Appeasing Bankers: Financial Caution on the Road to War

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 Vill?le 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@claremontmckenna.edu