War and Economic History

Joshua Goldstein

Wars have influenced the economic history profoundly across time and space. Winners of wars have shaped economic institutions and trade patterns. They have influenced technological developments as well. Above all, recurring war has drained wealth, disrupted markets, and depressed economic growth.

Economic Effects of War

Wars are expensive (in money and other resources), destructive (of capital and human resource), and disruptive (of trade, resource availability, labour management). Large wars constitute severe shocks to the economies of participating countries. Notwithstanding positive aspects of short-term stimulation and long-term destruction and rebuilding, war generally impedes economic development and undermines prosperity.

1. Inflation

The most consistent short-term economic effect of war is to push up prices, and consequently to reduce living standards. This war-induced inflation was described in ancient China by the strategist Sun Tzu: “Where the army is, prices are high; when prices rise, the wealth of the people is exhausted.” His advice was to keep wars short and have the money in hand before assembling an army.

Paying for wars is a central problem for states. One way governments pay for war is to raise taxes (which in turn reduces civilian spending and investment). US revolutionary Thomas Paine warned in 1787 that “war … has but one thing certain, and that is to increase taxes.” Another way to pay for war is to borrow money, which increases government debt, but war-related debts can drive states into bankruptcy as they did to Spain in 1557 and 1596. A third way to fund war is to print more currency, which fuels inflation. Inflation thus often acts as an indirect tax on a national economy to finance war.

Industrial warfare, especially the two World Wars, created inflationary pressures across large economies. Increasingly, governments mobilized entire societies for war — conscripting labour, bidding up prices in markets for natural resources and industrial goods, and diverting capital and technology from civilian to military applications. World War I caused ruinous inflation as participants broke from the gold standard and issued currency freely. Inflation also accompanied the US Civil War, World War II, and the Vietnam War, among others. War-induced inflation, although strongest in war zones, extends to distant belligerents, such as the United States in the World Wars, and, in major wars, even to neutral countries, owing to trade disruption and scarcities.

2. Capital Depletion

In addition to draining money and resources from participants’ economies, wars create zones of intense destruction of capital such as farms, factories, and cities. These effects severely depress economic output. The famine and plague that accompanied the Thirty Years’ War (1618-48) killed nearly one-third of Germany’s population, as mercenaries plundered civilians and civilians became mercenaries to try to survive. World War I reduced French production by nearly half, starved hundreds of thousands of Germans to death, and led to more than a decade of lower Soviet output.

3. Human Costs

Battle casualties, war-induced epidemics, and other demographic disruptions have far-reaching effects. World War I contributed to the 1918 influenza epidemic that killed millions. Quincy Wright estimates that “at least 10 percent of deaths in modern civilization can be attributed directly or indirectly to war.” The US “baby boom” after World War II continues decades later to shape economic policy debates ranging from school budgets to social security. Wars also temporarily shake up gender relations (among other demographic variables), as when men leave home and women take war jobs to replenish the labour force, as in the Soviet Union, Britain, and the United States during World War II.

Countries that can fight wars beyond their borders avoid the most costly destruction. For example, the Dutch toward the end of the Thirty Years’ War, the British during the Napoleonic Wars, the Japanese in World War I, and the Americans in both World Wars enjoyed this relative insulation from war’s destruction, which meanwhile weakened their economic rivals.

Positive Economic Effects

War is not without economic benefits, however. These are not limited to having misfortune strike trade rivals. At certain historical times and places, war can stimulate a national economy in the short term.

1. Low Labour Costs

During slack economic times, such as the Great Depression of the 1930s, military spending and war mobilization can increase capacity utilization, reduce unemployment, and generally induce patriotic citizens to work harder for less compensation.

2. Improved Infrastructure

War also sometimes clears away outdated infrastructure and allows economy-wide rebuilding, generating long-term benefits. For example, after being set back by the two World Wars, French production grew faster after 1950 than before 1914.

3. Technological Development

Technological development often follows military necessity in wartime. Governments can coordinate research and development to produce technologies for war that also sometimes find civilian uses (such as radar in World War II). The layout of European railroad networks was strongly influenced by strategic military considerations, especially after Germany used railroads effectively to overwhelm French forces in 1870-71. In the 1990s, the GPS navigation system, created for US military use, found wide commercial use. Although these war-related innovations had positive economic effects, it is unclear whether the same money spent in civilian sectors might have produced even greater innovation.

Overall, the high costs of war outweigh the positive spinoffs. Indeed, a central dilemma for states is that waging wars — or just preparing for them — undermines prosperity, yet losing wars is worse. Winning wars, however, can sometimes pay.

Conquest, Trade and Accumulation

Nearly all wars are fought over control of territory, and sometimes over specific economic resources such as minerals, farmland or cities. The patterns of victory and defeat in wars through history have shaped the direction of the world economy and its institutions. For example, when Portugal in the 16th century used ship-borne cannons to open sea routes to Asia and wrested the pepper trade away from Venice (which depended on land routes through the Middle East), it set in motion a profound shift in Europe’s economic centre of gravity away from the Mediterranean and toward the Atlantic.

Wars of conquest can more than pay for themselves, if successful. The nomadic horse-raiders of the Iron Age Eurasian steppes found profit in plunder. Similarly, the 17th- to 18th-century Dahomey Kingdom (present-day Benin) made war on its neighbours to capture slaves, whom it sold to Europeans at port (for guns to continue its wars). War benefitted the Dahomey Kingdom at the expense of its depopulated neighbours.

