The economies of war

Of the various things that I have little knowledge of, such as law and biology, the subject I most wish I knew more of is economics.

I was reading The Ascent of Money by Niall Ferguson today. It isn’t a very great book but I did find some parts that were very interesting. Particularly the analysis of how economics drives war, more than anything else.

Ferguson talks about money and war in the context of his discussion of Nathan Meyer Rothschild, the patriarch, really, of the Rothschild family. During his time, Napoleon was the terror of the rest of Europe, and as one country after another fell to his armies, the British tried desperately to bring him under control – first sending expeditionary forces to Portugal, and then finally defeating him at Waterloo. These stories are fairly well known to those of us who have a historical bent of mind, but what is less well-known is the monetary angle.

Wars cost money. And the British and the French had two completely different ways of raising money for their battles. The French way was through taxation. They taxed the people whom they conquered – from Egypt to Portugal – and that paid for Napoleon’s army.

The British raised money through debt – specifically the sale of Government bonds. Anyone could buy them, and the Government would pay a certain coupon rate on them. And the money raised from the sale of the bonds was used to fund the army. And Rothschild was the man who arranged for the issue of the bonds, sometimes backing them the way today’s investment banks back IPOs.

After the spectacular success of British bonds, Rothschild helped the Germans (Prussians, more precisely) raise bonds for their wars. He introduced a very cool innovation, though: the German bonds would be sold in pounds sterling, but the interest could be collected, not just in London, but anywhere in Europe. He was able to do this because his far-flung family ran centers of business in Austria, Italy, France – everywhere worth mentioning in 18th-century Europe. One successful bond sale followed another, and Rothschild made millions off the commissions.

More importantly, Rothschild could influence wars. If he wanted to discourage a country from going to war, all he had to do was to refuse to issue bonds to fund the war of that country. This he did to devastating effect in the US Civil War. The Confederates needed money to build their army; Rothschild decided they were too risky to bet on. The Confederates went ahead and issued bonds in Europe anyway, backed, not by interest, but by cotton (which had enormous demand). Rothschild’s prudence served to ensure that the bonds had a lukewarm response, and in any case it proved to be a good decision – when New Orleans was captured by the Union Army, none of the Confederates’ creditors could ship their cotton out of the South. And when the North won, they promptly repudiated all Southern debt – so the holders of the Confederate bonds were left with a total write-off.

The chapter on bonds is fantastic. Similar stories about Germany’s efforts at raising bonds after World War 1 (leading to hyper-inflation) and about Latin American debt defaults, and how defaulting actually helped save the Argentine economy in the 1980’s.



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