonians opened up a number of new mines and began minting coins on a large scale. Some of these commemorated the triumphs of their king, Philip, in the Olympics (an example of how coins were used in the ancient world as instruments of propaganda). The quantity of coins minted by Philip was far in excess of the normal requirements of the Greeks and Macedonians. Therefore, when Alexander the Great inherited the throne he had a large financial reserve to pay for the initial stages of his campaign against the Persians.

By the time Alexander's army was fully engaged in Asia the cost was about 20 talents or half a ton of silver a day! This shows how important his father's preparations were to the success of his campaign. Later on Alexander captured immense quantities of Persian gold and silver, much of which was then turned into coins by the mints he also captured, and so his war became self-financing.

The Roman Empire

After discussing the financial aspects and consequences of Alexander's conquests Glyn Davies goes on to discuss the role of economics in the rise and fall of the Roman Empire. The Punic Wars between Rome and Carthage proved to be very expensive and at one stage Rome seems to have run out of money altogether and been forced to rely on credit. The expense of supporting the Roman army may be judged by the fact that the cost of maintaining just one legion (after the last Punic War) was about 1,500,000 denari a year. Therefore the main use of the annual production of silver coins was simply to pay the army.

Because of this expense emperors were often tempted to try and make savings by debasing the coinage - a technique used in many countries for as long as coins were made from precious metals. (One typical method of debasement was to use metal with a lower grade of purity). However, debasement resulted in inflation which got steadily worse when in addition to their army the Romans had to maintain a large bureaucracy and also spent huge amounts on welfare payments.

Various emperors introduced financial reforms to try and halt inflation but some of their attempts actually made matters worse.

Aurelian simply raised the nominal value of his coins by two and a half times the value of similar ones with the result that the pace of inflation was no longer constrained by the rate at which hand-struck coins could be minted. Glyn Davies suggests that those who believe in the disinflationary magic of a gold currency should note that Aurelian proved conclusively that a "reformed" currency is perfectly compatible with an increase rather than a decrease in inflation.

The most successful was Diocletian who introduced a whole series of measures including reforms of the currency, a system of annual budgets, and a prices and incomes policy. Thus there was a shift from a market economy in the direction of a controlled one. Diocletian's successor Constantine continued his reforms and also introduced new gold coins and ensured that there was a plentiful supply for the influential sections of Roman society. The measures undertaken by these two emperors did not eradicate inflation but they did enable Rome to live with it, ensuring the survival of the western empire until the 5th century and laying the foundations of the eastern or Byzantine empire. The army and the bureaucracy were kept happy while welfare payments helped to keep the poorest sections of society from causing trouble. Nevertheless Rome was seriously weakened by inflation before it fell to the Barbarians.

Anglo-Saxon and Viking Invasions of Britain

The effect of the fall of Rome was particularly marked in Britain where money virtually disappeared from use for a couple of centuries, the island reverting to barter. Later, after the Anglo-Saxon invaders started to mint coins (originally by copying those made in France) they had in their turn to face invaders from the east - the Vikings.

This led to a immense increase in the minting of coins in England because of the demand for Danegeld to pay the invaders to go home, or heregeld, a tax to pay for the armies of those monarchs who chose to fight the Vikings. Huge quantities of English coins from this period have been found in Scandinavia. After Athelstan reconquered the Danelaw he passed the Statute of Greatley in 928 which established a single national currency for England and marked the start of the unbroken 1,000 year history of the pound sterling. Later monarchs relied more on their mints than their armies to defend the realm. Aethelred's 75 mints coined nearly 40 million silver pennies for the payment of Danegeld.

One linguistic legacy of the Viking era is the phrase "to pay through the nose". This expression comes from the unfortunate habit of the Danes in Ireland in the 9th century who slit the noses of those unwilling or unable to pay the Danish poll tax.

The Norman Conquest

William the Conqueror financed the Norman invasion and conquest of England partly by debasing Norman currency. However, he resisted the temptation to do the same to the English coinage and instead raised revenue through the introduction of new taxes. The very detailed survey of the resources of his new kingdom, recorded in the Domesday Book, facilitated the imposition of these taxes. Furthermore, the tax collectors would naturally reject below-weight or impure coins and thus the system of taxation not only provided an alternative to debasement but also gave the rulers an incentive to maintain the quality of the coinage and so the value of English money remained remarkably stable for several centuries, in marked contrast to the situation on the Continent.

