The development of parliamentary constraints on the executive was critical in Western European political history. Previous scholarship identifies external wars as a key factor, but with varying effects. Sometimes, willing monarchs granted parliamentary rights in return for revenues to fight wars. Yet at other times, war threats empowered rulers over other elites or caused states to fragment. We analyze a formal model to understand how external wars can either stimulate or undermine prospects for a contractual relationship between a ruler and elite actors. We recover the standard intuition that war threats make the ruler more willing to grant parliamentary rights in return for revenue. Our key insight is that war threats also affect the bargaining position of elites. A previously unrecognized tension yields our new findings: stronger outsider threats increase pressure either on elites to fund the ruler or on the ruler to accept constraints—but not both simultaneously. Elites with immobile wealth depend on the ruler for security. War threats undercut their credibility to refuse funding for an unconstrained ruler. By contrast, war threats make elites with mobile wealth and a viable exit option unwilling to fund a hopeless war effort. Only under circumscribed conditions do war threats align three conditions needed for parliament to arise in equilibrium: ruler willingness, elite credibility, and elite willingness. We apply our theory to posit strategic foundations for waves and reversals of historical European parliaments.

Although taxes were raised substantially in the United States during World War I, recourse was had to five bond issues, the famous Liberty loans, to finance the bulk of war expenditures. The Secretary of the Treasury, William Gibbs McAdoo, hoped to create a broad market for the Liberty bonds and to limit their yields by following an aggressive policy of ‘capitalizing patriotism’. He called on everyone from Wall Street bankers to the Boy Scouts to volunteer for campaigns to sell the bonds. The campaigns have become legendary. Some of the nation's best-known artists were recruited to draw posters depicting the contribution to the war effort to be made by buying bonds, and giant bond rallies featuring Hollywood stars were organized. These efforts, however, enjoyed limited success. The yields on the Liberty bonds were kept low mainly by making the bonds tax exempt and by making sure that a large proportion of them were purchased directly or indirectly by the Federal Reserve, turning the Federal Reserve into an engine of inflation. Patriotism proved to be a weak, although not powerless, offset to normal market forces.