The political economy of war finance

Rosella Cappella, University of Pennsylvania

Abstract

What explains the variation in how states pay for war? Leaders must choose between four primary means of war finance: taxation, domestic debt, external extraction, and printing. Each alternative has different political and economic costs and benefits. Borrowing compounds the cost of war through high interest rates; printing can result in disastrous inflation; taxation combats high inflation and minimizes cost yet can be politically damaging; while garnering money from abroad invites outside influence and fosters dependency. Conventional wisdom suggests that regime type dictates war finance strategy. However, based on statistical analysis of a novel data set and in-depth case studies, I demonstrate that regime type plays at best only a small role in a state's war finance story. I argue that there are four primary influences shaping war finance outcome: support for the war effort, fear of inflation, bureaucratic capacity, and the ability to cope with a balance of payments problem. To test these hypotheses, my dissertation presents the results of the first large-scale statistical analysis of war finance. It utilizes an original data set on interstate war finance from 1823 to 2003. I augment my statistical analysis with six case studies, three paired comparisons. First, I compare the financing of the United States' war effort in the Korean and Vietnam Wars. I then compare the Russian and Japanese financing of the Russo-Japanese War. Lastly, I compare British financing of its war efforts in the Crimean War and World War II. The study ultimately finds that a larger percentage of the war effort is financed by taxation when there are one or more of the following conditions: high support for the war, inflationary fears, or high bureaucratic capacity to extract tax revenue. In contrast, higher levels of borrowing and printing are likely to fund wars when support for the war is low or the state has low bureaucratic capacity. Moreover, the state will borrow from abroad when it is facing low currency reserves.

Subject Area

Economic history|Political science

Recommended Citation

Cappella, Rosella, "The political economy of war finance" (2012). Dissertations available from ProQuest. AAI3542786.
https://repository.upenn.edu/dissertations/AAI3542786

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