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i

iii

Strategic Studies Institute

and

U.S. Army War College Press

GOLD, BLOOD, AND POWER:

FINANCE AND WAR THROUGH THE AGES

James Lacey

May 2015

The views expressed in this report are those of the author and 

do not necessarily reflect the official policy or position of the 

Department of the Army, the Department of Defense, or the U.S. 

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offer new and sometimes controversial perspectives in the interest of furthering debate on key issues. This report is cleared for 

public release; distribution is unlimited.

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This publication is subject to Title 17, United States Code, 

Sections 101 and 105. It is in the public domain and may not be 

copyrighted.
iv

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ISBN 1-58487-682-4
v

FOREWORD

Cicero once pointed out that the crucial sinew of 

war is, and always has been, “endless streams of money.” Wars throughout history have been waged for 

only as long as the money has held out. If silver and 

gold continued to pour forth from a state’s treasury, 

then a ruler or government could tap a never-ending 

supply of soldiers and war materiel. However, soon 

after the supply of coin was expended, armies began 

to vanish and sources of supply would dry up. Only 

when new methods of providing long-term finances 

started to evolve, first in the Netherlands and soon 

thereafter through the Bank of England, do we begin 

to witness progress toward a financial revolution that 

was still evolving at the start of the 20th century. By 

World War II, however, this process was complete. 

For the first time in recorded history, a major war was 

fought where the manpower and productive capacity of states was exhausted before any major state’s 

finances gave out.

This monograph provides a survey of the crucial 

interplay between finance, national power, and the 

capacity to wage war, starting in the ancient era and 

progressing through to the present. As such, it demonstrates the crucial importance of economic power, 

particularly in the realm of finance, as the basic underpinning of all strategic considerations and plans. 

Embedded within this survey, Dr. Lacey provides 

in-depth case studies that present new debate-sparking insights, such as: how a military Lilliputian such 

as Greece defeated the might of the Persian Empire; 

how Rome’s decision to defeat the Huns proved to 

be an epic strategic blunder; how Britain’s preparations for hugely increased social spending helped 
win World War I; and, finally, how the Federal Reserve’s inexhaustible money spigot turned the tide of 

World War II.

This monograph concludes with some thoughts 

about the potential problems the United States will 

face in financing military power in the first-half of 

the 21st century, as well as the prospects for funding 

a major increase in military spending in the event of 

a future military crisis. The Strategic Studies Institute 

hopes this historical survey will draw attention to an 

aspect of military power that is too often neglected.

 

DOUGLAS C. LOVELACE, JR.

Director

 Strategic Studies Institute and

 U.S. Army War College Press

vi
vii

ABOUT THE AUTHOR

JAMES LACEY is the Professor of Strategy at the Marine Corps War College. Prior to that, he was a widely 

published senior analyst at the Institute for Defense 

Analyses in Washington, DC. He also teaches graduate level courses in Military History and Global Issues 

at Johns Hopkins and Georgetown Universities. Mr. 

Lacey has written extensively for many other magazines, and his opinion columns have been published 

in National Review, The Weekly Standard, the New York 

Post, the New York Sun, Foreign Affairs, and many other 

publications. He is also regularly published in Military 

History Magazine, Military History Quarterly, and the 

Journal of Military History. He is the author of Moment 

of Battle (Bantam), The First Clash (Bantam), Takedown: 

The 3rd Infantry Division’s 21-Day Assault on Baghdad

(Naval Institute Press), Pershing (Palgrave-Macmillan), The Making of Peace (Cambridge University Press), 

The Making of Grand Strategy (Cambridge University 

Press), and Keep from All Thoughtful Men (USNI, 2010). 

Mr. Lacey also has a trilogy of works on global terrorism published in 2008 (Naval Institute Press). He 

is currently working on a book about the relationship 

between President Franklin Roosevelt, the Joint Chiefs 

of Staff, and the War Cabinet during World War II.

ix

SUMMARY

This monograph presents a survey of the crucial 

link between state (national) power and finance from 

the ancient era through the present day. Cicero once 

said that the true sinew of war was “endless streams 

of money.” His observation remains as accurate today as it was when Rome first began constructing 

its Empire. 

Unfortunately, too many historical works leave 

this crucial underpinning link out of their narratives. 

Even those that do economic and financial concerns 

typically miss the fact that the size of a state’s economy often has little to do with its capacity to wield influence on the global stage. Much more crucial in this 

regard is the possession of an administrative system 

capable of efficiently mobilizing a state’s resources. 

It was such an administrative apparatus that allowed 

Britain to punch far above its weight in the international arena for centuries. As a survey, this work is 

far from comprehensive, but the author hopes it will 

provide a stepping stone for a much-needed in-depth 

examination of the topic.

1

GOLD, BLOOD, AND POWER:

FINANCE AND WAR THROUGH THE AGES

Victory has always gone to the side with the more 

flourishing production base.

 

Paul Kennedy, 

 The Rise and Fall of Great Powers1

Professor Kennedy is wrong. Victory has not always gone to the side with the greatest materiel resources, although that often remains the best wager. 

Rather, it has gone to the side best able to mobilize its 

resources for the decisive effort of war. Persian production, for example, far exceeded anything available 

to Alexander, yet Persia’s mighty 200-year-old empire 

collapsed in an historical twinkle under the successive 

hammer blows of the formidable Macedonian army. 

Likewise, the barbarians who later brought Rome to 

its knees possessed almost no production base. Yet, 

these barbarians eventually massed sufficient force to 

collapse the greatest empire in history, which, for a 

variety of reasons, was no longer capable of mobilizing even a fraction of its latent power. In later periods, 

one need only look at tiny Britain, which for centuries punched far above its weight in the international 

arena as a result of its superior ability to mobilize its 

relatively meager national resources for war. 

Since the start of organized warfare, the crucial 

sinew of war had been “endless streams of money.”2

For as long as the money held out, there was always 

a well-armed mercenary for hire. On the other hand, 

when the money was gone, the war ended as armies 

dissolved for lack of pay. By World War II, however, 

money was no longer a crucial concern of the major 

belligerents. In every World War II case, production 
2

capacity and manpower were exhausted long before 

the wherewithal to pay for them. Money concerns 

only came to the fore when one nation exhausted its 

production base and had to purchase munitions from 

other nations. The best example of this was Britain’s 

rapid depletion of its foreign reserves to purchase 

munitions from the United States in the early days 

of World War II, a looming financial disaster that 

was averted only by the institution of Lend Lease by 

President Franklin Roosevelt.

Throughout history, power has flowed not out of 

the barrel of a gun, as Mao famously claimed. Rather, 

it has derived from a nation’s ability to amass sufficient funds to prosecute a war. In other words, the 

ability to buy Mao’s guns and the ammunition that 

goes with them has been, and remains, the crucial element of any strategic policy.3

 As Presidential advisor 

James Carville famously said, “It’s the economy, stupid,” and in war, this particularly means the financial 

aspects of the economy. Despite 3,000 years of experience, historians often ignore the financial aspects of 

warfare. To some degree, this is understandable; after 

all, it was barely more than a generation ago that most 

battle and campaign narratives neglected the effects of 

logistics. Despite general awareness of the old adage, 

“amateurs talk tactics, while experts talk logistics,” 

historians still largely ignored logistical concerns, 

except for the periodic mention of famine-induced 

disasters. One probable reason for this neglect is that 

logistical studies are boring, and recounting logistical 

matters invariably slows down the narrative pace of a 

campaign history. After all, who really wants to read 

about how many trains it took to move ammunition to 

the front in 1916 or the hay consumption rate of one of 

Marshal Joachim Murat’s cavalry divisions?4
3

If military historians find logistics boring, they 

find economics and finance are positively “coma-inducing.” Despite their begrudging allowance of logistical concerns into the mainstream of military history, 

many historians (there are exceptions) are still barring 

the door to the inclusion of economic matters. Two factors likely explain this neglect: economics lacks drama, 

and it is difficult to understand. Historians who write 

of armies sweeping across continents and who paint 

verbal pictures of brutal battlefield carnage have little 

desire to delve into the economics that drive the character and form of war. Furthermore, the “dismal science” of economics is not a subject military historians 

typically have invested much time in learning.5 Unfortunately, this neglect will likely widen, as economics 

continues on its current path toward pure mathematics and model-based econometrics, while slipping further away from its original moorings within a larger 

topic of political economy. 

