Date: Thu, 24 Jul 2014 20:12:15 +0200
Another Kind of Victory: Wartime Economic Statecraft
Blowing the Budget
Wars create financial dependencies that powerful creditor nations often
exploit. That's certainly true of the United States, writes Rosella Cappella
Zielinski. In World War I and II, it capitalized on Great Britain's
financial vulnerabilities for its own geopolitical gain.
By Rosella Capella Zielinski for ISN
24 July 2014
The redistribution of power in the international system has traditionally
been attributed to two mechanisms - long-term economic growth and the final
outcome of war between victor(s) and vanquished. Yet, in an international
system that's currently defined by economic austerity and anti-war
sentiment, the ability of leaders to redistribute power via either of these
means is greatly diminished. Neither of these predicaments is likely to last
forever, which in turn raises the unpalatable prospect of state trying to
flex its geopolitical muscle with military power. But that's not to say that
some states cannot capitalize on wartime to the shift the distribution of
power in their favor without firing a single shot.
Wartime vs. Peacetime Economic Statecraft
Economic statecraft has long been used by states to exercise power (and
manipulate) over rivals and allies. The formula is straightforward enough:
state A withholds (or threatens to withhold) something of value to state B
in order to make it comply with a specified form of behavior. Put another
way, economic statecraft is about exploiting dependencies.
Yet, while the literature on economic statecraft is vast and comprehensive,
it tends to overlook how wartime impacts upon the aforementioned 'rules of
the game'. The few works that do emphasize wartime focus on warring
adversaries and are more concerned with how to deny the enemy access to
strategic resources or financing. Very little attention is paid to how
allies can exploit their own relationships for gain beyond advancing the war
effort.
In peacetime, the ability to find substitutes for needed goods is relatively
easy. States can bypass sanction regimes by smuggling, conserving resources
or developing new markets for goods. During wartime, however, the state may
not have time to create these long-term alternatives. In order to match the
adversary, the state needs inputs for the war immediately. The penalty for
leaders who lose the war, or whose war effort goes badly, ranges from being
voted out of office to being put to death. As a result, states are more
likely to acquiesce to demands made by states they are dependent upon in
wartime rather than peacetime.
Creating Wartime Dependencies
Leaders acquire war inputs by seizing them, making them, or buying them.
These inputs include manpower, equipment (reflected via a defense industry
or a convertible civilian industry coupled with raw materials), foodstuffs,
and transportation assets. When a state supplies its entire war effort via
domestic inputs (i.e. autarkic defense production), it negates the need to
purchase inputs from abroad and isolates it from financial dependencies.
Wartime dependency occurs when a state needs to purchase goods for its war
effort from abroad yet does not have enough of the supplier state's currency
to pay for them. Ensuring ample currency to purchase goods from abroad is
paramount. In wartime, exports often become limited, as trading partners are
hurt by the war, enemies enact blockades, or states convert export-oriented
industries for the war effort. Simultaneously, the need to import goods
increases in order to supply armed forces. The decrease in exports results
in a decrease of currency reserves while the increase in imports increases
the need for it. Since self-correcting mechanisms to increase currency
reserves are unavailable, states need currency loans to continue wartime
purchases, resulting in debtor dependency. The larger the loan, the more
difficult the ability of the belligerent state to procure the supplier
state's currency. The more intense the war effort, the higher the level of
debtor dependency.
The size of the loan varies by price of goods purchased. Military equipment,
particularly finished goods such as airplanes or battleships, will be among
the most expensive. Given that modern weapons systems are increasingly
complex, the ability to switch factors of production within an economy to
wartime industrial production is becoming ever more difficult. Thus, we can
expect increasing debtor dependency as states purchase expensive finished
goods.
Debt dependency also varies with the ability of the belligerent state to
procure the supplier state's currency. States that are able to run a balance
of payments deficit, whose currency is widely held, or are characterized as
having a reserve currency, are more likely to avoid financial dependencies.
The demand for the belligerent state's currency provides the state with a
unique ability to accrue other national currencies. Supplier states' desire
to hold belligerent states' currencies decreases potential dependencies.
Finally, the extent of debtor dependency varies with the intensity of the
war effort. As the war expands, the state needs more goods to confront the
enemy. Simultaneously, domestic production reaches its limit and the state
will need to purchase more war inputs from abroad. At the same time, leaders
feel more pressure to win the war in order to avoid losing power. As the
political economist Susan Strange wrote, "The greater the perceived threat
to security, the higher price will be willingly paid and the greater risk
accepted."
<http://www.isn.ethz.ch/Digital-Library/Articles/Detail/?lng=en&id=182106#_e
dn1> [i] Thus, the need to purchase goods from abroad is compounded,
resulting in increased dependency on creditors extending currency loans.