The Crusades and the Re-Emergence of Banking

Before the time of Henry II it was normal in England, as in other feudal countries, for the the king's tenants-in-chief and their retainers to owe him a period of military service, usually 40 days annually. Henry replaced this obligation with cash payments known as scutage and used the money to pay for a permanent professional army of mercenaries or soldiers as they commonly became known after this time from the solidus or king's shilling that they earned. England's participation in the Crusades required additional expenditure which Henry II financed by levying heavy taxes on all movable property and all incomes. But, although huge sums accumulated in Henry's eastern account he refused to let anyone spend them until after the disastrous battle of Hattin in 1187. Thus the loss of much of the Holy Land to Saladin was due to the miserly restrictions placed by Henry on the use of his vast hoard of money in a vain attempt to have his cake and eat it.

Henry's successor, Richard I (the "Lion Heart") raised money for the 3rd Crusade partly by the sale of as many publicly owned assets as possible (a measure which the author compares to Margaret Thatcher's "privatization" policy in the 1980s which has been copied by governments around the world). On his return journey he was captured in Vienna and imprisoned by Emperor Henry VI. The ransom demanded far exceeded the average revenue of the Kingdom of England but nevertheless a high proportion of it was raised quite quickly (through special taxes and gifts) and he was released.

Payments for supplies, equipment, allies, ransoms etc. required safe and speedy means of transferring vast resources of cash. Consequently the Knights of the Temple and the Hospitallers began to provide some banking services such as those already being developed in some of the Italian city states where the need to transfer sums of money for trading purposes led to the development of financial services including bills of exchange. Banking had been invented in the Middle East long before the invention of coins but was abandoned and forgotten after the collapse of the Roman empire. The Crusades gave a great stimulus to its re-emergence.

The Spanish Conquest of Mexico and Peru

The Spanish conquests in the New World were, like the Crusades, partly motivated by missionary zeal but also by greed. The Europe of the Middle Ages had often experienced shortages of bullion but with the conquest of the Aztecs in Mexico and the Incas in Peru, and the opening of the silver mines in Potosi (now in Bolivia) the dearth gave way to abundance leading to problems of inflation in Europe. The repercussions of the Spanish conquests were felt as far away as China. Initially imports of silver from the New World gave a boost to the Chinese economy but eventually the country became dangerously dependent on that source for its basic monetary supplies. The stage was reached when the total annual output of China's own silver mines was less than that carried in a single Spanish galleon sailing from Acapulco. As a result, when bullion imports started to dry up after 1640 the Chinese economy, the world's largest, was plunged into a terrible recession which undermined the stability of the Ming Empire (1368-1644).

Francis Drake and the Spanish Armada

During Francis Drake's circumnavigation of the globe 1577-1580, booty estimated at between £ 300,000 and £ 1,500,000 was seized from the Spaniards. According to John Maynard Keynes:

The booty brought back by Drake in the Golden Hind may fairly be considered the fountain and origin of British Foreign Investment. ... In view of this, the following calculation may amuse the curious. At the present time (in round figures) our foreign investments probably yield us about 6½ per cent net after allowing for losses, of which we reinvest abroad about half - say 3¼ per cent. If this is, on average, a fair sample of what has been going on since 1580, the £ 42,000 invested by Elizabeth out of Drake's booty in 1580 would have accumulated by 1930 to approximately the actual aggregate of our present foreign investments, namely £ 4,200,000,000 - or say 100,000 times greater than the original investment.

Several years after his epic voyage Drake and his fellow Sea Dogs were in action against the Spanish Armada. Atrocious weather in the summer of 1588 helped to seal the Armada's fate but it is possible that things might have worked out differently if it had been able to sail earlier. The previous year, agents acting for Sir Francis Walsingham, Elizabeth I's secretary of state and spymaster, are reputed to have cornered large numbers of bills drawn on Genoan banks in order to delay the build up of resources to equip the Spanish fleet - an early example of economic warfare.