ANCIENT WORLD

Herodotus, the father of history, or if you believe 

Plutarch, “the father of lies,” lays out for us that history of the start of the great wars without ever really 

explaining how relatively insignificant Athens mustered sufficient military force to defeat the fully mobilized might of the Persian Empire. As such, a brief case 

study examining the relative wherewithal of the two 

contenders might illuminate why a thorough comprehension of the economic, and particularly financial, 

context of any conflict is crucial if one is to understand 

its outcome.
4

Persia vs. Athens.

The Limits of Power.

In the 5th century BC, Persia was the sole superpower.6

 Its land mass covered 7.5 million square 

miles, reaching from the Aegean Sea to India, and its 

population was probably in excess of 40 million. Measured against that standard, Athens was feeble.7

 All of 

Attica amounted to less than 4,000 square miles, and 

in 490 BC possessed probably 150,000 citizens.8 It is 

no wonder that many historians considered Athens’ 

stand at Marathon a forlorn hope, and its victory akin 

to a miracle. What is therefore no less remarkable 

is that Athens, with a full understanding of Persian 

wealth and power, still decided to stand against the 

titan. Or did Athens know something that has mostly 

been overlooked by later historians?

The first thing to understand about ancient empires is that the latent power that appears available 

from just a cursory look at the numbers is illusionary. 

Not discounting the organizational achievements of 

Darius, it is fair to say that the Roman Empire possessed a superior organization. Despite this, Rome, 

even at the height of its power, normally maintained 

less than 2 percent of the empire’s total population 

under arms, and found that it could only sustain 3 

percent mobilization for a limited period of time.9 It 

is safe to assume that Persia, despite a slightly inferior 

administrative organization, could maintain an approximately equal percentage of it population under 

arms.10 It should also be remembered that throughout 

most of history, the bulk of the population survived 

at the barest subsistence level, and even the slightest change in conditions could bring on famine. In 
5

these societies, every hand was needed in the fields, 

and only a small proportion would be available for a 

professional military.11

Two percent of the population of Persia equates 

to 800,000 men. But remember, this is a high estimate 

of Persian capabilities, and there is reason to believe 

that the Persians failed to approach these levels.12 In 

this regard, another comparison with Rome may be 

beneficial. In the Roman Empire, approximately half 

of state revenues went to pay the army.13 However, 

after Darius’ early years of high expenditures, a large 

proportion of Persian revenues were simply hoarded. 

Moreover, Rome paid a high price in political stability, as such large forces concentrated at various points 

throughout the empire, which provided a constant 

temptation for their commanders to use them in a bid 

for ultimate power. Darius, who had come to power by 

way of a military coup, knew better than anyone the 

danger of maintaining large standing forces without 

an external enemy to hold their attention. Therefore, 

the Persian permanent military establishment was always small and counted on local levies in the event of 

war. In support of this claim, one only has to look at 

how long it took to mobilize sufficient forces to crush 

the relatively minor Ionian Revolt—5 years. 

This is not the end of it, though. Persia’s frontiers 

were not secure. Thrace remained restive, and beyond 

the Danube, the Scythians were still awaiting any 

opportunity to damage the empire, while their kin 

on Persia’s northeastern borders were always ready 

to sweep down on the Empire’s fertile plains. Keeping these enemies in check required well-garrisoned 

fortresses, and one suspects a mobile field force sufficiently large to immediately counter any major 

incursion. Moreover, all the other frontiers of the 
6

empire also required permanently stationed troops. 

Further, the Ionian Revolt was a reminder, if any was 

needed, that there were a number of subject people 

within the polyglot empire who were looking for any 

sign of weakness to make their own bid for independence. To forestall this, Darius had to keep a large 

number of royal garrisons in large cities and at key 

geographical locations.

Finally, one must never lose sight of the cost and 

logistical difficulties of sending an expeditionary 

army far from the center of power. Again, the Roman 

example is instructive. When Caesar began the conquest of Gaul, he had only four legions, with probably an equal number of auxiliaries, for a total force of 

about 35,000 men. It is doubtful that he ever had over 

50,000 legionaries during the entire war. As another 

example, when Crassus, set out to conquer the entire 

Parthian Empire, he led out only 45,000 legionnaires. 

Even the more resilient and aggressive early Republic 

had great difficulty sending substantial forces far from 

Italy. Although Republican Rome could maintain over 

100,000 troops facing Hannibal in Italy for 16 years, 

it strained every resource to maintain a mere 30,000 

in nearby Africa for the decisive Zama campaign. In 

summary, if the most efficient and warlike empire of 

the ancient world could sustain only 50,000 troops on 

distant campaigns, can we reasonably expect that the 

Persians could do much better? That they did manage 

to double this for Xerxes’ 480 BC campaign reflects 

that the Persians spent almost half a decade preparing, and that they expected this to be a lightning campaign, which would allow for the demobilization of 

most of the army in a very short time.14 More than any 

other factor, the inability of Persia to maintain a large 

expeditionary force for more than a single campaign-
7

ing season accounts for Xerxes’ departure with probably half the army, before they had suffered any major 

setback on land. 

When judging how much power Darius could 

throw against Greece, one must note the fact that the 

Persian Empire had just finished crushing the Ionians, 

at a cost that must be judged as catastrophic. Victory 

had taken over half a decade, and in the process Persia 

had lost two fleets, and probably had one extensively 

damaged at the Battle of Lade. Furthermore, the Carians had annihilated one field army, and thousands 

more Persians must have fallen in other operations. 

On top of all this, a substantial part of the empire—

previously the richest portion—was left in ruins. As 

this was the region (Ionia) from which the Persians 

expected to draw the bulk of the support required for 

an invasion of Greece, its economic devastation was a 

severe drag on preparations.

On the other side of the equation, the Persians who 

were preparing for the Marathon expedition were 

probably able to forgo calling up new and untried 

levies. The veterans of the Ionian campaigns (probably with a number of defeated Ionians among them) 

and Mardonius’ earlier campaign in Thrace were still 

available, and Athens offered them rich booty. As very 

few of these men would have been survivors of the 

Carian disaster, this army would have never tasted 

defeat—an inestimable confidence booster. Inured to 

hard conditions and familiar with combat, these men 

would make formidable foes. They did, however, suffer from one serious weakness. They had never faced 

an army of veteran hoplites in a set-piece battle. That 

would make all the difference. 

Given all of the aforementioned, and extrapolating from the best available estimates of the size of 
8

Persian armies during the campaigns in Thrace and 

Ionia, a supreme Persian effort could have fielded at 

best 40,000 troops, and possibly as many sailors for a 

campaign in 490 BC.15 It is almost inconceivable that 

the Athenians—living in the period, having experienced personally the difficulties of campaigning, and 

having a number of citizens (not the least of whom 

was Miltiades) with substantial experience with the 

Persian army—were not aware of these factors and 

limitations. Still, 40,000 troops and a similar number 

of sailors was a substantial force. In fact, it was several times larger than the entire hoplite class of Attica. 

