Appeasing Bankers: Financial Caution on the Road to Warby Jonathan Kirshner
In Appeasing Bankers, Jonathan Kirshner shows that bankers dread waran aversion rooted in pragmatism, not idealism. "Sound money, not war" is hardly a pacifist rallying cry. The financial world values economic stability above all else, and crises and war threaten that stability. States that pursue appeasement when assertivenessor even/i>
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In Appeasing Bankers, Jonathan Kirshner shows that bankers dread waran aversion rooted in pragmatism, not idealism. "Sound money, not war" is hardly a pacifist rallying cry. The financial world values economic stability above all else, and crises and war threaten that stability. States that pursue appeasement when assertivenessor even conflictis warranted, Kirshner demonstrates, are often appeasing their own bankers. And these realities are increasingly shaping state strategy in a world of global financial markets. Yet the role of these financial preferences in world politics has been widely misunderstood and underappreciated. Liberal scholars have tended to lump finance together with other commercial groups; theorists of imperialism (including, most famously, Lenin) have misunderstood the preferences of finance; and realist scholars have failed to appreciate how the national interest, and proposals to advance it, are debated and contested by actors within societies. Finance's interest in peace is both pronounced and predictable, regardless of time or place. Bankers, Kirshner shows, have even opposed assertive foreign policies when caution seems to go against their nation's interest (as in interwar France) or their own long-term political interest (as during the Falklands crisis, when British bankers failed to support their ally Margaret Thatcher). Examining these and other cases, including the Spanish-American War, interwar Japan, and the United States during the Cold War, Appeasing Bankers shows that, when faced with the prospect of war or international political crisis, national financial communities favor caution and demonstrate a marked aversion to war.
Lars Seland Gomsrud
"The book is richly rewarding and full of insights into the behind the scenes power plays that lay behind the major, and far reaching, policy decisions reviewed through the five case studies."Richard C. K. Burdekin, EH.net
"Scholars have long debated the role of bankers and businesspeople in matters of war and peace. Some claim that states frequently go to war in search of markets and profits, whereas others see economic interests as the great constituency for peace. In this richly historical and wonderfully written book, Kirshner provides the definitive account of the policy preferences of the financial community in countries on the brink of hostilities."Foreign Affairs
"[T]his is a most stimulating book; attractively written, and demonstrating a thorough grasp of all the wide-ranging historical circumstances that it treats."Forrest Capie, The International History Review
"Appeasing Bankers is a must read for students and scholars of international finance. Kirshner provides evidence of the historically consistent and global regularity of the financial destructiveness of war, and a compelling case for the pacific preferences of bankers that should prompt further study of additional cases."Anastasia Xenias, Political Science Quarterly
"Kirshner's book is interesting as it avoids multifaceted liberal concepts but rather sticks to one key argument based on rich historical accounts. As such, this book should interest any student of globalization and any scholar questioning the role of bankers and financiers in war and peace."Lars Seland Gomsrud, Journal of Peace Research
"Kirshner is able to construct a well-theorised, thoroughly researched study on how the financial community reacts to the possibility of war. This in itself is no small feat, as it convincingly contradicts various theories that indict finance as the catalyst of Western imperialism."Patrick Shea, Political Studies Review
Richard C. K. Burdekin
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Read an ExcerptAppeasing Bankers
By Jonathan Kirshner Princeton University Press
Copyright © 2007 Princeton University Press
All right reserved.
Chapter One What Does Finance Want?
Is your money that good? -Bob Dylan
Bankers dread war. More precisely, financial communities within states favor cautious national security strategies and are acutely averse to war and to policies that risk war. This general rule holds across time and place, in a wide variety of political and economic settings. This chapter explains why finance has these preferences. The chapters that follow probe and evaluate this argument, and consider its implications for contemporary international politics. The short answer is: finance wants macroeconomic stability. Because war is largely incompatible with macroeconomic stability, the financial community is especially leery of risking armed conflict. This disposition is an important influence in contemporary international relations and will remain so, especially for as long as financial globalization endures.
