Burdekin on Kirshner, _Appeasing Bankers: Financial Caution on the Road to War_

[eh.net-review at eh.net]

Published by EH.NET (April 2008)

Jonathan Kirshner, _Appeasing Bankers: Financial Caution on the Road 
to War_. Princeton, NJ: Princeton University Press, 2007. ix + 233 
pp. $25 (paperback), ISBN: 978-0-691-13461-1.

Reviewed for EH.NET by Richard C.K. Burdekin, Department of 
Economics, Claremont McKenna College.


This volume by Jonathan Kirshner of Cornell University uses a set of 
five case studies to illustrate how banking and financial interests 
typically resist the march to war. This resistance reflects concerns 
about the budgetary and monetary strains associated with armed 
conflict. An early expression of such reservations can be seen in 
Kirshner's quotation from French premier Jean-Baptiste Villèle in 
1827: "Cannon fire is bad for good money." In threatening 
over-spending and inflation, the onset of war also was likely to 
disrupt international financial arrangements, ending the 
convertibility of the national currency into gold in the days of the 
classical gold standard or, in more modern times, leaving the 
government unable to maintain the type of fixed exchange rate laid 
down under the Bretton Woods system.

The caution expressed in financial circles when faced with the threat 
of war is illustrated across a broad span of history, encompassing 
the Spanish-American War of 1898, Japan and France in the interwar 
era, early postwar U.S. policymaking, and finally the United Kingdom 
and the Falklands conflict. Each of these case studies offers 
interesting and valuable insights into the policymaking process of 
the time as well as the tension that repeatedly arose between 
financial interests and other groups. In the case of the 
Spanish-American War, the author links the prewar debate to the 
earlier dispute between "hard money" advocates who favored a gold 
standard and other forces, including western silver-producing states 
and agricultural interests, who urged unlimited coining of silver as 
a means of offsetting the U.S. deflation of the 1880s and early 
1890s. In this regard, Kirshner contrasts the martial sentiments of 
future president Theodore Roosevelt with a pacifism on the part of 
the financial community that was itself "not a function of deeply 
held principles about international politics but derived from 
concerns about how war might affect macroeconomic conditions and thus 
their narrow economic interests."

The ensuing chapters on Japan and France between the wars offer 
instances where, unlike the Spanish-American War, financial interests 
appeared to enjoy some success in shaping the course of government 
policy. In Japan's case, this was reflected in restrictive monetary 
and fiscal policies in the 1920s, culminating in a return to the gold 
standard in 1930. These policies were accompanied by a 30 percent 
drop in real farm incomes over the second half of the 1920s, however, 
and the return to gold remarkably ill-timed as it coincided with the 
onset of the Great Depression and the rapid unraveling of the 
international gold standard Japan had striven so hard to rejoin. The 
subsequent "defeat" of financial interests at the hands of the 
military in the 1930s may well have been aided, therefore, by popular 
disquiet over the preceding hard money strategy. Kirshner offers more 
forthright criticism of the influence of financial interests in the 
French case, pointing to not only the (expected) opposition to 
expanded military spending but also the channeling of the limited 
funding into defensive areas (particularly the Maginot Line) at the 
expense of offensive capabilities. Moreover, weak French economic 
performance is blamed on the restrictive policies supported by hard 
money advocates, in turn leaving France with less capacity to draw 
upon as the need for re-armament belatedly became recognized near the 
end of the 1930s.

The U.S. experience in the early postwar period encompasses the 
historically significant Federal Reserve-Treasury Accord of 1951 that 
finally ended the World War II policy of pegging the price of 
long-term government bonds. This policy had forced the Federal 
Reserve to keep buying these bonds as their issuance increased, 
thereby threatening inflation as new money was injected into the 
economy. The more independent role for monetary policy came as the 
administration appeared to accede to pressure for greater restraint 
in military spending. An important difference from the interwar 
experiences is that the impact of financial interests was clearly in 
the direction of restraining inflationary pressures rather than being 
an agent of _deflationary_ impetus as portrayed in France and Japan. 
This is a distinction that the author might have dwelt more upon as, 
while many (if not most) economists would view the moderation of 
inflation as desirable, very few indeed would find any attraction in 
deflation. The concerns with deflation include, for example, the 
rising real value of debts that raise default risks and the tendency 
for consumers to postpone non-essential purchases and thereby reduce 
the aggregate demand for goods and services.

The discussion of the political crisis triggered by Argentina's 
invasion of the Falkland Islands in 1982 is compelling reading and 
Kirshner usefully incorporates the backdrop of the Suez crisis of 
1956 -- when Great Britain endured financial defeat on the eve of 
military victory owing to a run on the pound. The exclusion of the 
Chancellor of the Exchequer from Prime Minister Margaret Thatcher's 
War Cabinet was itself apparently influenced by Suez veteran Harold 
Macmillan's advice to keep the Treasury uninvolved. Thatcher's 
resolve and unwillingness to accede to the diplomatic solution 
advocated in financial circles was further buttressed by recognition 
that only successful military action could allow her government to 
recover from the popular furor over the loss of the Falklands. There 
was really no time for meaningful debate in the immediate aftermath 
of the Argentine invasion, however, given that the decision to send a 
task force was announced before the special Saturday session of 
Parliament called the very next day. This means that the tension 
between dueling interests in the run up to military action, 
emphasized in the other case studies, really is not present in the 
Falklands case.

Overall, 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. 
Admittedly, as an economist, I would like to have seen more analysis 
of the impact of the policies and a more explicit focus on which 
alternative strategies could have, for example, helped France and 
Japan perform better during the post-World War I period. Was there a 
way to reduce the risk of military takeover in Japan or of France's 
quick capitulation to Germany -- and to what extent may the influence 
of financial interests have helped precipitate these events? It also 
does not seem that the nuances of the author's argument that 
financial interests will be the voice of caution, but not necessarily 
ultimately opposed to war, are really borne out by case studies 
where, in every instance, the push seemed to be for peace over war. 
The author may well have more to offer us on this topic, however. In 
particular, the closing discussion of the United States potentially 
becoming more susceptible to international financial constraints 
could usefully be returned to in the context of the recent credit 
crunch and plunging value of the dollar. It would also be interesting 
to see Kirshner focus his analysis on the debate that preceded the 
U.S. invasion of Iraq. Meanwhile, going in the other direction 
historically, would the French decision to intervene in the American 
Revolution not be another worthy case to examine (among many other 
candidates, of course)?


Richard C. K. Burdekin is Jonathan B. Lovelace Professor of Economics 
at Claremont McKenna College and is an Editorial Board Member of _The 
Open Economics Journal_. His latest book on _China's Monetary 
Challenges: Past Experiences and Future Prospects_ is being published 
by Cambridge University Press in 2008. E-mail: 
richard.burdekin at claremontmckenna.edu

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