What advantages did Athens have that convinced its 

citizens that making a stand would be more than a 

forlorn-hope?

The most important factor on the credit line was 

that Athens was going to fight this war on its home 

court and would therefore be able to mobilize a far 

higher percentage of its population than Persia. If 

we accept a total population of Attica of 150,000, that 

would mean there were about 30,000-35,000 men of 

combat age.16 Of these, the author estimates that Athens could afford to equip 14,000 of them as hoplites. 

As there were only 9,000 Athenian hoplites at Marathon, this total requires a defense. First, it is unlikely 

that the hoplites at Marathon represented all that was 

available to Athens, although it may have consisted 

of the best of them. For one thing, there were 4,000 

colonists at Chalcis, whom Herodotus tells us were 

ordered to go to the aid of Eretria when the Persians 

attacked that city.17 They did not arrive in time, and 

that is the last Herodotus mentions of them. This represents several thousand hoplites who would not have 

mustered with any of the 10 tribal regiments at Marathon. In all probability, they were left on the northern 
9

frontier to keep watch on Thebes and to harass any 

Persian move or cavalry raid in that direction. Moreover, the road from Marathon, guarded by the bulk 

of the Athenian army, was indeed the easiest route to 

Athens, but not the only one. Other roads and even 

paths (the Persians proved at Thermopylae that access 

to a goat path was enough for them to inflict a nasty 

surprise on an enemy) would have to be strongly garrisoned. The same was true of key positions along 

the coast, in order to prevent the Persians from making an amphibious end-run around the encamped 

Athenian army. 

However, could Athens afford 14,000 hoplites? 

The answer is probably yes. During this time, a hoplite was expected to supply his armor and weapons at 

his own expense. This cost was not insignificant, and 

was a strong limiting factor in the size of the armies 

of many Greek cities. However, there were a number 

of factors that would have made it easier for many of 

Athens’ citizens to afford the entire hoplite panoply. 

Foremost among these were the land reforms of Pisistratus. By breaking up numerous large noble estates, he had given thousands of the poor and landless 

enough property for them to produce a surplus of food 

for sale in the city. This surplus was sufficient to enable thousands of yeoman farmers to purchase armor 

and join the privileged ranks of hoplites.18 As Attica 

transitioned its primary cash crop from grain to olives, 

the surplus created by trading would have been even 

greater. Revenues from olive-based trade would also 

have paid for a number of city and costal dwellers to 

enter the hoplite class. Furthermore, although the richest veins in the Laurion silver mines were discovered 

a few years later, the mine was still producing enough 

silver to allow the government to subsidize some 
10

hoplites, if necessary. I have discovered no evidence 

that the state was giving or loaning cash to purchase 

armor. There is substantial evidence of numerous 

loans for farming and other business activities, which 

amounts to the same thing. It would be odd indeed if 

a city that had been almost constantly at war for the 2 

previous decades (against other Greek city-states) did 

not do all within its power to increase the size of its 

main fighting force.

These constant wars had led to at least three battles that Athens won decisively. Although it is hard to 

guess at total numbers of enemy losses, we know that 

700 Thebans were captured in one battle, and it might 

be assumed that twice that number was killed. Also, 

the army of Chalcis was beaten severely enough for 

that city to withdraw immediately, and as it was no 

longer rated a threat by Athens, it must have demobilized most of its military establishment, i.e., turned 

over its armor and weapons to Athens. Megara, a city 

about the same size as Chalcis, was able to field 3,000 

hoplites in 480 BC, so that is probably a fair estimate 

of the size of Chalcis’ army. Finally, the Athenians 

killed 1,000 Argive hoplites and an unknown number 

of Aeginetans in battle the year before Marathon. A 

conservative guess is that, over the years, Athens easily collected enough armor from its enemies to outfit 

about 8,000 hoplites. From this, it would seem that 

the normally expensive hoplite panoply was probably 

available in Athens at drastically reduced prices.19

However, this is not the end of Athens’ mobilization. As the Battle of Marathon was fought after the 

harvest, the rest of the male population of Attica was 

also available for military duty. These were mostly 

the thetes class of poorer citizens, who were used as 

light troops.20 These light troops were not mentioned 
11

by Herodotus as being present at Marathon, but it is 

unlikely they would have been left behind, particularly as we know an even lower class—slaves—did 

fight in the battle. Like the contemporary accounts of 

medieval battles, which habitually left out the contributions of the peasants and foot-soldiers in favor 

of the daring deeds of the heavy cavalry (knights), 

Herodotus probably did not believe the participation 

of these citizens of any account. Although slaves were 

normally forbidden from participation in combat, they 

were present at every major battle, and in emergencies, they could be freed and permitted to fight in the 

ranks.21 Under any circumstances, slaves would have 

been present to prepare food, rescue wounded men, 

serve as attendants, and, most importantly, act as baggage carriers and caretakers for the hoplites’ armor.22

However, if Athens ever faced an emergency situation, Marathon was it. It is likely that in this crisis, 

Athens would have released at least a proportion of 

its slaves for combat duties, and evidence for this does 

exist. Pausanias states that, during his travels, he was 

shown the common grave of the Plataeans and “servants” killed at Marathon.23 There is no way to know 

the number of slaves and recently freedmen who traveled with the army, but several thousand would seem a 

reasonable estimate. 

So, in practical terms, Athens could field a fighting 

force at least numerically equal to what the Persians 

were capable of throwing at it in 491 BC. More importantly, the core of the Athenian army was made up of 

9,000 heavily armored hoplites. 

The Athenian victory was indeed stunning. 

However, any reasonable assessment makes it clear 

that as long as Athens stood on the strategic defensive, the deck was not as stacked against it as is 

typically assumed.
12

The Financial Comparison.

According to Herodotus, Darius received 14,560 

talents from the empire on an annual basis, although 

this was not likely to be his only source of revenue 

(for instance, neither tribute from nearby nations, nor 

imperial customs duties are included). Translating ancient currency amounts into something understandable to a modern reader is always difficult, but some 

effort must be made to present an impression of the 

awesome wealth at the empire’s disposal in the event 

of war. During Darius’ reign a single talent could pay 

the wages for a trireme’s 200-man crew for 2 months, 

or the wages of three laborers for 20 years. As trained 

soldiers tended to receive a higher rate of pay than day 

laborers, a talent would pay the salary for a single soldier for 20 years.24 In other words, if the empire had no 

other expenses to pay, which was far from the case, it 

could pay a full-time professional force of over a quarter of a million men out of annual revenues. To put this 

in perspective, Athens began the Peloponnesian War 

with 6,500 silver talents in its treasury, and its annual 

revenue was about 1,000 talents (400 internal and 600 

from tribute from other members of the empire).25 So, 

even at the height of its power, Athens’ annual revenues were approximately 1/15th of Persia’s. It needs 

to be remembered that Athens did not have an empire 

at the time of the first Persian invasion, nor had it yet 

exploited the richest veins of the Laurion silver mines. 

An estimate of annual Athenian revenues in the years 

preceding Marathon should be placed under 250 talents, with only a percentage of that available for war. 

This was approximately a 50th of Persia’s revenues. 

(See Figure 1.)
13

Figure 1. Tax Rates on Persian Provinces.

Within Persia, this massive transfer of wealth to 

the center did not represent the full tax burden on the 

peoples of the empire. As none of these tax receipts 

were typically transferred back to the provinces, the 

local satraps collected additional revenues to pay for 

their own upkeep, infrastructure projects, and defense. 