States unable to secure inputs for war domestically (or pay for imported
goods outright) need a currency loan to purchase goods from abroad. In order
to mobilize and sustain warfare and ensure leadership and state survival,
these states become dependent on their wartime creditors. Once dependent,
creditor states are able to exploit their newfound power, extracting
concessions on issues or goods the belligerent states would otherwise not
acquiesce too. The result is a shift in the distribution of power in favor
of the creditor state without having to go to war.
It worked for Washington
While many creditor states have exploited their wartime financial
dependencies, the United States has generated the greatest shifts and
redistributions of power in the international system. At the start of the
First World War, for example, Great Britain attempted to domestically secure
its war inputs. Yet, as the war increased in intensity and its French and
Russian allies were no longer able to provide for their own war efforts,
Britain needed to purchase goods from the United States. And as imports far
exceeded exports (especially as Britain assumed financial responsibility for
French and Russian dollar contracts in the United States), London did not
have enough dollars and gold to purchase American goods outright. In short,
Britain needed a dollar loan.
The American government, led by President Wilson and Treasury Secretary
McAdoo, realized Britain's newfound dependency and began to exploit it with
the goal of replacing the Pound with the dollar as the dominant reserve
currency, thereby moving the world financial center away from London in the
process. This was not lost on the British. Keynes wrote in May 1918, "It
almost looks as if they took a satisfaction in reducing us to a position of
complete financial helplessness and dependence."
<http://www.isn.ethz.ch/Digital-Library/Articles/Detail/?lng=en&id=182106#_e
dn2> [ii] Unable to continue fighting the war without a dollar loan, the
British acquiesced to American demands. While the British, and Allied
powers, were able to successfully defeat the Germans, they were unable to
preserve Sterling's status. Not only did the financing of the war drain
Britain of its assets, it caused the rise of a reserve currency competitor.
Washington was able to repeat its wartime dependency exploitation during the
Second World War.
A Note of Caution
The United States has, so far, been able to avoid the fate it helped to
bestow on Great Britain. The dollar remains the dominant reserve currency
and inputs for its war efforts are produced within its borders. However, the
two pillars which allow Washington to avoid racking up debts and exploit
creditor dependencies might soon be resting upon shakier foundations.
Recent events have brought the supremacy of the dollar into question. Since
2009, China and Russia have used their growing economic prowess to
repeatedly call for the replacement of the dollar as the dominant reserve
currency. Within the U.S., fears are rising that the recent trend of dollar
depreciation will result in decreased demand for the dollar as foreign
states restructure their reserve holdings. These fears were compounded in
2013, when an unprecedented near-default on U.S. government debt resulted in
credit rating warnings.
In addition, the fact that autarkic defense production is no longer the norm
potentially creates new economic vulnerabilities for the United States. For
example, the total number of licensed production and
coproduction/co-development programs between1986-1990 were almost 200%
greater than1961-1965 and more than 50% greater than 1971-1975. In 1990, an
Office of Technology Assessment report noted that, "Much weapons
technology.is developed by large multinational companies with manufacturing
facilities around the world.Many U.S. weapons systems depend.on Japanese and
European technology, parts, and components. Interdependence of the defense
industries is a fact of life."
<http://www.isn.ethz.ch/Digital-Library/Articles/Detail/?lng=en&id=182106#_e
dn3> [iii]
In sum, wartime creates unique financial dependencies that are ripe for
exploitation by creditor states. The greater the dependency, the greater the
ability of a state to extract concessions that it would not otherwise be
able to do. The U.S. capitalized on this dependency in both World Wars to
promote the shift in power from Britain to America. The dollar's role as
reserve currency and autarkic defense production has maintained U.S. power.
That said, these pillars of strength are waning as the dollar comes under
question and the U.S. outsources defense production. Thus, if the U.S. does
not want to fall into the same trap as Britain during WWII and be exploited
by potential creditors in the next big war, it needs to be aware of the
dangers that these potential dependencies might create.
_____
<http://www.isn.ethz.ch/Digital-Library/Articles/Detail/?lng=en&id=182106#_e
dnref1> [i] Strange, S. (1988) States and Markets. New York: Continuum, 29.
<http://www.isn.ethz.ch/Digital-Library/Articles/Detail/?lng=en&id=182106#_e
dnref2> [ii] Burk, K. (1979) 'Great Britain in the United States, 1917-1918:
the turning point', The International History Review 1(2): 228-45, 242.
<http://www.isn.ethz.ch/Digital-Library/Articles/Detail/?lng=en&id=182106#_e
dnref3> [iii] Brooks, S. G. (2005) Producing Security: Multinational
Corporations, Globalization, and the Changing Calculus of Conflict,
Princeton: Princeton University Press, 87.
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_____
Rosella Cappella Zielinski is an Assistant Professor of Political Science at
Boston University and a former fellow at the Dickey Center for International
Understanding at Dartmouth College.
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