The English Civil War 1642-1651

This war broke out because parliament disputed the king's right to levy taxes without its consent. The use of goldsmith's safes as secure places for people's jewels, bullion and coins increased after the seizure of the mint by Charles I in 1640 and increased again with the outbreak of the Civil War. Consequently some goldsmiths became bankers and development of this aspect of their business continued after the Civil War was over. Within a few years of the victory by the parliamentary forces, written instructions to goldsmiths to pay money to another customer had developed into the cheque (or check in American spelling). Goldsmiths' receipts were used not only for withdrawing deposits but also as evidence of ability to pay and by about 1660 these had developed into the banknote.

War of the League of Augsburg and the War of the Spanish Succession

In addition to taxation (and sometimes debasement of coinage) wars were financed by borrowing. This was one of the motives behind the establishment of the Bank of England in 1694. At that time the British government was desperately short of cash for the war against Louis XIV, the most powerful ruler in Europe. The lending resources of the goldsmiths combined with taxation, including new forms of taxation copied largely from the Dutch, could not supply the money needed. If the British government could raise a perpetual loan at a rate of interest acceptable to it, then instead of having to repay the capital only the interest would ever be repaid and the additional taxation required at any time would be just a fraction of the total loan. The lenders agreed to these terms because of various benefits to themselves that were attached to the deal. This, and other official borrowings, formed the "national debt" because it was not the personal debt of the monarch, which might be repudiated as Charles II did with his infamous "Stop of the Exchequer", but the debt of the government itself, guaranteed by parliament.

The role of the Bank of England was not confined simply to enabling the government to raise the money needed for the prosecution of the war. Michael Godfrey, the Bank's deputy governor (who was killed by a French cannonball during the siege of Namur in 1695) succeeded in establishing a system whereby the army received its funds promptly, (in marked contrast to the situation that prevailed during Henry II's participation in the 2nd Crusade when failure to make the money available in time was a major factor in the defeat by Saladin). After an interval of 4 years of peace a fresh war against Louis XIV broke out, the war of the Spanish Succession, and Britain and her allies were completely victorious, thanks largely to the military genius of John Churchill, Duke of Marlborough (an ancestor of Winston Churchill).

Anglo-French Wars in North America

In 1690 the first official state issue of paper money was made by the Massachusetts Bay Colony. These notes, amounting to £ 40,000 and promising eventual redemption in gold or silver, were issued to pay soldiers returning from an expedition to Quebec. A chronic shortage of official British coins caused other colonies to follow this example. Over-issuing of notes caused inflation but attempts by the British government to restrict the use of paper money caused considerable resentment.

Competition between the British colonies for Spanish silver coins pushed up their market rate causing problems in obtaining military provisions. Inflation was blamed for the lack of equipment and the delays which led to the defeat of General Braddock at Fort Duquesne in 1755. General Wolfe also complained of a lack of funds in his successful Quebec campaign in 1759. These complaints stiffened the British government's determination to increase taxation and revenue in America, so spurring the Revolution.

The American Revolution

The importance of war as a cause of inflation increased with the adoption of paper money in the west. Because of a general shortage of currency in the British colonies in north America, many of the colonies started to issue paper money. As these issues were often excessive, causing inflation, the British government acted at first to restrict and then to forbid the issue of paper money and this was one of the many acts of interference which caused the resentment which led, eventually, to the American Revolution.

When the war broke out the monetary brakes were released completely and the revolution was financed overwhelmingly with an expansionary flood of paper money and so the American Congress financed its first war with hyperinflation. By the end of the war the "Continentals" had fallen to one-thousandth of their nominal value. Yet although the phrase "not worth a Continental" has subsequently symbolized utter worthlessness, in the perspective of economic history such notes should be counted as invaluable as being the only major practical means then available for financing the successful revolution.

The Napoleonic Wars

Britain was the first country to undergo the Industrial Revolution. It was already well underway when the Napoleonic Wars broke out and was a factor in Britain's economic strength. Much of the working capital required by the new enterprises was supplied by the commercial banks which had emerged to supply the needs of various regions and Glyn Davies asserts that "without the banks the revolution would have been strangled in its infancy" (page 292).

