scorecardresearchRussia-Ukraine War: What is the cost of war on global economies? We explain
Cost of War on Economies
Cost of War on Economies

Russia-Ukraine War: What is the cost of war on global economies? We explain

Updated: 02 Mar 2022, 03:25 PM IST
TL;DR.

Putting aside the very real human cost, war has also serious economic costs – damage to infrastructure, a decline in the working population, inflation, shortages, uncertainty, a rise in debt and disruption to normal economic activity.

Throughout the history of human civilization, from ancient times until the modern era, conflicts and wars have always involved the raising of resources and war finance has since remained, in some form or the other, a major part of any defence economy plan. For example, economics played a key role in the Roman Empire. The brutal wars between the Roman empire and the Carthage proved to be very costly so much that Rome even ran out of money altogether at one stage.

Rome began to devalue the coins to finance the wars. The Roman emperor Nero began to devalue the Roman currency from 60% to 90% in 60 A.D. Over the next 150 years, the silver content was reduced to 50%. By 265 A.D., the silver content had dropped to 5%. As the quality of the coins declined and soldiers demanded much higher wages, the devaluation produced nearly 1,000% of annual inflation. Due to the huge financial burden that the maintenance of the military operations would have on the economy, techniques were thought up to help solve the burden. One such technique was the process of debasing the coinage. This was used in many countries that used coins from precious metals and they would debase the coins. This however didn't last very long as inflation started to increase. 

In fact, the income tax was introduced in many countries was to finance the wars.

Countries use certain methods for war financing, such as money printing, taxation, selling government debt to the public, and acting as a debtor to other nations. Each one comes with its own consequences. Combining financing strategies is also not uncommon.

let’s look at the wars of some countries that have had an impact on their economies

Napoleonic wars (1803-1815)

The Napoleonic Wars were massive in their geographic scope, ranging, as far as Britain was concerned, over all of the five continents. They were massive, too, in terms of expense. From 1793 to the Battle of Waterloo in June 1815, the wars cost Britain more than £1,650,000,000. Only 25 per cent of this sum was raised by government loans, the rest coming largely from taxation, not least from the income tax that was introduced in 1798. But the wars were massive most of all in terms of manpower.

The Civil War (1861-1865)

The Civil War changed the country more than any other event in U.S. history. 

The Civil War affected all areas of American finance. It turned Wall Street into the second-biggest financial market in the world. It brought the first income tax into being (and with it, the forerunner of the IRS). The national debt rose from a trivial $65 million in 1860 to $2.7 billion in 1866. That was more than 40 times what it was only five years earlier at $65 million.

World war 1 (1914 -1918)

Germany Hyperinflation- During World War I, Germany borrowed heavily from France and Belgium through bonds for war financing. Germany received between 27 and 38 billion marks in loans. By 1931, German foreign debt stood at 21.514 billion marks. It even suspended the gold standard (the convertibility of its currency to gold).

In November 1922, Germany defaulted on its reparations payment as scheduled. In response, France and Belgium sent troops into Germany’s main industrial area, the Ruhr Valley. They occupied coal mines, railways, steelworks and factories – all things that were important to Germany’s economy. Germany was already suffering from high levels of inflation due to the effects of the war and the increasing government debt. 

In order to pay the striking workers, the government simply printed more money. This flood of money led to hyperinflation as the more money was printed, the more prices rose. Prices ran out of control, for example, a loaf of bread, which cost 250 marks in January 1923, had risen to 200,000 million marks in November 1923. One US dollar was worth went to 4,210,500,000,000 (42 billion Marks) 

 During the crisis, workers were often paid twice per day because prices rose so fast their wages were virtually worthless by lunchtime. By autumn 1923 it cost more to print a note than the note was worth.

World War II (1939 -1945)

By the end of World War II Britain had amassed an immense debt of £21 billion. Much of this was held in foreign hands, with around £3.4 billion being owed overseas (mainly to creditors in the United States), a sum which represented around one third of annual GDP.

By the time World War II began in 1939, Britain had already spent considerable money on building its military capabilities. The rearmament programme, which had begun in the mid-1920s, was costing £197 million by 1937. In 1938 the standard rate of income tax was increased to 27.5 per cent, with a 41 per cent surtax on incomes over £50,000. Some 10 million people were by now paying direct taxation.

During the war, the income tax rate increased further to meet the vast expense requirements. However, in the 1941 budget, the promise of 'tax credits' was introduced to make the growing burden more affordable to taxpayers. 

Britain even borrowed heavily in order to finance the war with axis powers. by the end of the conflict, debt exceeded 200 per cent of GDP, as it had done after the end of the Napoleonic wars.

The economy in the United States during World War II was another story. The country is suffering from high levels of unemployment due to the Great Depression of 1929. President Roosevelt signed into law nine months ago to create a land-lease program. It allowed the supply of U.S. warships, aircraft, and weapons (and food for civilians) to help Allied nations fighting Germany, Italy, and Japan.

In the process, the U.S.A economy is suddenly doing great. Production accelerated, new factories were built, closed factories reopened and millions of jobs were created in the private and public sectors. Tanks began to flow out of car factories. The assembly lines used to make vacuums and kitchen appliances began to change bombs. By the end of 1943 two-thirds of the American economy was integrated into the war effort and unemployment had fallen to record levels.

 

"In short, World War II helped the USA economy."

Vietnam war (1970) and Nixon Shock

The Vietnam war was by far the more expensive one. Without a declaration of war to put the country on a wartime economy, Congress paid for Vietnam by increasing the national debt. Over the course of the conflict, America's debt nearly doubled, growing from approximately $317 billion in 1965 to $620 billion in 1976. The Vietnam War cost $168 billion or $1 trillion in today's dollars. That included $111 billion in military operations and $28.5 billion in aid to South Vietnam.

In 1968, President Johnson's spending on the Vietnam War and the Great Society boosted economic growth to 4.9%. But it sent inflation to a disturbing 4.7%. As Americans prospered, they imported more goods, paying in dollars. That created a huge balance of payments deficit. The excess of dollars threatened the gold standard. To stop the foreign governments from redeeming more and more dollars for gold. President Richard Nixon closed the gold window in 1971 in order to address the country's inflation problem.

In August, Nixon ends the gold standard. This sends the dollar plummeting, which increases import prices. He imposes a 10% tariff on imports, which also worsens inflation. He institutes wage-price controls to stop inflation, but that slows growth. Companies can't lower wages, so they lay off workers to cut costs.

This move created a decade of stagflation. It was only cured by double-digit interest rates, causing the devastating 1981 recession. Ending the gold standard, permitted the U.S. government to print dollars to solve every economic woe. That ensured the dollar's value would fall indefinitely.

First Published: 28 Feb 2022, 02:28 PM IST