Hostname: page-component-cd9895bd7-mkpzs Total loading time: 0 Render date: 2024-12-26T06:06:11.631Z Has data issue: false hasContentIssue false
  • English
  • Français

Central Banks at War

Published online by Cambridge University Press:  21 October 2014

Paul Poast
Get access

Abstract

War is expensive—troops must be equipped and weapons must be procured. When the enormous borrowing requirements of war make the sovereigns' credibility problem more difficult, central banks enhance a government's ability to borrow. By being the sole direct purchaser of government debt, the central bank increases the effective punishment that can be imposed on the government for defaulting on the marginal lender. This increases lenders' confidence that the government will be punished in case of default, making lenders willing to purchase the debt at a lower rate of interest. The sovereign, dependent on the low borrowing costs offered by the central bank, has an incentive to retain the bank. Data covering the nineteenth and early twentieth centuries reveal that possessing a central bank lowers the sovereign's borrowing costs, particularly during times of war.

Type
Research Article
Information
International Organization , Volume 69 , Issue 1 , Winter 2015 , pp. 63 - 95
Copyright
Copyright © The IO Foundation 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I thank Ted Brader, Lawrence Broz, Rosella Capella, William Roberts Clark, Gary Cox, Mark Dincecco, Marc Flandreau, Benjamin Fordham, Page Fortna, Gerhard Glomm, Katja Klienberg, Sarah Kreps, James D. Morrow, Yotam Margalit, Brian Min, Pablo Pinto, Tonya Putnam, Daniel Rieter, Michael Rubin, Patrick Shea, Ken Shultz, David Stasavage, Allan Stam, Johannes Urpelainen, Nicholas Valentino, Jana Von Stein, Todd Walker, Barry Weingast, two anonymous referees, and Jon Pevehouse for helpful comments and guidance. Earlier versions of this article were presented in seminars at Binghamton University, Columbia University, Indiana University, Miami University, and the University of Michigan. All errors are the sole responsibility of the author.