In addition to greatly increasing expenditure on Britain's own armed forces, William Pitt, the prime minister, sent large subsidies to Britain's allies, a total of more than 15 million Pounds between 1793 and 1801, including a loan of 1,200,000 Pounds to Austria in July 1796. In 1797, after a run on the Bank of England triggered off by an abortive French landing in Pembrokeshire, the Bank's notes were made inconvertible.

Between 1783 and 1816 the National Debt rose from 273 million to 816 million Pounds. In addition to long term borrowing Pitt raised funds by introducing income tax, at a rate of 10%, and widening indirect taxes as far as possible. During the Napoleonic wars Britain experienced a certain amount of inflation which, despite being of a rather modest degree, was worrying to contemporary observers who were used to stable prices and an official inquiry blamed the Bank of England for issuing too much credit. As a result Britain adopted the gold standard for the Pound after the wars were over in 1816.

The War of 1812

After the revolution one might have expected the newly independent Americans to have welcomed with enthusiasm their freedom to set up banks but in fact there was a great deal of opposition to banking in general. The first true American bank, the Bank of North America had its congressional charter repealed in 1785. The first national bank, the Bank of the United States, though a financial success, was forced to close when its charter was not renewed. As a result, when the 1812 War broke out there was no government bank to exert a restraining hand on the commercial banks which issued far too many notes backed by far too little specie and the American financial scene reverted to its familiar inflationary pattern.

After the 1812 War the Second Bank of the United States was set up but once one of the heroes of that war, General Jackson, became president it was doomed to failure. Jackson admitted to Nicholas Biddle, the last president of the Bank, "ever since I read the history of the South Sea Bubble I have been afraid of banks." By killing the Second Bank Jackson delayed the establishment of a sensibly regulated banking system for eighty years.

The US Civil War

The war required a rapid transfer of resources from diffused and decentralized civilian expenditure to concentrated and centrally controlled military expenditure, by means of some combination of taxing, borrowing and printing money. The mixture actually chosen differed markedly between the Unionists and the Confederates.

The Union government levied two direct taxes; the first was on each of the states in proportion to population rather than ability to pay and it was therefore regarded as unfair by the poorer states. Rather better yields were obtained by a general income tax but even so these two taxes together yielded less than $200 million. Much more important were indirect taxes which at their maximum rates yielded over a billion dollars. Initial attempts at long term borrowing were not very successful but after an Ohio banker, Jay Cooke, was put in charge of marketing bonds an issue of $500 million was oversubscribed by the public. During 1863 and 1864 another $900 million were issued but the low interest rate no longer appealed to the public and so the Union had to rely on the assistance of the banks to ensure the sale of the debt instruments.

The North's record on inflation stands up well in comparison with the experience of victorious countries in later wars, even though the Greenbacks' (inconvertible notes issued by the Union government) worth in gold fell to half their nominal value.

In the South the imposition of adequate taxes and their collection was a case of too little too late. The Confederacy's borrowing policy was more successful than its taxation policies but was still inadequate. The Southern states relied on Europe's dependence on "King Cotton" to raise loans of $15 million but because of the blockade only around a quarter of the expected supplies came from such sources. The one seemingly unlimited resource was the printing press and hyperinflation resulted from its use. The South could probably at best only have moderated hyperinflation to a limited degree as the mix of fiscal and financial policies available to the Union was just not possible for the Confederacy to put into effect.

The Franco - Prussian War 1870-1871

In the same year as their victory over France the German states united to form a single country and adopted the Mark as their common currency, basing it on the gold standard which had already been in use by Britain for decades. Other countries followed the German example leading to the abandonment of bimetallism and the gold standard becoming an international one. The demonetization of silver by European countries was partly responsible for an increase in the amount of silver available in world markets. Consequently countries which still depended on silver for their currencies such as India, China and Japan suffered from inflation. The victorious Germans forced France to pay a huge indemnity of 5 billion francs. The money was raised easily by a loan which was more than 10 times oversubscribed. This experience partly explains French reliance on borrowing in preference to taxation in the First World War and French insistence on German reparations afterwards.

1st World War.