The principal argument of this book is that the caution of finance and its strong aversion to war are virtually universal traits; they are extraordinarily remarkable regularities that provide scholars of international relations with an important analytical tool for understanding worldpolitics. The preferences of finance, especially since they are not felt with equal force in all states, affect the balance of power between states and influence the pattern of international conflict. Additionally, illustrating how the macroeconomic policy predilections of finance forge its foreign policy preferences enhances our understanding of the security strategies and choices that states embrace, by providing insights into how the definition of the national interest, and how best to advance that interest, is debated and contested by actors within societies.
For many inquiries, it would seem (and it often is) inappropriate to lump together a potentially diverse group of actors with occasionally divergent interests under the heading of finance. However, while acknowledging this, I argue that finance-meaning banks, the financial services sector, insurance companies, attendant financial institutions, various exchange markets (especially for currencies, bonds, and equities), and their allies and affiliates in government (almost always central banks and usually treasury departments)-share a deeply held set of preferences regarding the basic domestic macroeconomic environment in which they operate. Thus only two claims are in effect here: these actors share a basic disposition regarding the management of the economy, and this disposition, this package of policy preferences, represents strongly held first principles that reflect the fundamental material and institutional interests of the parties concerned. I do not assume that members of the financial community are in agreement on other issues; nor do I argue that finance acts in concert to advance its shared interests.
This basic disposition of the financial community is common across disparate countries and consistent over long periods of time. Finance, above all else, wishes to operate in a macroeconomic environment conducive to its interests. In a phrase, the ideal playing field is one of "macroeconomic stability." In practice, this means low inflation and, just as important, policies designed to keep inflation low, robust and predictable real interest rates, stability in and maintenance of the value of the exchange rate and unfettered access to international financial centers abroad, balanced government budgets, modest government spending, low rates of taxation, and small and clearly sustainable levels of government debt.
War and Monetary Disorder
The problem for finance is that war, and even policies that risk war, tends to undermine each and every one of these core preferences. War almost always results in inflation and the erosion of monetary discipline, gyrations in real interests (with negative real rates common as inflation outpaces nominal increases), exchange rate depreciation and instability, interruptions in international financial flows, and huge increases in government spending, partly offset by increased taxes but typically resulting in unbalanced budgets facilitated by expanding government debt and monetization (printing more money to pay the bills).
In the history of the United States, wartime inflation has been as American as apple pie. Indeed, militarized macroeconomic mayhem predates the establishment of the republic. Massachusetts racked up large debts and liberally issued paper money during King William's War (1689-97) and Queen Anne's War (1702-13). During the Seven Years' (French and Indian) War many of the colonies resorted to the issue of paper notes to meet expenses, but even those that faithfully retained hard currency standards experienced wartime inflation. These difficulties, acutely felt at the time, proved to be but a warm-up for the collapse in the value of the Continental Currency during the Revolutionary War, which led to the once-common idiom "not worth a Continental." Since independence, the American way of financing war has typically been to divide the effort between new debt, money creation, and some increases in taxes. A common consequence of this has been inflation and "debt that ultimately yielded large, negative returns to bond holders." Runaway inflation from the issue of greenbacks in the North and Confederate notes in the South during the Civil War is well established in American lore; but it was the War of 1812 that led to the first issue of circulating treasury notes, and the economic management of that conflict caused "very near[ly] a financial breakdown." In its wars of the twentieth century, America did not flirt as intimately with financial ruin, but the United States nevertheless emerged from its international conflicts carrying a legacy of inflation, larger government, and increased public debt. These wartime consequences and burdens do not pass unnoticed by the financial community. The costs and financial management of the Vietnam War weakened the dollar both at home, in the form of increased inflation, and abroad, by undermining the gold-dollar link at the foundation of the Bretton Woods international monetary regime (which collapsed in 1971). Even radical critics of U.S. foreign policy acknowledge that by 1968 the American financial community was very alarmed by the economic consequences of the war. Public statements by leading officers of major U.S. banks in a variety of venues linked the war with the problems of inflation, international monetary disorder, and attacks on the dollar; Federal Reserve chair William McChesney Martin warned that the management of the war economy had led to "an intolerable budget deficit and an intolerable deficit in our balance of payments." While increasing dissent regarding the war could be heard from other members of the business community, it was finance whose interests felt the burdens of the war most directly and acutely.