References

Acemoglu, Daron, Johnson, Simon, and Robinson, James A.. 2005. The Rise of Atlantic Europe: Atlantic Trade, Institutional Change, and Economic Growth. American Economic Review 91 (5):546–79.Google Scholar
Appleyard, Dennis R., Field, Alfred J., and Cobb, Steven L.. 2006. International Economics. 5th ed. Boston: McGraw-Hill.Google Scholar
Bairoch, Paul. 1988. Cities and Economic Development: From the Dawn of History to the Present. Chicago: University of Chicago Press.Google Scholar
Bean, Richard. 1973. War and the Birth of the Nation State. Journal of Economic History 33 (1):203–21.Google Scholar
Beaulieu, Emily, Cox, Gary W., and Saiegh, Sebastian. 2012. Sovereign Debt and Regime Type: Reconsidering the Democratic Advantage. International Organization 66 (4):709–38.Google Scholar
Beck, Nathaniel, and Katz, Jonathan N.. 2001. Throwing Out the Baby with the Bath Water: A Comment on Green, Kim, and Yoon. International Organization 55 (2):487–95.Google Scholar
Bennett, D. Scott, and Stam III, Allan C.. 2000. EUGene: Expected Utility Generation and Data Management Program. Version 3.2 (released October 2007). Available at <http://eugenesoftware.org>. Accessed on 10 June 2011..+Accessed+on+10+June+2011.>Google Scholar
Bodenhorn, Howard, and Cuberes, David. 2010. Financial Development and City Growth: Evidence from Northeastern American Cities, 1790–1870. Working Paper 2010/35. Barcelona, Spain: Institut d'Economia de Barcelona.Google Scholar
Bordo, Michael D., and White, Eugene N.. 1991. A Tale of Two Currencies: British and French Finance During the Napoleonic Wars. Journal of Economic History 51 (2):303–16.Google Scholar
Bordo, Michael D., and Rockoff, Hugh. 1996. The Gold Standard as a “Good Housekeeping Seal of Approval.” Journal of Economic History 56 (2):389–428.Google Scholar
Brambor, Thomas, Clark, William R., and Golder, Matt. 2006. Understanding Interaction Models: Improving Empirical Analyses. Political Analysis 14 (1):63–82.Google Scholar
Broz, J. Lawrence. 1998. The Origins of Central Banking: Solutions to the Free Rider Problem. International Organization 52 (2):231–68.Google Scholar
Broz, J. Lawrence. 1999. Origins of the Federal Reserve System: International Incentives and the Domestic Free-Rider Problem. International Organization 52 (2):39–70.Google Scholar
Broz, J. Lawrence, and Grossman, Richard S.. 2004. Paying for Privilege: The Political Economy of Bank of England Charters, 1694–1844. Explorations in Economic History 41 (1):48–72.Google Scholar
Bueno de Mesquita, Bruce, Morrow, James D., Siverson, Randolph, and Smith, Alastair. 2003. The Logic of Political Survival. Cambridge, MA: MIT Press.Google Scholar
Bulow, Jeremy, and Rogoff, Kenneth S.. 1989. A Constant Recontracting Model of Sovereign Debt. Journal of Political Economy 97 (1):155–78.Google Scholar
Cappella, Rosella. 2012. The Political Economy of War Finance. PhD diss., University of Pennsylvania, Philadelphia.Google Scholar
Carruthers, Bruce. G. 1996. City of Capital: Politics and Markets in the English Financial Revolution. Princeton, NJ: Princeton University Press.Google Scholar
Clark, William R., and Hallerberg, Mark. 2000. Mobile Capital, Domestic Institutions, and Electorally Induced Monetary and Fiscal Policy. American Political Science Review 94 (2):323–46.Google Scholar
Cox, Gary W. 2012. Sovereign Debt, Political Stability, and Bargaining Efficiency. Working Paper. Palo Alto, CA: Stanford University.Google Scholar
Crouzet, François. 1999. Politics and Banking in Revolutionary and Napoleonic France. In The State, the Financial System, and Economic Modernization, edited by Sylla, Richard E., Tilly, Richard H., and Tortella, Gabriel, 20–52. New York: Cambridge University Press.Google Scholar
Dafoe, Allan. 2011. Statistical Critiques of the Democratic Peace: Caveat Emptor. American Journal of Political Science 55 (2):247–62.Google Scholar
Dincecco, Mark. 2009. Political Regimes and Sovereign Credit Risk in Europe, 1750–1913. European Review of Economic History 4 (1):31–63.Google Scholar
Dincecco, Mark. 2011. Political Transformations and Public Finances: Europe, 1650–1913. New York: Cambridge University Press.Google Scholar
Driscoll, John, and Kraay, Aart C.. 1998. Consistent Covariance Matrix Estimation with Spatially Dependent Data. Review of Economics and Statistics 80 (4):549–60.Google Scholar
Ferguson, Niall. 1998a. The House of Rothschild. Vol. 1, Money's Prophets, 1798–1848. New York: Viking.Google Scholar
Ferguson, Niall. 1998b. The House of Rothschild. Vol. 2, The World's Banker, 1849–1999. New York: Viking.Google Scholar
Ferguson, Niall. 2001. The Cash Nexus: Money and Power in the Modern World, 1700–2000. New York: Allen Lane.Google Scholar
Flandreau, Marc, and Flores, Juan H.. 2009. Bonds and Brands: Foundations of Sovereign Debt Markets, 1820–1830. Journal of Economic History 69 (3):646–84.Google Scholar
Flandreau, Marc, and Flores, Juan H.. 2012. The Peaceful Conspiracy: Bond Markets and International Relations During the Pax Britannica. International Organization 66 (2):211–48.Google Scholar
