Veterans Day: Every War is a Banker’s War

People would have little enthusiasm or tolerance for war if the costs weren’t hidden by deficit spending.

The saying that “every war is a banker’s war” expresses the suspicion that warfare ultimately depends upon the financial institutions that furnish governments with the means to wage it.

Closely related is the argument that wars would be far rarer and shorter if governments were obliged to finance military operations through immediate taxation instead of borrowing.

The relationship between banking and warfare is almost as old as modern banking. During the Renaissance, Italian banking houses extended credit to European monarchs to finance military campaigns. The Fuggers of Augsburg became major financiers of the House of Habsburg, advancing enormous sums to Charles V and other rulers.

In return, financiers frequently received lucrative concessions, political influence, and privileged access to royal revenues. Sovereign borrowing created a relationship of mutual dependence between political authority and private capital.

The establishment of the Bank of England in 1694 was a key development. Founded during William III’s war against France, the bank supplied a £1.2 million loan to the English government in exchange for incorporation and other privileges.

The resulting system of funded national debt enabled Britain to mobilize resources on a scale that would have been scarcely possible with taxation alone. Over the following century, Britain’s sophisticated public credit system became an important strategic advantage in its wars against France, culminating in the Napoleonic Wars.

The Napoleonic era also demonstrated the growing importance of international banking houses, particularly the Rothschild family, whose financial networks facilitated government borrowing, international transfers, and the movement of funds to armies abroad.

During the American Civil War, the Union employed taxation, bond issuance, and the creation of paper currency, while the Confederacy relied heavily on monetary expansion and increasingly unsuccessful borrowing. The Union’s superior fiscal capacity and access to capital markets contributed to its eventual victory. The war demonstrated that military endurance depends not merely on soldiers and weapons but also on a government’s ability to finance the bloody enterprise.

During the First World War, Max M. Warburg (1867–1946) was a prominent Hamburg banker who served as a personal financial adviser to Kaiser Wilhelm II and helped manage German state finance and war bonds during World War I.

His brother, Paul M. Warburg, emigrated to the United States in 1902, married into the prominent Kuhn, Loeb & Co. banking family, and became a U.S. citizen. He was a principal architect behind the creation of the U.S. Federal Reserve System and later served as the vice chairman of the Federal Reserve Board from 1916 to 1918. Paul helped design and lead America’s central banking system.

Debt financing allows governments to transfer much of the economic burden of warfare into the future. Instead of demanding that citizens pay the full cost of military operations as they occur, governments can borrow against anticipated tax revenues, distribute war bonds, or create money.

A government obliged to finance every military expenditure through immediate taxation would quickly incur popular resistance, especially during periods when the citizenry is already struggling with the cost of living.

As the American economist James Buchanan observed, borrowing weakens the perceived connection between current government expenditures and the sacrifices required to finance them. Thus, deficit financing greatly diminishes the objections to military adventurism.

With US government debt now standing at $40.56 trillion, the BS wars against Russia and Iran simply wouldn’t have happened if Uncle Sam had been obliged to ask the US taxpayer to dig deep to pay for them. It’s easy to get excited about wars when you and your kids don’t have fight them, and the costs aren’t tacked onto your annual tax bill.

I thought of this today when a friend in Boston sent me a fascinating essay titled “How Inflation Fed the Slaughter of World War I.” Click on the image below to read the essay.