Lecture 5
Economic Consequences of War
War and Economic History
• “War has influenced economic history profoundly across time and space. Winners of war have shaped economic institutions and trade patterns. Above all, recurring war has drained wealth, disrupted markets, and depressed economic growth. • Wars are expensive (in money and other resources), destructive (of capital and human capital), and disruptive (of trade, resources availability, labour management). Large wars constitute severe shocks to the economies of participating countries. (Joshua Goldstein, War and Economic History).
• inflation – push up prices and reduce living standards. Sun Tsu: “Where the army is, prices are high; when prices rise the wealth of the people is exhausted.” –
short wars & money.
• capital depletion – destruction of capital such as farms, factories, and cities.
• “Kondratieff waves” in the world economy – relationship between war and military spending on the one hand and inflation and economic growth on the other. – USSR & USA
Calculating costs
• The economic consequences of going to war will depend on
• (a) the reasons for going to war; • (b) the scope of the war; and • (c) the outcome of the war. Costs will include:
• ‐ raising a fighting force;
• ‐ ensuring supplies and logistical support;
• ‐ economic destruction;
• ‐ veteran care
For the defeated side:
• ‐ war indemnities and reparations;
• ‐ territorial losses;
• ‐ cost of recovery;
Peloponnesian War
• military losses: “Perhaps well over 400 or 500 Athenian ships, even apart from those of the imperial allies, were lost during the war. For Greece as a whole the number may have been double that number.” • financial reserves of Athens were depleted;
• many of the wealthiest farms in the Athenian plain were plundered;
• agrarian infrastructure of Attica was not permanently destroyed – trees and vines were too numerous and too difficult to destroy entirely;
• “the cost was more in terms of the material surfeit and the intellectual energy of Greece that were depleted. Thus, the prosperity and affluence accrued from prior centuries was gone." (Victor Davis Hanson)
• First Punic War (264 to 241 BC) was a full‐scale war between Carthage and Rome for the control of Sicily. • Carthage signed a peace treaty under the terms of which they evacuated Sicily and paid Rome a large war indemnity. • Rome secured the release of all 8,000 prisoners of war without ransom and, furthermore, received a considerable amount of silver as a war indemnity.
• Carthage spent the years following the war improving its finances and expanding its colonial empire in Hispania. • Eventually, Rome annexed Corsica and Sardinia. Carthage was under siege and accepted the subsequent Roman conditions for ongoing peace, which also increased the war indemnity levied against Carthage after the first Punic War.
•
• Second Punic War (218 to 201 BC) is
most remembered for Hannibal's
crossing of the Alps. He and his army
invaded Italy from the north and
resoundingly defeated the Roman
army in several battles, but never
achieved the ultimate goal of causing
a political break between Rome and
its allies. Hannibal's campaign
continued in Italy inconclusively for
sixteen years.
• Between the Second and Third Punic War, the Roman Senate debates the fate of Carthage as Rome’s population grows and needs to be fed. • The Third Punic War (149–146 BC) involved an extended siege of Carthage, ending in the city's thorough destruction;
• 50,000 Carthaginians were sold into slavery;
• The agricultural system of Carthage was taken over by the Romans.
Punic wars
Carthaginian Possessions through the Punic Wars
Agincourt: Proper Financing
• Henry V, in preparation of the Agincourt campaign, ordered his treasurer, Thomas, earl of Arundel, to audit all the department of state;
• Every single royal official, from the treasurer of England down to the humblest clerk in the exchequer, knew that the king himself was scrutinizing their accounts.
• The king needed to tax his subjects, something he could not do without the approval of Parliament;
• Henry established extremely good relations with the Commons;
• The most significant result of this collaboration was the willingness of the Commons to grant Henry’s requests for taxation.
• Appeals to the City of London for a loan – “On June 16, [1415] the city offered the king a loan of 10,000 marks.”
• Appeals to citizens for private loans –
“The biggest loan of all, worth £ 10,936 3s 8d, came from Roger Salveyn, treasurer of Calais who would have to wait more than six years for repayment in full.”
• Appeals to members of the clergy for loans – also successful.
• The wages for the campaign were to be paid quarterly in advance. . . . The king’s financial commitment to his men was not limited to paying their wages and the regard; in every indenture he also undertook to pay the cost of shipping each company to and from France or Aquitaine, together with horses, harness and supplies.
• The aristocracy were expected to fight by virtue of their birth: the military profession was their calling and duty.
• Some 250 individual indentures for the Agincourt campaign have been identified, though this may be only a small proportion of the whole, since 632 pouches were purchased for the exchequer in 1416. Even so, 250 was an unprecedented number: nothing like it had been seen before the Agincourt campaign or would be again.
• additional costs: taking French prisoners to England for ransom;
• victory celebrations; Canterbury and London;
• funds for a second expedition: “Parliament responded with a generosity that was unparalleled in its history . . . . Most extraordinary of all, the House of Commons granted Henry custom duty on all imports and exports, including wool and wine, for the rest of his life.”