This likely amounted to a sizeable sum, as many of the 

satrapies had hostile neighbors on their borders and 

were expected to see to their own defense against all 

but the strongest attacks. However, the tax burden did 

not end there. In addition to the satraps, there were a 

large number of sub-satraps, regional governors, and 

other administrators who collected taxes to pay for 

their own maintenance, which was often extravagant. 

For instance, the sub-satrap for Judah during this time 

First Province 400 Talents

Ionians, Magnesians, Aeolians, Carians, 

Lycians, Milyans, Pamphylians

Second Province 500 Talents

Mysians, Lydians, Lasonians Kabalians, 

Hytennai

Third Province 360 Talents

Phrygians, Thracians, Paphlagonians, Cappadocians, Mariandynians 

Fourth Province 500 Talents

Cilicians

Fifth Province 350 Talents

Posideion, Phoencia, Syria, Cyprus

Sixth Province 700 Talents

Egypt, Libya, Cyrene, Barke

Seventh Province 170 Talents

Sattagydians, Gandarians, Dadikai

Eighth Province 300 Talents

Susa, Kissians

Ninth Province 1,000 Talents

Babylonia, Assyria

Tenth Province 450 Talents

Ecbatana, Media, Parikanians,

Orthokorybantians

Eleventh Province 200 Talents

Caspians, Pausikai, Pantimathnoi, Dareitai Twelfth Province 360 Talents

Baktrians, Aigloi

Thirteenth Province 400 Talents

Paktyike, Armenia

Fourteenth Province 600 Talents

Sagartians, Sarangians, Thamanaians, 

Outians, Mykians

Fifteenth Province 250 Talents

Sacae, Sogdiana

Sixteenth Province 300 Talents

Parthians, Chorasmians, Areians

Seventeenth Province 400 Talents

Parikanians, Ethiopians of Asia

Eighteenth Province 200 Talents

Matienians, Saspeires, Alarodians
14

fed 150 of his officers from his own table every day.26

But even this was not the end. All levels of the Persian government also collected taxes in kind, and tens 

of thousands of sheep, mules, and horses and tons of 

foodstuffs, incense, ebony, and ivory were taken by 

the tax collectors every year. 

All of this constituted an enormous burden on the 

empire’s economy. It would not have been so bad if 

the government had spent the money or found some 

other way to keep these funds in circulation. However, 

it would be 2,000 years before Britain discovered that 

it was economically better to keep its specie in circulation to grow the economy, while still remaining available through taxes and loans in an emergency. Prior to 

this, every good ruler stored as much bullion as possible in his treasury as insurance in the event of war or 

bad times. The Persians proved to be second to none 

at the art of hoarding. This was plainly demonstrated 

after Alexander brought the empire crashing down. 

Reportedly, after the Macedonians captured the Persian royal treasuries, Alexander seized almost 200,000 

talents in gold and silver. This must have seemed a 

fantastic sum for an adventurer, who had begun his 

march of conquest with only 60 talents in his own 

treasury and owing 500 talents to creditors. It should 

be noted that this massive sum of Persian treasure was 

what remained after Darius III had already drawn 

down vast sums to pay for the war against Alexander, 

and after he made off with 8,000 talents when he fled 

Alexander’s approach.

Over time, the propensity to neglect the role of finance in warfare has not only hampered our understanding of history’s many conflicts, it has also often 

led to considerable misrepresentations of history. For 

example, the greatest historian of the ancient world, 
15

Thucydides, in his history of the Peloponnesian 

War, made only one mention of the Athenian silver 

mines that funded much of the Athenian war effort. 

That mention came when he quoted a speech by the 

Athenian turncoat, Alcibiades, urging the Spartans to 

fortify Decclea: 

Whatever property there is in the country will become 

yours, either by capture and surrender, and the Athenians will at once be deprived of the revenues of their 

silver mines at Laurium.27

Following Thucydides’ lead, for two millennia, 

historians have identified Athens’ failed Syracuse 

Expedition as the turning point in the Peloponnesian 

War. In truth, Athens made good most of the losses 

from that campaign in a remarkably short period and 

continued the war for another decade. What wrecked 

Athenian power was the assault on the economic basis 

of its military power: losing the silver revenues from 

Laurium, isolation from the revenues of the Delian 

League, and, finally, a blockade imposed by a Spartan 

fleet (financed by Persia) on the routes between Athens and its Black Sea food sources. One would have 

to read Thucydides very closely, indeed, to see that 

Athens was defeated through economic warfare and 

exhaustion, rather than on the field of battle.

Likewise, the discovery of two major silver mines 

in Macedonian-controlled territory is an often-overlooked factor in Phillip’s rise to dominance over 

Greece. Just as neglected is the role this new Macedonian wealth played in Alexander’s dismantling of 

the powerful Persian Empire. One must wonder how 

successful Alexander would have been if he could not 

purchase the loyalty of his soldiers by paying them 
16

two or three times the going wage for the most skilled 

masons.28 Once Alexander invaded Persia, the cost of 

paying and maintaining this force was approximately 

20 talents (about 1,000 pounds of silver) a day, a sum, 

despite his silver mines, that was far beyond Alexander’s means.29 Fortunately for his prospects, each conquered Persian city yielded a vast horde of bullion, 

including over 50,000 talents in Susa alone.30 If the Persian king, Darius, had spent this money on defense, 

rather than hoarding it, Alexander’s invasion would 

likely have been crushed before it got far out of the 

starting gate.31 After Alexander’s death, this vast treasure financed decades of war by the Diadochi, paying 

for armies on a scale rarely seen in the ancient world.

In the Roman era, military historians marvel at 

the brilliant maneuvers and stratagems of Hannibal 

and his nemesis, Scipio. However, much more rarely 

mentioned are the silver mines Hannibal controlled in 

Spain, which allowed him to keep his army in the field 

for almost 2 decades without any additional financial 

support from Carthage. This factor also helps explain 

Scipio’s strategy for defeating Carthage by first invading Spain, rather than trying to best Hannibal’s army 

in Italy. By cutting Hannibal off from his inexhaustible source of finance and simultaneously securing 

the silver mines for Rome, Scipio ensured Hannibal’s 

eventual defeat as surely as if he had vanquished him 

on the field of battle.32

In the end, the Punic Wars proved a financial bonanza for Rome. In the first two Punic Wars, however, 

victory almost eluded Rome due to financial collapse. 

To turn the tide of the First Punic War, Rome required 

a new fleet capable of wresting control of the seas 

around Sicily from Carthage. But after 20 years of 

war, the state was bankrupt. Salvation came in what 
17

Polybius calls their “patriotic and generous spirit,” 

Rome’s wealthiest citizens came forward with enough 

donations to build 200 quinqueremes, which were crucial to winning the decisive victory at the Battle of 

Aegates.33 Rarely mentioned, however, is the fact that 

these citizens were promised repayment with interest after Rome’s ultimate victory, making this the first 

recorded instance of a debt-financed war. 