What is remarkable about the American experience with wartime monetary upheaval is that it represents the rule, not the exception, across time and place. The association of war with macroeconomic instability is an enduring historical regularity, especially in the nineteenth and twentieth centuries, but with clear antecedents that stretch back throughout recorded history.
From ancient times, debt, debasement (reducing the precious-metal content of coins in order to stretch the state's purchasing power), and even early experiments with paper currency and its debauchment were common features of war as money-starved governments resorted to what ever techniques they could call upon or invent to support their armies in the field. The Peloponnesian War forced Athens to debase its coins due to the "stress of the war and its consequences." (Arthur Burns compared the monetary disorder of that time to the terrible inflationary consequences of the First World War.) Some fifteen hundred years later, the stability of the unshakable Byzantine gold coin was lost to the financial strains of war; on the other side of the world, in the twelfth century, the Song dynasty in China resorted to paper currency to meet its mounting wartime expenditures; a century after that, the occupation of South China (with the fall of the Southern Song) was financed by a tenfold increase in the issue of paper money. The European wars of the late Middle Ages and the Renaissance, generally across the Continent but most notably involving Britain and France, were often long and expensive affairs that also led to considerable monetary disorder.
In more modern times, especially with the more common use of paper currency and innovative forms of state finance, the relationship between war and macroeconomic distress became even more intimate. The Napoleonic Wars challenged state treasuries across the Continent: Spain borrowed heavily, expanded the issue of paper currency dramatically, and was left to wrestle with the consequences of inflation and depreciation. Even Britain, which avoided Spain's financial blunders, was forced to break with gold and borrow money to fight and endure its own inflationary episode. Ironically, France, having previously shredded its credibility as an international borrower as a result of the hyperinflation of the assignats that financed the French Revolution, suffered relatively less macroeconomic distress, though at the cost of a dramatic increase in domestic taxation, including the introduction of an income tax. Other wars left similar results. To help pay for the Crimean War, the Ottoman Empire expanded the production of the paper kaime, which in short order lost half of its value and generated considerable popular discontent. Throughout the second half of the nineteenth century, neighboring Greece suffered crisis-related spikes in defense expenditures that generated budget deficits, monetization, and inflation-its 1897 war with Turkey was financed by paper money creation and a further surge in inflation. Russia's troubled monetary history was deeply intertwined with its military adventures. From the late eighteenth century, Russia's ambitions as a great power brought about increased taxation but still did not raise enough revenue to avoid chronic budget deficits, financed by expanded emissions of paper money and foreign loans. Monetary instability accompanied the first Turkish war and the wars with Sweden, Poland, and Persia (and Turkey again) that followed. Contrapositively, the currency reform of 1839-43 was possible only after a decade of peace; this was washed away by the flood of rubles printed to finance the Crimean War (the money supply doubled during the conflict). The subsequent monetary rehabilitation of 1868-75 was set back by the military spending, monetization, inflation, and indebtedness caused by the war with Turkey in 1877-78, a pattern that was repeated during the Russo-Japanese War. As one scholar of Russian macroeconomic history concluded, "The [monetary] expansions of 1853-57, 1877-78, and 1905 resulted from budget deficits due to heavy expenditures for the Crimean, Balkan, and Japanese Wars, respectively."