Flandreau, Marc, and Zumer, Frédéric. 2004. The Making of Global Finance, 1880–1913. Paris: Organisation for Economic Cooperation and Development.Google Scholar
Gartzke, Erik. 2007. The Capitalist Peace. American Journal of Political Science 51 (1):166–91.Google Scholar
Glass, Carter. 1927. An Adventure in Constructive Finance. Garden City, NY: Doubleday, Page.Google Scholar
Global Financial Data, Inc. 2011. Global Financial Database. Los Angeles, CA: GFD. Available at <www.globalfinancialdata.com/About/about.html>. Accessed 10 June 2011..+Accessed+10+June+2011.>Google Scholar
Greene, William. 2011a. Fixed Effects Vector Decomposition: A Magical Solution to the Problem of Time-Invariant Variables in Fixed Effects Models? Political Analysis 19 (2):135–46.Google Scholar
Greene, William. 2011b. Reply to Rejoinder by Plümper and Troeger. Political Analysis 19 (2):170–72.Google Scholar
Grieg, Avner, Milgrom, Paul, and Weingast, Barry R.. 1994. Coordination, Commitment, and Enforcement: The Case of the Merchant Guild. Journal of Political Economy 102 (4):745–76.Google Scholar
Grossman, Herschel I., and Van Huyck, John B.. 1988. Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation. American Economic Review 65 (2):1088–97.Google Scholar
Gurr, Tedd R. 1990. Polity II: Political Structures and Regime Change, 1800–1986 [computer file] (study no. 9263). Ann Arbor, MI: Inter-University Consortium for Political and Social Research.<www.icpsr.umich.edu>..>Google Scholar
Hamilton, Alexander. 1964 [1790]. The Second Report on the Further Provision Necessary for Establishing Public Credit (Report on a National Bank), December 13, 1790. In The Reports of Alexander Hamilton, edited by Cooke, Jacob E., 46–82. New York: Harper Torchbooks.Google Scholar
Heckman, James J. 1979. Sample Selection Bias as a Specification Error. Econometrica 47 (1):153–61.Google Scholar
Herrmann, David G. 1996. The Arming of Europe and the Making of the First World War. Princeton, NJ: Princeton University Press.Google Scholar
Hertzel, Robert L., and Leach, Ralph. 2001. The Treasury-Fed Accord: A New Narrative Account. Federal Reserve Bank of Richmond Economic Quarterly 87 (1):33–55.Google Scholar
Hirschman, Albert O. 1970. Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States. Cambridge, MA: Harvard University Press.Google Scholar
Hoechle, Daniel. 2007. Robust Standard Errors for Panel Regressions with Cross-Sectional Dependence. Stata Journal 7 (3):281–32.Google Scholar
Hohenberg, Paul M., and Lees, Lynn H.. 1985. The Making of Urban Europe, 1000–1950. Cambridge, MA: Harvard University Press.Google Scholar
Jones, J.R. 1994. Fiscal Policies, Liberties, and Representative Government During the Reigns of the Last Stuarts. In Fiscal Crises, Liberty, and Representative Government 1450–1789, edited by Hoffman, Philip T. and Norberg, Kathryn, 67–95. Palo Alto, CA: Stanford University Press.Google Scholar
Judson, Ruth A., and Owen, Ann L.. 1995. Estimating Dynamic Panel Data Models: A Guide for Macroeconomists. Economics Letters 65 (1):9–15.Google Scholar
Kennedy, David M. 1975. War and the American Character. The Nation, 3 May, 522–25.Google Scholar
Kirshner, Jonathan. 2007. Appeasing Bankers: Financial Caution on the Road to War. Princeton, NJ: Princeton University Press.Google Scholar
Krasner, Stephen D. 1999. Sovereignty: Organized Hypocrisy. Princeton, NJ: Princeton University Press.Google Scholar
Kroos, H.E. 1967. Financial Institutions. In The Growth of the Seaport Cities, 1790–1825, edited by Gilcrhist, D.T., 104–38. Charlottesville: University Press of Virginia.Google Scholar
Krugman, Paul R., and Obstfeld, Maurice. 2005. International Economics. 7th ed. Boston, MA.: Pearson.Google Scholar
Maddison, Angus. 2006. The World Economy. Paris: OECD Publishing.Google Scholar
Marshall, Monty G., Jaggers, Keith, and Gurr, Tedd R.. 2009. Polity IV Project: Political Regime Characteristics and Transitions, 1800–2012. Washington, DC: Center for Systematic Peace.Google Scholar
Meissner, Christopher M. 2005. A New World Order: Explaining the International Diffusion of the Gold Standard, 1870–1913. Journal of International Economics 66 (2):385–406.Google Scholar
Mishkin, Frederic S. 2004. The Economics of Money, Banking, and Financial Markets. 7th ed. Boston, MA: Pearson.Google Scholar
Murphy, Henry C. 1950. National Debt in War and Transition. New York: McGraw-Hill.Google Scholar
Nickell, Stephen J. 1981. Biases in Dynamic Models with Fixed Effects. Econometrica 49 (6):1417–26.Google Scholar
North, Douglass C., Wallis, John J., and Weingast, Barry R.. 2009. Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History. New York: Cambridge University Press.Google Scholar
North, Douglass C., and Weingast, Barry R.. 1989. Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England. Journal of Economic History 49 (4):803–32.Google Scholar
Oatley, Thomas H. 2004. International Political Economy: Interests and Institutions in the Global Economy. New York: Pearson.Google Scholar
Obstfeld, Maurice, and Taylor, Alan M.. 2003. Sovereign Risk, Credibility, and the Gold Standard: 1870–1913 Versus 1925–1931. Economic Journal 113 (487):241–75.Google Scholar