In the Second Punic War, after losing three consular armies at the Battles of Lake Trasimene and 

Cannae, Rome was in such dire financial straits that it 

nearly sued for peace. Just to feed the fleet, Rome was 

forced to borrow the price of 6 months of corn from 

Hiero of Sicily—the first record of international borrowing to finance a war.34 In fact, the loss of so many 

wealthy citizens in these battles so decimated the tax 

rolls that Rome could not, for a time, finance the rebuilding of its army or send a planned expedition to 

Spain. The Senate considered raising the tax rate, but 

voted the measure down lest it financially ruin Rome’s 

remaining taxpayers.35 In the end, a Roman praetor 

was sent to the markets to ask the tradesmen to supply the army on credit, “on condition that as soon as 

there was money in the treasury, they should be the 

first to be paid.”36 As the financial crisis continued 

into the following year, Rome was forced to seize a 

trust fund put aside for widows and orphans, further 

defer contractor payments, and withhold the pay of 

cavalrymen (typically wealthier citizens) and centurions. Only Scipio’s victories in Spain, which filled Roman coffers with plunder and the rich ores of Spanish 

silver mines, alleviated Rome’s financial straits and 

allowed it to prosecute the war to victory.
18

Victory in the Punic Wars brought Rome a financial windfall that financed its continued military conquests, which soon began paying for themselves. In 

just the 50 years after the defeat of Carthage, Roman 

currency in circulation increased by a factor of 10, as 

seizures and tribute from the newly conquered provinces poured into its coffers. In addition to the 14,000 

talents demanded from Carthage in reparations, 

Sidon was forced to pay 15,000 talents, while 12,000 

talents were extorted from Greece. Thousands of more 

talents were seized from former Carthaginian possessions in Spain, while the output of Spanish mines was 

doubled by the liberal application of slave labor.37 By 

such methods, the pattern of Rome’s expansionary 

wars paying for themselves was established, at least 

until Caesar’s costly conquest of Gaul.

For much the same reason that Rome and Scipio 

decided to fight Carthage in Spain, Caesar, in his war 

against Pompey a century-and-a-half later, invaded 

Spain before moving east to confront Pompey’s gathering army. After exhausting the 15,000 gold bars and 

30,000 silver bars that he had seized from the Roman 

treasury at the outset of the war, Caesar found himself in dire financial straits. His army was a capable 

and veteran force, but one that would melt away in an 

instant if it was not paid. He dearly needed the silver 

from Spain’s mines to carry on the war. Historians, 

focusing on the military dynamics of the situation, 

have often wondered what was behind Caesar’s propaganda statement, “I go to meet an army without a 

leader, and I shall return to meet a leader without an 

army.”38 The reality is that Caesar chose his main theater of operations not because Pompey had stationed 

seven legions there, but because Spain was where 

the mines he needed to finance an extended conflict 

were located. 
19

Lost in most analyses of the conflict is a fact Caesar 

knew well: the base of Pompey’s power was Spain’s 

wealth. Knowing it would take time to mobilize the 

wealth of the eastern portions of Rome’s empire, Pompey had placed seven legions in Spain to protect his 

source of funds and recruits. Caesar knew that without access to Spain’s mines, Pompey would inevitably 

find it difficult to finance his army.39 As it turned out, 

through Herculean efforts, Pompey extorted sufficient 

money to raise an Eastern army, but it was a near-run 

thing, and his raids on temples throughout Asia Minor and confiscation of their gold and silver did much 

to undermine his local support.40

For the several hundred years that the Roman Empire existed, finance remained inextricably linked to 

Rome’s military power. In fact, the word “soldier” 

is derived from the name of the gold coin issued by 

the Emperor Constantine—the solidus.

41 The argument has been made with considerable justification 

that the Western Empire foundered when its financial 

system broke down and Rome could no longer gather 

the specie to pay the legions.42 A perfect example of 

this is the Roman crisis of the 3rd century. By almost 

any measure, the situation appeared as bad as it did 2 

centuries later when the Empire finally collapsed. The 

key difference was that in the 3rd century crisis, Rome 

maintained its hold on the wealthiest tax-generating 

core of the Empire, and used this wealth to first stabilize the situation and then reverse it. 

In the 5th century, however, Rome made a terrible 

strategic mistake. By concentrating its military force 

against the Huns, who were ravaging less crucial 

(from a financial point of view) areas of the Empire 

(Gaul), Rome allowed a rather insignificant number 

of Vandals to rampage across North Africa. When the 
20

Vandals captured Carthage and entrenched themselves throughout the province, they effectively broke 

the tax spine that maintained the military might of the 

Empire. Unable to raise sufficient funds elsewhere to 

sustain its legions, Rome’s final collapse was merely a 

matter of time.

The reasons for the collapse of the Western Roman 

Empire to barbarians that the Republic or early Empire 

would have easily vanquished has puzzled historians 

for over 1,500 years. As such, it is worth examining in 

more detail the underlying financial constraints that I 

believe provides much of the explanation.

The Fall of Rome.

Breaking the Tax Spine.

At the center, there was Rome, which maintained 

itself through taxes drawn from the wealth and productive capacity of the rest of the empire.43 As Keith 

Hopkins has points out, the Roman Empire had three 

distinct segments:44

1. The outer ring of the frontier provinces in which 

the defensive armies were stationed;

2. An inner ring of rich, tax exporting provinces 

(Gaul, Spain, Egypt, North Africa, Asia Minor, and 

Syria); and, 

3. The center, Rome, later joined by Constantinople.

The crucial element of Rome’s long-term survival, 

therefore, rested on keeping the tax-exporting provinces secure and stable. Only by doing so, could the 

Roman elite maintain themselves in luxury, while still 

feeding approximately one-quarter million Roman 
21

citizens free of charge. Moreover, by the time of the 

empire, neither Rome nor the Italian peninsula produced sufficient excess wealth to sustain itself, and 

neither could pay even a small fraction of the cost 

of a large professional army. Therefore, it fell to the 

provinces to fund the frontier armies, on which their 

safety and prosperity depended. Even at the time, 

Rome recognized that the frontier provinces or zones 

would never produce enough wealth to sustain the 

troops stationed there. The great Cicero, a republican 

who never confronted the expense of empire, was 

known to complain that many provinces were barely 

able to pay anything in their own defense.45 Strabo, 

who wrote prior to Rome’s invasion of Britain, did not 

believe it could support the cost of even one legion.46

And yet, throughout much of the empire’s existence, 

it continuously stationed at least four legions on 

the island.

As Keith Hopkins notes the process of building the 

empire paid for itself: 

Conquest by the Romans disrupted established patterns even in economically advanced regions: Romans 

plundered the stored reserves of generations, from 

towns, temples and from rich individuals treasure 

chests. They siphoned off skilled and unskilled labor 

as slaves; they gave loans to oppressed landowners 

and then distrained upon their estates, when they 

were unable to pay extortionate rates of interest.46a

As the Empire ceased its previously rapid expansion, 

this source of funding dried up, and it had to rely on 

its own internal resources to support its strategic policies.47 Anyone trying to grasp the full range of strategic 

options available to Rome must first comprehend the 

extent of this resource base. Using recent estimates, 
22

Raymond W. Goldsmith places Roman government 

expenditures during the Augustan era at between 

600 and 825 million sesterces.48 This amounts to between 3 and 4 percent of the total national product of 

the empire. While Rome may have been able to raise 

a few percent more during times of crisis or civil war, 

such spending could not be long sustained.49 Given 

the practical economic limits placed on Roman expenditures how much of a military force could the empire bear? Through the first 3 centuries of the empire, 

Rome, on average, spent approximately 450 million 

(perhaps as high as 500 million) sesterces annually on 

the maintenance of its military. This represents about 

half of total imperial expenditures during the early 

empire.50 For this, they got a military establishment 

of 150,000 legionaries, 150,000 auxiliaries, a Praetorian Guard, transport, and a navy.51 Interestingly, the 

amount Rome spent on its military is only a fraction 

of the personal revenues and expenditures of the Roman elite, which was several times that of the empire’s 

treasury. This disparity likely increased in the later 

empire, as private fortunes grew even as the Empire 

began having trouble maintaining its tax base. Rome’s 

inability, or unwillingness, to access the accumulated 

wealth of its elites was a crucial handicap when the 

funds necessary to secure the Empire ran short. Nero 

may not have fiddled as Rome burned, but many of 

its richest citizens continued leading the high-life 

even as the Goths, Vandals, and Franks poured across 

the frontiers. 
23

Figure 2. Roman Per Capita GDP as Given

by the Main References for this Section.