•
“It took several years' more campaigning, but Henry was eventually able to fulfill all his objectives. He was recognized by the French in the Treaty of Troyes (1420) as the regent and heir to the French throne. This was cemented by his marriage to Catherine of Valois, the daughter of King Charles VI.” (Juliet Barker, Agincourt)
Costs of Wars‐ WWI
Overall: 40 Billion Dollars
• UK: From being the world's largest overseas investor, it became one of its biggest debtors with interest payments forming around 40% of all government spending. ‐ The value of the £ fell by 61.2%. British private investments abroad were sold, raising £550 million. However, £250 million new investment also took place during the war. The net financial loss was therefore approximately £300 million. ‐ The net financial loss was approximately £300 million. • Germany, was forced to pay 132 billion marks ($31.5 billion, £ 6.6 billion) in reparations (a very large amount for its day which was finally paid off in October, 2010). • It experienced a period of hyperinflation in Germany between 1921 and 1923. • On December 1922 the Reparations Commission declared Germany in default, and on 11 January 1923 French and Belgian troops occupied the Ruhr until 1925. • France: industrial production by 1919 reduced to 57% of its 1913 level
• In the areas where trenches and fighting lines were located, such as the Champagne region of France, quantities of unexploded shells remained, some of which remains dangerous, continuing to cause injuries and occasional fatalities in the 21st century.
• Cleanup of major battlefields is a continuing task with no end in sight for decades more. WWII
• $ 1944 Billion US dollars worldwide
• By the end of the war, the European economy has collapsed with 70% of the industrial infrastructure destroyed;
• The eastern victors demanded payment of war reparations from the defeated nations, and in the Paris Peace Treaty, the Soviet Union's enemies—Hungary, Finland and Romania—were required to pay $300,000,000 each to the Soviet Union. • Italy was required to pay $360,000,000, shared chiefly between Greece, Yugoslavia, and the Soviet Union. • The much larger reparations from occupied Germany to Russia were to be paid not by goods or money but by the transfer of capital goods, such as dismantled manufacturing plants. • Germany and Italy also paid in the form of POW‐provided forced labor; 100,000 in Britain and 700,000 in France. The U.S settled for appropriating German patents as well as all German company assets in the U.S. • The destruction of Europe and the destruction of a significant portion of the United Kingdom's cities (via aerial bombing) also ruined the reputation of the imperial nations in the eyes of their colonies. • Coupled with the enormous expense incurred in the war, an empire was perceived to be an unnecessarily expensive possession. • Thus this would provoke the rapid decolonization process that would see the empires swept away.
• These tendencies helped India and Pakistan become independent from the British Empire in August 1947. Soon Malaysia and other South East Asian colonies also became independent. The Netherlands lost Dutch East Indies, and France lost Indochina. In just a few decades, most Asian and African colonies were independent.
Iraq (2003‐2011)
• $ 757.8 Billion (US war cost) • $ 1 trillion in extra spending to care for veterans returning from combat thorough 2050
• UK spent approximately 4.5 billions pounds on war in Iraq
Afghanistan (2001‐2006)
• Total operational cost from 2001 – 2006 is $ 93.6 billion.
• The projected total cost relating to Afghanistan in fiscal year in 2011 is expected to be $ 118.6 billion.
Positive Effects
• Positive effects on production: (1) “in the short term, war can effectively ‘squeeze’ maximum production out of a national economy;” (2) “war seems sometimes to ‘shock’ a national economy into a reorganized mode based on a new ‘technological style’;” (3) war shapes “the formation of the nation‐state itself and hence the overall context of production.”
Historical Perspectives
• Four eras: 1495‐1648; 1648‐1815; 1815‐
1945; 1945‐2015
• The first hegemonic era begins before 1495 and last through the end of the Thirty Years’ War in 1648; no clear leader;
• Militarily as well as economically, the second era after 1648 began with Dutch predominance. But as Europe recovered from the Thirty Years’ War, Britain gained greater and greater trade predominance, while the Netherlands declined.
• The third era extends from the end of the Napoleonic wars in 1815 to the end of World War II in 1945. British hegemony is challenged first by Germany by the end of the nineteenth century and then by the USA.
• The fourth era (1945‐2015) is of one of economic dominance by the USA that is challenged by emerging strong economies (EU, China, India) and the war on terrorism.
Phantasy and Reaality
• “For the United States the pre‐1914 growth also slows down in the 1914‐
1945 period (and again, not just after 1929). In the World War II years, U.S. production surges but by 1947 has dropped back to where it would have been without the war. • Resources allocated to war were not available for productive economic purposes (including both consumption and investment), and • economic assets destroyed by war (houses, factories, farms, and so forth) no longer contributed to production. • For the twentieth century, in which date are fairly good, war has clearly acted to set back economic growth.
• Despite the popular American belief that ‘war is good for the economy,’ common sense as well as historical experience indicate that war is not, on balance, good for the economy. • Since 1947, U.S. production follows roughly the same growth curve as held from 1933 to 1940, a lower curve than prevailed before 1914. • Despite the American belief in the economic ‘benefits’ of war, war appears to have played a significant role not in sustained economic growth but only in the short boom of 1939‐1944.”