Political Economy of War Finance

My original research on the political economy of weapons details how states need "financial wherewithal" to debt finance war. Stated differently, my research clarifies the methods and consequences of debt financing a war. As conducting war became increasingly expensive, especially after 1500, governments increasingly relied on borrowing to pay for the acquisition of military equipment and labor.  Compared to taxation, borrowing money gives a government access to a substantially larger pool of funds. But after acquiring a large sum of debt to finance war, some governments may refuse to repay the borrowed funds.  This fundamental problem of sovereign debt can make some (or even most) lenders reluctant to loan funds to a government.  What can governments do to alleviate the concerns of lenders?


In a paper I co-authored with a former student (Patrick Shea) that was published recently in the Journal of Conflict Resolution, I discuss how only states with particular financial and economic attributes -- what we call ``financial wherewithal'' -- are able to debt finance military expenditures. Stated bluntly, the rich get richer and only the rich can afford war.  On average, lenders are only willing to give money to states with the financial institutions, economic performance, and political characteristics that make debt repayment likely. Hence, only states with these attributes will enter war. This clarifies a mechanism by which economic power underpins military power (an early probe into the politics of default served as the foundation for this paper).


The argument and findings of this paper also challenge a prominent assumption in the literature. Some notable work assumes that losing a war necessarily leads a nation to default on its debt obligations. But we find that war outcomes have no association with default. In reality, nearly all nations that go to war, win or lose, repay their debts. Default is instead a function of economic fundamentals and political expediency, not whether a war ended in defeat (or victory).


Historically, one component of ``financial wherewithal'' attractive to lenders is the existence of a central bank.  In a paper published in International Organization,  I detail how early central banks enabled governments to credibly commit to repay the massive quantities of debt accumulated during war. Specifically, prior to 1914, the existence of a central bank was viewed by private lenders as a signal of a government's willingness to create institutions necessary to finance debt payments.  This encouraged lenders to provide governments with funds, even during times of war when governments commonly acquire a massive amount debt in a short period of time. After collecting original data on central bank presence from 1700 to 1950, I combine these data with sovereign debt data and, using a host of analysis techniques for panel data, show that states at war are charged lower interest rates if they have a central bank.


bonds Back to Research Description