52

Evidence clearly indicates that Roman policymakers were aware of these limits. As Elio Lo Cascio states: 

What we know of the ratonarium, which was published 

regularly by Augustus and his successors, and the 

breviarium totius imperii left by Augustus at his death, 

shows that state authorities kept track of the various 

elements of income and expenditure.53

The pains Augustus took to reorganize the taxation 

system of the Principate further attests to this knowledge. During the Empire’s early years, a: 

uniform, if not universal, criteria for counting subjects 

and assessing their wealth were extended first of all to 

the provvciae Caesaris, the provinces under the direct 

control of the emperor, and later to the provinciae populi as well.54

Rome may have been what most historians call a “low 

tax state,” and most of the evidence does seem to indicate that the Roman yoke was not particularly harsh. 

Still, these historians are examining Roman tax rates 

from a modern standpoint where collecting under 5 

percent of GDP in annual taxes does indeed appear 

miniscule. In relation to other pre-industrial mostly 

Gross Domestic Product 

(GDP) Goldsmith Hopkins Scheidel Lo Cascio Maddison

Per Capita in (AD 14) (AD 14) (AD 150) (AD 150) (AD 14)

Sesterces Wheat

1990 International Dollars

HS380

843 kilograms (kg)

HS 225

491-kg

HS 260

680-kg

$620

HS 380

855-kg

$940

HS 380

843-kg

$570
24

subsistence economies, however, the Romans were as 

good as any, and better than most, when it came to 

revenue collection. Only Egypt and the Persian Empire of Darius, where wealth was far more concentrated on a per capita basis, did better. In later centuries, 

Western European rulers did not approach Roman 

levels of revenue collection until the early modern 

era. By creating a taxation infrastructure capable of 

drawing substantial revenue toward the center Rome 

was able to compensate for a GDP per capita that was 

probably only half that of Western Europe in the latemedieval era. 

Figure 3. Population and Tax Revenues 

350 BC to AD 1200.55

However, as noted in the body of this report, when 

it comes to military power, the total amount of national wealth is secondary to a nation’s ability to mobilize whatever wealth is available. For this reason, a 

strategist cannot examine Roman revenues in isolation. Wealth and the ability to draw on such wealth 

for military purposes must always be weighed against 

Population Revenues Revenues Per Head

(Millions) (Tons of Silver) (Grams of Silver)

Persia (350 BC) 17 697 41

Egypt (250 BC) 7 384 55

Rome (AD1) 50 825 17

Rome (AD 150) 50 1,050 21

Byzantium (850 BC) 10 150 15

Abbasids (AD 800) 26 1,260 48

Tang (AD 850) 50 2,145 43

France (AD 1221) 8.5 20.3 2.4

England (AD 1203) 2.5 11.5 4.6
25

enemy capabilities. In this regard, Rome had a distinct 

advantage through the first few centuries of the Empire, particularly in Western Europe. According to 

Angus Maddison, the barbarian region (in the early 

Empire) was only half as populous as the Roman Empire and had a per capita GDP of $400.56 Such a level is 

just barely enough for survival and leaves little excess 

for a centralized authority to build the structures of 

a functioning state. This alone, accounts for the fragmentation of the barbarian tribes through the first two 

centuries of the Empire, a situation that changed as 

the tribes grew richer in succeeding centuries.

On Rome’s eastern front, the Parthian Empire was 

much richer and possessed an infrastructure capable 

of collecting substantial funds and deploying them 

for military purposes. In fact, Parthia proved quite 

capable of defending itself against Roman incursions 

(Crassus’ defeat at Carrhae in 53 BC and Mark Anthony’s disastrous invasion in 37 BC) despite periodic 

setbacks, such as those inflicted by the emperors Trajan and Severus. When facing Rome, however, Parthia 

was almost always on the defensive. Pressed by barbarians on its own northern and eastern borders, along 

with continuous upheavals within the ruling dynasty, 

Parthia was never able to mount a formidable challenge to Roman power. This dramatically changed, 

however, when the Sassanid Persians overthrew the 

Parthian Empire in AD 224. The new Persian dynasty 

was highly centralized and determined to reconquer 

all of the lands that formally made up the great Persian 

Achaemenid Empire, which included the bulk of the 

Eastern Roman Empire. For the next several centuries, 

until the coming of the Arab invasions in the early7th century, the Sassanids remained a mortal threat to 

the Empire. 
26

In summary, the Roman Empire possessed vast, 

but not unlimited riches. Given the character of the 

economy, its low growth rate in the early centuries, followed by a declining economic situation from at least 

the Antonine Plague (AD 165-180) forward, the size of 

the Roman military establishment likely represented 

the greatest possible sustained effort the empire was 

capable of maintaining. As long as its enemies were 

fragmented and/or weak, this was sufficient to guard 

the frontiers and maintain internal stability. However, as Rome’s economic fortunes declined and its 

enemies grew in wealth and strength, the Empire was 

hard pressed to maintain the integrity of the frontiers. 

Compounding this was a corrupted political order, 

particularly after the period of the “good emperors” 

that increasingly damaged the empire’s internal stability and often denuded the frontier of legionary protection just when it was most needed. Still, as long as 

Rome was able to protect and make use of its core 

central tax base, it had the wherewithal to survive, 

counterattack, and restore its fortunes. Nowhere is 

this better displayed then by Rome’s recovery from 

the “3rd Century Crisis.” However, when the “tax 

spine” was broken, as it was in the 5th century, Rome 

and its empire were doomed.

In the 3rd century, under the relentless pressure of 

barbarian invasions, civil war, and natural disasters, 

the empire began to disintegrate. At one point, it even 

split into three major parts: Britain, Gaul, and Hispania 

broke off in AD 258 to form the Gallic Empire; 2 years 

later, the eastern governor created his own Palmyrene 

Empire out of the provinces of Syria, Palestine, and 

Aegyptus. However, he died soon thereafter, leaving his son, Vaballathus, a weakling who was thoroughly controlled by his mother, Zenobia, to lead the 
27

eastern legions in a war of conquest into Syria, Egypt, 

and Lebanon. 

As bad as this fragmentation was, the true damage to the Empire’s future prospects was the economic 

changes that were occurring almost unnoticed against 

the backdrop of military crisis. As widespread unrest 

made safe travel for merchants impossible, the vast 

Roman trading network broke down. This breakdown 

hugely exacerbated a financial crisis that began when 

Rome needed to find new funds to defend the Empire, and that grew worse as various provinces were 

devastated or broke away. As a result, cities and large 

landowners began establishing autarkic economic 

zones. This was a profound economic change, as wide 

swathes of the Empire stopped exporting or importing goods. From this point on, these regions would 

look only to themselves for subsistence crops, as well 

as many manufactures. At the same time, many cities, no longer confident that legions could hold the 

frontier lines, began looking to their own defenses 

and erecting walls. These changes to the basic fabric 

of the empire would make themselves felt in the following century. By then, local leaders, economically 

independent and despairing of support from Rome, 

rather than fight and see their property ravaged, 

began finding it advisable to come to terms with 

invading barbarians.57

Ancient Roman historian Michael Grant states, 

“That the survival of the Empire, in the face of intolerable odds, is something of a miracle, and one of the 

most remarkable phenomena in human history.”58

While saving the empire was remarkable, it was not 

a miracle, for the Empire, even in this dark hour, still 

possessed formidable strength. As a result of invasions and revolts, the Empire was forced back upon 
28

it core provinces, and here it found salvation. Despite 

everything that had gone wrong, the core of the Empire (Byzantium and Anatolia, Italy, Spain, and, most 

importantly, North Africa) remained wealthy enough 

for one great effort. All that was required was leadership, which, when it was most needed, was found 

in the emperors Gallienus, Aurelian (the self-declared 

restorer of the Empire), and Diocletian. In a series of 

lightning campaigns, these emperors reunited the 

Empire, restored the borders (except for Dacia, which 

was abandoned), and damaged the Sassanids sufficiently to negotiate a 30-year-long peace. It was only 

after Julian was defeated by the Sassanids almost 100 

years later (AD 363), coupled with the loss of the Eastern field army to a Gothic force at Adrianople, in AD 

378 that the Roman world began its final decent.