Oneal, John, and Russett, Bruce. 2005. Rule of Three, Let It Be? When More Really Is Better. Conflict Management and Peace Science 22 (4):293–310.Google Scholar
Pahre, Robert.2008. Politics and Trade Cooperation in the Nineteenth Century: The “Agreeable Customs” of 1815–1914. New York: Cambridge University Press.Google Scholar
Plümper, Thomas, and Troeger, Vera E.. 2007. Efficient Estimation of Time-Invariant and Rarely Changing Variables in Finite Sample Panel Analyses with Unit Fixed Effects. Political Analysis 15 (2):124–39.Google Scholar
Poast, Paul. 2006. The Economics of War. New York: McGraw Hill-Irwin.Google Scholar
Preworski, Adam, and Wallerstein, Michael. 1988. Structural Dependence of the State on Capital. American Political Science Review 82 (1):11–29.Google Scholar
Rabe-Hesketh, Sophia, and Skrondal, Anders. 2008. Multilevel and Longitudinal Modeling Using Stata. 2nd ed. College Station, TX: Stata Press.Google Scholar
Reinhart, Carmen M., Rogoff, Kenneth S., and Savastano, Miguel. 2003. Debt Intolerance. Brookings Papers on Economic Activity 1:1–74.Google Scholar
Reinhart, Carmen M., and Rogoff, Kenneth S.. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press.Google Scholar
Rousseau, Peter L., and Sylla, Richard E.. 2005. Emerging Financial Markets and Early US Growth. Explorations in Economic History 42 (1):1–26.Google Scholar
Sargent, Thomas J., and Velde, Francois R.. 1995. Macroeconomic Features of the French Revolution. The Journal of Political Economy 103 (3):474–518.Google Scholar
Sarkees, Meredith R., and Wayman, Frank W.. 2010. Resort to War: 1816–2007. Washington, DC: CQ Press.Google Scholar
Scheve, Kenneth, and Stasavage, David. 2012. Democracy, War, and Wealth: Lessons from Two Centuries of Inheritance Taxation. American Political Science Review 106 (1):81–102.Google Scholar
Schultz, Kenneth A., and Weingast, Barry R.. 1998. Limited Governments, Powerful States. In Strategic Politicians, Institutions, and Foreign Policy, edited by Siverson, Randolph M., 15–50. Ann Arbor: University of Michigan Press.Google Scholar
Schultz, Kenneth A., and Weingast, Barry R.. 2003. The Democratic Advantage: The Institutional Sources of State Power in International Competition. International Organization 57 (1):3–42.Google Scholar
Sexton, Jay. 2005. Debtor Diplomacy: Finance and American Foreign Relations in the Civil War Era, 1837–1873. Oxford, UK: Oxford University Press.Google Scholar
Shea, Patrick E. 2014. Financing Victory: Sovereign Credit, Democracy, and War. Journal of Conflict Resolution 58 (5):771–95.Google Scholar
Signorino, Curtis S., and Ritter, Jeffrey M.. 1999. Tau-b or Not Tau-b: Measuring Similarity of Foreign Policy Positions. International Studies Quarterly 43 (1):115–44.Google Scholar
Singer, J. David, Bremer, Stuart, and Stuckey, John. 1972. Capability Distribution, Uncertainty, and Major Power War, 1820–1965. In Peace, War and Numbers, edited by Russett, Bruce M., 19–48. Beverly Hills, CA: Sage.Google Scholar
Slantchev, Branislav L. 2012. Borrowed Power: Debt Finance and the Resort to Arms. American Political Science Review 106 (2):787–809.Google Scholar
Stasavage, David. 2003. Public Debt and the Birth of the Democratic State: France and Great Britain, 1688–1789. New York: Cambridge University Press.Google Scholar
Stasavage, David. 2011. States of Credit: Size, Power, and the Development of European Polities. Princeton, NJ: Princeton University Press.Google Scholar
Sussman, Nathan, and Yafeh, Yishay. 2006. Institutional Reforms, Financial Development, and Sovereign Debt: Britain 1690–1790. Journal of Economic History 66 (4):906–35.Google Scholar
Sylla, Richard E. 2001. The United States: Financial Innovation and Adaptation. In Transferring Wealth and Power from the Old to the New World: Monetary and Fiscal Institutions in the Seventeenth Through the Nineteenth Centuries, edited by Bordo, Michael D. and Cortès-Conde, Robert, 231–58. New York: Cambridge University Press.Google Scholar
Sylla, Richard E., and Wilson, Jack W.. 1999. Sinking Funds as Credible Commitments: Two Centuries of US National Debt Experience. Japan and the World Economy 11 (2):199–222.Google Scholar
Tilly, Charles. 1992. Coercion, Capital, and European States, A.D. 990–1992. Cambridge, MA: Blackwell.Google Scholar
Weingast, Barry R. 1997. The Political Foundations of Limited Government: Parliament and Sovereign Debt in Seventeenth- and Eighteenth-Century England. In Frontiers of the New Institutional Economics, edited by Drobak, John N. and Nye, John V.C., 148–93. New York: Academic Press.Google Scholar
Supplementary material: File

Poast Supplementary Material

Appendix A

Download Poast Supplementary Material(File)
File 20.8 KB
Supplementary material: File

Poast Supplementary Material

Appendix B

Download Poast Supplementary Material(File)
File 23.2 KB
Supplementary material: File

Poast Supplementary Material

Appendix C

Download Poast Supplementary Material(File)
File 46.5 KB
Supplementary material: File

Poast Supplementary Material

Supplementary Material

Download Poast Supplementary Material(File)
File 19 MB