Lloyd George, as chancellor of the exchequer, was responsible for a revolutionary series of budgets from 1909-1911, introducing far greater progression into the financial system, tapping far more copiously the wealth of the rich. The author writes: "although the purpose of Lloyd George's fiscal policy was for financing social welfare benefits the fiscal framework had thereby been fundamentally transformed on the eve of the First World War into a much more buoyant source of revenue, ripe for the insatiable demands of the military machine. What had been introduced at the cost of a seething constitutional crisis, for welfare became a timely godsend for warfare." (page 369)

Even so the scale of expenditure so alarmed Keynes that he warned of the danger of Britain becoming bankrupt by the spring of 1916. This did not happen. As in previous wars old taxes were increased and new ones were introduced. Huge loans were also raised, including the first billion pound loan in world history. However the British government failed to use its monopsonistic power as the only purchaser of really large loans in wartime to get such loans at a cheap rate. Britain also raised loans abroad, borrowing 1,365 million Pounds chiefly from the USA but that was more than offset by Britain's loans to its allies, a total of 1,741 million Pounds.

After the war Germany has difficulty in making its agreed reparations and experiences hyperinflation from 1922-1923. Later, in the 1930s the social turmoil resulting from mass unemployment results in Hitler's installation as Chancellor.

2nd World War

"By the beginning of the Second World War Keynes's ideas had already so permeated Whitehall and Westminster that high interest rates were rejected as unnecessary, costly and perverse" (page 391). Glyn Davies describes the various ingenious methods adopted by the government to raise money at low rates of interest. "With just a few unimportant exceptions, 3 percent became in fact the maximum rate at which the government borrowed within the United Kingdom" (page 391). "The most grievously costly war in history, in real, human terms was thus financed by incredibly cheap money. The financial lessons of all previous wars had been the more you borrow the higher the rate. The revolution in economic thought led by Keynes had helped the government to borrow far more money than ever before at rates of interest far lower than ever before in such circumstances." (page 393)

The US government also succeeded in keeping interest rates low with the Fed strongly supporting the seven War Loans and the Victory Loan. During the 1930s the New Deal had required a new banking system to restore business confidence in order to revive industry and agriculture and reduce America's appalling total of 13 million unemployed. The first relief agency (which had already been set up by President Hoover in 1932) was the Reconstruction Finance Corporation which played an important role not only in the recovery from the Depression but also supplied vitally needed investment for military purposes during the War. From $16 million in 1930 the national debt rose to $269 million in 1946. This immense increase in borrowing was accomplished at very low interest rates (2.5% or less). Direct controls on credit were introduced, and physical controls and rationing, though nothing like as severe as in Britain, suppressed most of the inflation until after the war ended.

After its defeat, For the second time in a generation Germany experienced hyperinflation. In Hungary hyperinflation was the worst in world history. Many European countries introduced new reformed currencies in the years after the war.


As a result of his survey of the history of money the author concludes:

"The military ratchet was the most important single influence in raising prices and reducing the value of money in the past 1,000 years, and for most of that time debasement was the most common, but not the only, way of strengthening the 'sinews of war'." (page 646)

However, despite its importance, military expenditure has not been the only cause of inflation, nor has it been the most important in every case.

One of the author's main themes is the problem of simultaneously trying to control the quality and quantity of money. He discusses many cases of inflation over the past couple of thousand years and identifies several (not necessarily mutually exclusive) causes. These are:

As a result of the above-mentioned factors the supply of money tends to alternate in every age between too little and too much, with the pendulum swinging from excessive concern with the quality of money to the opposite extreme of an inflationary, excessive quantity of money.

This is the basis of the author's Pendulum Meta-Theory of money, i.e. a "general theory comprising sets of more limited, partial theories, which spring out of the special circumstances of their time. The enveloping pendulum or metatheory also explains why the usual theories of money, despite being so confidently held at one time, tend to change so drastically and diametrically (and therefore so puzzlingly to the uninitiated) to an equally accepted but opposite theory within the time span appropriate to historical investigation." (pages 31-32).

In support of these claims Glyn Davies ranges widely, both chronologically, from the dawn of civilization about 3000 BC onwards, and geographically from China to the New World, Denmark to Fiji. Thus a huge range of evidence regarding the causes of changes in both the quality and quantity of money is surveyed and the author concludes Chapter 12, Global Money in Historical Perspective, with the words of the Russian novelist Dostoevsky:

"Money is coined liberty."


A Russian translation of this article by Mia Davis of Wow Essays

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