5th Century Collapse.

After the Roman defeat at Adrianople, the barbarian Goths devastated the Balkans before being induced 

to move west, where they sacked Rome itself in AD 

410. Rome survived that shock, and the Goths eventually moved on to southwestern Gaul where they were 

settled. Unfortunately, Rome was given no time to restore its frontier defenses so as to properly confront 

the large populations of barbarians, who, pressured 

by the Huns to the east, began their migration into the 

empire. Unchecked by any Roman army, Vandals, Alans, Suevi, Franks, and many others moved across the 

Rhine river. Great cities—Trier, Tournai, Arras, and 

Rheims—were sacked as the invaders cut away large 

regions of the empire as permanent settlements for 

themselves. They met with little resistance, as those in 

the path of these invaders, having developed autarkic 
29

economic systems and no longer protected by Roman 

arms, found accommodation preferable to resistance. 

Still Rome was not beaten. For all appearances, the 

current crisis does not appear to have been as bad as 

what the Empire survived in the 3rd century. Despite 

some incursions, the Eastern Empire remained powerful and remarkably unscathed during this period. 

Moreover, the imperial army, now mostly consisting 

of barbarian troops, was still capable of fighting force. 

In fact, as late as AD 451 at the Battle of Chalons or 

Catalaunian Fields, a Roman field army along with 

Gothic allies defeated Attila’s Hunnic force, precipitating the collapse of the short-live Hunnic Empire. 

So, although, Rome’s entire strategic enterprise, at 

least in the West, had collapsed, the empire was not 

yet without resources. Even if the Eastern emperor, 

dealing with problems of his own, could not be prevailed on to send assistance, for a time, much of Italy 

remained free of barbarians. More importantly, North 

Africa, the jewel and breadbasket of the Empire, remained untouched. These regions, in conjunction with 

resources drawn from other provinces not yet ravaged 

(Sicily), were likely sufficient for Rome to undertake 

the re-conquest of what had been lost. After the defeat 

of the Huns, the remaining barbarian tribes averaged 

between 10,000 and 30,000 warriors. Moreover, they 

were fragmented and incapable of combined action. 

In short, none of these tribes was a match for a welltrained and well-led Roman field army, which, as 

proven at Chalons, Rome was still capable of fielding.

So why was Rome not able to repeat the feat of the 

3rd century and restore, if not all, at least the bulk of 

the Western Empire? Among a host of reasons historians have presented, one great strategic blunder stands 

out. Totally fixated on the deluge of barbarians cross-
30

ing the Rhine and then later on the Hunnic threat, 

the Romans allowed an earlier invader, the Vandals, 

to enter Africa in AD 429. Once the Vandals had captured Carthage, in AD 439, they controlled the African 

grain supply that propped up the Western Empire. As 

Chris Wickham relates:

The Vandals broke the Mediterranean infrastructure 

of the West, the source of most of the city of Rome’s 

food. The food had largely been supplied free, in tax; 

the Vandals were autonomous, however, and kept the 

African produce for themselves—although they were 

prepared to sell it. The Carthage-Rome tax spine ended. The population of the city of Rome began to lessen 

precipitously after the mid-fifth century, in the next 

it dropped more than 80 percent. And a gaping hole 

appeared in the carefully balanced fiscal system of the 

western empire; the Romans faced a fiscal crisis, just 

when they needed to spend as much on troops as they 

possibly could.59

Wickham continues: 

Not foreseeing that Geiseric would take Carthage . . .

is arguably the main strategic error of the imperial 

government in the 5th century: the moment when the 

political break-up of the imperial government became 

a serious possibility.60

The breaking of Rome’s “tax spine” tore out the economic machinery of the Western Empire.61 Without 

economic resources, not even the most brilliant strategic conception could be enacted. After 500 years of 

adhering to a simple strategic formulation, Rome, in 

the mid-5th century, had forgotten its cardinal tenet—

defend, at all cost, the rich economic core. Once this 

was lost, so was the Western Roman Empire.
31

DARK AGES

The end of the Western Roman Empire accelerated 

an economic decline that had become evident more 

than a century before.62 By the middle of the 5th century, coins were no longer used as a medium of exchange 

in Britain; by the middle of the 6th century, the issue 

of new silver and gold coins ceased throughout what 

had been the Western Roman Empire. It would be 200 

years before coins were again minted within the region.63 As a result, trade was nearly extinguished, and 

central authority in most areas collapsed. This period 

marks the final break between the ancient classical era 

and the emergence of what has become known as the 

Dark Ages.64

As the financial system broke down, coins became 

scarce. In the decades immediately after the fall of 

Rome, barbarian kings often tried to maintain the Roman tax system for their own purposes. It was a losing game, as the political fragmentation of the Empire, 

coupled with the disruption of trading networks, soon 

worked their effects on the tax system. As coins gradually disappeared, kings took ever greater amounts 

of their tax haul “in-kind,” but this only slowed the 

decay, it did not stop it. For instance, by the 6th century, the Frankish Merovingian kings were taxing only 

their ever-dwindling numbers of Roman subjects, exempting all Franks from such payments. By the next 

century, taxation was so unpopular among all classes 

that it was viewed as an abuse of power and halted.65

From this point, kingly (that is to say central government) revenues were based on the funds a king could 

raise from his own royal lands rather than through 

taxes drawn on the entire population or wealth of a 

country. For most of the period coinciding with the 
32

Merovingian Dynasty, there were sufficient royal 

lands to parcel out to followers to purchase the loyalty of the army. In fact, land available for presenting 

to followers in return for military service lasted much 

longer than many would have thought possible, as the 

Merovingian kings were able to reclaim many lands 

upon a recipient’s death or through assorted legal 

maneuvers. Sooner or later, however, the land had to 

give out, and during Frankia’s 7th century civil wars, 

it finally did. 