And, of course, no discussion of the macroeconomic consequences of war could be complete without reference to World War I, which overturned the preferences of finance one by one as if working its way methodically down a list-widespread suspension of convertibility, the disruption of international finance, ever greater government expenditures and accumulations of debt, more and more taxation, and finally an increasingly desperate expansion of the money supply when all other options were exhausted, leading to the complete collapse of the domestic and international European monetary order-which then contributed considerably to the crises of the interwar years. These pathologies have by no means been limited to the United States or to Europe and its periphery. South America's wars (more common before the remarkable long peace of the twentieth century, a puzzle worthy of further attention) visited the same macroeconomic consequences on their participants. War between Argentina and Brazil in the 1820s brought about a "monetary cataclysm" in Argentina; the Brazilian real lost half of its value. The real fared even worse during the War of the Triple Alliance (1864-70); while all of the combatants struggled with wartime inflation and Paraguay was left bankrupt and in ruins, Brazil, even in victory, faced the music of a fivefold increase in its money supply, generated to fight the war. The Pacific War (1879-83) caused monetization, inflation, depreciation, and a burdensome debt in Chile, and even more dramatic "intense monetary instability" in Peru, where inflation approached 800 percent.
In every part of the world, and up to the present day, the song remains the same. Almost invariably, wherever and whenever there has been war, money has come under pressure, as seen in countless examples. Even Meiji Japan's successful wars of the 1890s and 1900s disrupted the country's finances and caused macroeconomic distress. China's unhappy decade of war after 1937 saw inflation jump to 27, 51, and 181 percent in the first three years of the fighting and then remained in triple digits. The financial economy was paralyzed; with negative real interest rates, banks were increasingly unwilling to engage in the business of lending. In Korea the money supply doubled in 1951 and again in 1952; rampant wartime inflation was a problem throughout the peninsula. War rattled India's macroeconomic stability in the 1960s, and the Iran-Iraq War of the 1980s had similarly predictable effects. In the 1990s war between Armenia and Azerbaijan ensured the descent of both countries' currencies into hyperinflation. History provides fewer messages with more clarity: war is an open invitation to macroeconomic disorder.
The principal argument of this book is that because of the macroeconomic consequences of war, financial communities within countries will be among the most cautious elements when it comes to waging war or supporting foreign policies that risk war. Note that this is an indirect argument: finance is cautious about risking war because of war's economic consequences, not because of any inherent preferences about the particular international controversy in question or attitudes about the legitimacy of competing claims in a given international conflict. Rather, the financial community's aversion to armed conflict is a residual of its basic disposition in favor of macroeconomic stability. This is also a relative argument-the claim is not that finance always opposes war, but rather that, as a general rule, finance will be among the most cautious and reluctant to risk and initiate war. The aversion of finance to war has been noted by many others in the past, especially in the more distant past. The "mere hint" of international friction has been held responsible for unsettling money markets; French premier Jean- Baptiste Ville'le (who served as his own finance minister) neatly captured the foundation of these sentiments in 1827, when, reluctant to celebrate the conclusion of a modest and successful military operation, he noted tersely, "Cannon fire is bad for good money." The interests of insurance companies are perhaps even more transparent in this regard. "War brings ruin," one advocate stated plainly. "The business of insurance is naturally allied with the forces that make for peace." Almost a century ago prominent financial observer Alexander Noyes explained that not only is the banking community inherently trepidant about war-as a "general rule ... capital is slow to rush into war excitement"-but, further, no other actors in society were "fitted by instinct, training, disposition, and opportunity to insist that the government go slow in committing the country to a program of war." Years later, Karl Polanyi would assert that haute finance acted purposefully to prevent war from breaking out between Europe's great powers; he held that these efforts were crucial in facilitating the long peace of the nineteenth century.
Excerpted from Appeasing Bankers by Jonathan Kirshner
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Jonathan Kirshner is professor of government at Cornell University.
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