According to one controversial school of thought, states in undertaking wars behave as rational actors maximizing their net benefits. However, wars are fought for many reasons beyond conquering valuable commodities.

Successful empires have used war to centralize control of an economic zone, often pushing that zone in directions most useful to continued military strength. Transportation and information infrastructures reflect the central authority’s political control. When European states conquered overseas colonies militarily (16th to 19th centuries), they developed those colonies economically to benefit the mother country. For example, most railroads in southwestern Africa were built — and still run — from mining and plantation areas to ports. Empires, however, inherently suffer the problems of centralized economies, such as inefficiency, low morale, and stagnation.

In recent centuries, the largest great-power wars have been won by ocean-going, trading nations whose economic style differs sharply from that of land-based empires. Rather than administer conquered territories, these “hegemons” allow nations to control their own economies and to trade fairly freely with each other. This free trade ultimately benefitted hegemons as advanced producers who sought worldwide export markets. The Netherlands after the Thirty Years’ War (1648), Britain after the Napoleonic Wars (1815), and the United States after the World Wars (1945) each enjoyed predominance in world trade. By virtue of superior naval military power, each of these great powers shaped — and to some extent enforced — the rules and norms for the international economy. For example, the international financial institutions of the Bretton Woods system grew out of US predominance after WWII. As nations recover in the decades following a great war, however, their power tends to equalize, so a hegemon’s raw power gradually matters less, and international economic institutions tend to become more independent. For example, the US today, despite its military predominance, does not unilaterally control the World Trade Organization.

Naval power has been used historically to win specific trading and extraction rights, in addition to its broader uses in establishing global economic orders. When asked the reasons for declaring war on the Dutch, a 17th-century English general replied, “What matters this or that reason? What we want is more of the trade the Dutch now have.” US warships in the 19th century forced open Japan’s closed economy. And in the mid-1990s, both Canada and Russia used warships to drive away foreign fishing boats from areas of the high seas that shared fish populations with Canadian and Russian exclusive economic zones as defined under the UN Convention on the Law of the Sea. In recent decades, disputes over control of small islands — which now convey fishing and mining rights up to 200 miles in all directions, have led to military hostilities in the South China Sea and the Falklands/Malvinas, among others.

Military power has provided the basis for extracting tolls and tariffs on trade, in addition to its more direct role in conquest of resources and trade routes. Danish cannons overlooking the Baltic Sound gave the Danes for centuries a stream of income from tolls on the Baltic trade. River-borne trade in Europe faced similar choke-points where strategic military fortifications allowed tolls to be charged. The military defeat of the Ottoman Empire, by contrast, cost Turkey the ability to control or tax traffic from the Black Sea to the Mediterranean, which today includes a large and growing number of oil tankers.

War and the World Economy

Just as wars’ costs and outcomes affect economic conditions and evolution, so too do economic conditions and evolution affect war. Causality runs in both directions. For example, Dutch economic strengths in the early 17th century allowed rapid and cheap production of ships, including warships. The resulting naval military advantage in turn supported Dutch long-distance trade. The wealth derived from that trade, in turn, let the Netherlands pay and train a professional standing army, which successfully sheltered the Netherlands from the ruinous Thirty Years’ War. This protection in turn let the Dutch expand their share of world trade at the expense of war-scarred rivals. Thus the evolution of warfare and of world economic history are intertwined.

War is the proximal cause of the recurring inflationary spikes that demarcate 50-year “Kondratieff waves” in the world economy. Those waves themselves continue to be controversial. However, they may have some predictive value to the extent they clarify the historical relationships between war and military spending on the one hand, and inflation and economic growth on the other. The 1990s mainly followed a predicted long-wave phase of sustained low inflation, renewed growth and reduced great-power military conflict. If this pattern were to continue, the coming decade would see continued strong growth but new upward pressures on military spending and conflict, eventually leading to a new bout of inflation in the great-power economies. Since scholars do not agree on the mechanism or even the existence of long economic waves, however, such projections are of more academic than practical interest.

The relationship between military spending and economic growth has also generated controversy. Despite its pump-priming potential in specific circumstances, as during the 1930s, military spending generally acts to slow economic growth, since it diverts capital and labour from more productive investment (such as in roads, schools or basic research). During the Cold War, high military spending contributed (among other causes) to the economic stagnation of the Soviet Union and the collapse of North Korea, whereas low military spending relative to GDP contributed to Japan’s growth and innovation. During the 1990s, as real military spending worldwide fell by about one-third, the United States and others reaped a “peace dividend” in sustained expansion. However, effects of military spending are long-term, and sharp reductions do not bring quick relief, as Russia’s experience since 1991 demonstrates.

The global North-South divide — a stark feature of the world economy — is exacerbated by war. The dozens of wars currently in progress worldwide form an arc from the Andes through Africa to the Middle East and Caucasus, to South and Southeast Asia. In some of the world’s poorest countries, such as Sudan and Afghanistan, endemic warfare impedes economic development and produces grinding poverty, which in turn intensifies conflicts and fuels warfare.

The role of war in the world economy is complex, yet pervasive. The shadow of war lies across economic history, influencing its pace and direction, and war continues to both shape economic developments and respond to them.

— Taken from: “The Oxford Encyclopedia of Economic History”