The rising “mayors of the palace”—Charles Martel and his sons, Pepin and Carloman—were quick to 

take advantage of the resulting Merovingian decline 

to push forward their claims of leadership. They too 

had to pay their soldiers with land, but they added a 

couple of new twists. First, they compelled churches 

and monasteries to turn over much of the land they 

had been accumulating for centuries.66 Then they 

ceased distributing land in small plots to individual 

soldiers in favor of giving large estates to loyal vassals. In return, these vassals would use the revenues 

from their estates to equip and train a force of soldiers 

that had to answer the mayors’ call to arms. Here, we 

see the primary origins of the feudal system, rooted in 

the Frankish king’s lack of silver and gold.67

As Western Europe began its emergence from the 

Dark Ages, a new barbarian plague descended on the 

continent—the Vikings.68 At first, the Vikings limited 

themselves to relatively minor raids, such as that at 

Lindisfarne in AD 793. However, starting with the AD 

865 arrival of the “great host” in England, the Vikings 

adopted a course of conquest and settlement. Over the 

next few generations, successive invasions left most of 

England under Viking control—an area known as the 

Danelaw. By the middle of the 9th century, only Wes-
33

sex, under its king, Alfred the Great, still resisted the 

Viking onslaught. Historians rightly credit Alfred the 

Great with saving his kingdom of Wessex by building England’s first standing army, a fortified system 

of burhs (fortified town), and even a small fleet. It remains little noted that the backbone of Wessex’s resistance lay in Alfred’s remaking of the kingdom’s financial administration.69 To pay for his troops, navy, and 

military construction, Alfred instituted a new taxation 

system and redoubled the Anglo-Saxon effort to mint 

sufficient coinage to keep Wessex on a permanent 

war footing.70

Alfred’s reorganization and military operations 

were successful mostly due to the early attention he 

paid to finance, particularly restoring the integrity of 

the kingdom’s coinage and the expansion of the mint 

network. Upon taking the throne, there were only 

two mints operating in his realm (Canterbury and 

London). Alfred expanded this to eight mints, each of 

which was placed in one of his strongest burhs, all purposely sited near a port so as to ease the transport of 

continental silver to the mints. From the outpouring of 

these mints, Alfred collected a fee of between 5 and 25 

percent. Moreover, the creation of a moneyed economy made it easier for Alfred to collect taxes, tolls, and 

fines in silver, rather than “in-kind” payments (corn 

or wheat).71 Without this strong financial base, Wessex 

could never have withstood the Viking onslaught. In 

fact, Alfred’s most enduring legacy was the basic administrative and financial system he bequeathed his 

successors. 

Although Alfred’s successor, Edward, grimly 

held onto his gains, in the end, the Viking assaults 

proved too much for the fractured states left in the 

wake of Rome’s collapse. Within a generation of Al-
34

fred’s death, England was paying off the invaders in a 

yearly tribute known as the Danegeld. The sums England paid out in Danegeld were huge when compared 

to any previous post-Roman standard.72 While often 

viewed as a drain on England’s limited resources, the 

Danegeld was actually a strong driving force in lifting 

the country out of the Dark Ages.73 As the system of 

taxation handed down by Alfred proved insufficient 

for collecting the huge sums required for the Danegeld, 

the Anglo-Saxons were forced to create a centralized 

administration system that drew England together 

as a unified state and became the basis of its military 

institutions. Although William the Conqueror later 

imposed a feudal system on top of this English administrative system, he and his Norman successors were 

careful not to disturb the Anglo-Saxon organizations 

that proved second-to-none in the systematic mobilization of funds throughout the Middle Ages. These 

funds, in turn, allowed England to influence international events far beyond what its resources implied as 

its limits for over 100 years. 

THE MIDDLE AGES

Still, in the years after William’s death in 1087, the 

demands of almost constant war nearly overwhelmed 

England’s finances, and the silver content of its coins 

became so debased that the Kingdom often verged on 

financial collapse.74 In one instance, after his mercenaries complained that their pay was in debased coins 

(silver content below the standard 92.5 percent) Henry I, rather than adopt a program of fiscal restraint, 

blamed his problems on dishonest minters, who were 

supposedly diluting the silver content of the realm’s 

coins so they could profit from the excess. To help 

“encourage” them to produce coins with more intrin-
35

sic value, on Christmas Day 1124, he called the country’s 150 mint-masters to Winchester Castle to defend 

themselves against charges of debasing the currency. 

In the end, 94 of them were found guilty and each had 

his right hand and one testicle removed. Given the 

state of medicine at the time, most of these unfortunates likely died.75 For a short period, the quality of 

money improved, and Henry I’s mercenaries in Normandy got back to their brutal work. However, by the 

end of his reign in 1135, the quality of silver coins was 

again at a low-point, and the mint-masters had learned 

not to put their names or other identifying marks on 

their coins. 

The quality of English currency completely collapsed in the next decade’s period of anarchy, as 

Henry’s daughter, Matilda, and his nephew, Stephen, 

fought a civil war over the crown. Only when Henry II 

ascended the throne in 1154 was there a decisive move 

to improve the quality of English currency and to put 

the monarchy on a firm financial footing. Henry’s reforms (reducing the number of mints from over 100 

to six and placing the issue of currency under firm 

royal control) made the English silver penny the preferred medium of exchange throughout Europe, and 

inaugurated a period of 200 years of currency stability in England.76 This stable currency was employed 

to fund England’s extensive military adventures on 

the European Continent and the formation of the Angevin Empire. However, holding on to these French 

territories required almost constant fighting and vast 

expense for the crown. Under such conditions the feudal system, which required a vassal to give his lord 40 

days of fighting, proved useless. In order to maintain 

full-time garrisons and a permanent standing army in 

the field, Henry II demanded cash from his lords in 

lieu of military service (scuttage). The proceeds from 
36

this scuttage allowed Henry to maintain a professional 

standing army and marked the beginning of the end 

for feudalism.77

Although England’s financial system, which others 

mimicked as best they could, was the most efficient 

seen for several hundred years, its success must be 

judged against the chaos of the Dark Ages. During the 

medieval era, no king ever approached the efficiency 

with which the ancients collected funds to support 

their empires. In the early-13th century, for example, 

French revenues averaged about 2.4 grams of silver 

per head, while English efficiency almost doubled 

that, at 4.6 grams per head. This explains how English kings were able to hold their own in a series of 

wars against a much larger and wealthier France. Still, 

both countries revenues fell far short of the 21 grams 

per head that Rome was collecting at the height of its 

power, and was not even in the same league as the 

still dangerous Arab Caliphs, who were soaking their 

richer population for 48 grams per head. 

Figure 4. Population and Tax Revenues 

350 BC to AD 1200.78

Population Revenues Revenues Per Head

(Millions) (Tons of Silver) (Grams of Silver)

Persia (350 BC) 17 697 41

Egypt (250 BC) 7 384 55

Rome (AD 1) 50 825 17

Rome (AD 150) 50 1,050 21

Byzantium (850 BC) 10 150 15

Abbasids (AD 800) 26 1,260 48

Tang (AD 850) 50 2,145 43

France (AD 1221) 8.5 20.3 2.4

England (AD 1203) 2.5 11.5 4.6
37

The inability of European rulers to grow their 

economies and develop crucial administrative systems explains almost all of the European way of war 

in the Middle Ages. Lacking large financial resources, rulers never possessed the capacity to wage war 

on the scale of the ancients. Moreover, without the 

money to maintain large standing armies, kings had 

little hope of unifying their feudal underlings into a 

cohesive state.

The greatest Western military adventure of the 

Middle Ages, the Crusades, clearly demonstrates how 

a paucity of funds can directly affect military operations. There is little doubt that just mounting the First 

Crusade in 1069 drained a significant portion of the 

West’s wealth. Almost every noble who went on crusade was forced to sell his estate or pawn whatever 

other property he owned to cover the expense of raising a force he could take with him to the Holy Land. 

In fact, so much money left for the East that many 

mints (which were typically kept busy reminting older coins) closed. All through Western Europe, money 

went into retreat.79 This was not without some benefit 

to Western rulers. Since the Crusades drew off significant numbers of troublesome knights and mercenaries, it is often credited with giving Europe a breathing 

spell from the previous era of incessant feudal wars. 

In truth, the general peace that descended on Europe 

was a natural result of much of its financial liquidity 

being drained off to the East. Without ready cash, Europe’s remaining nobles did not have the wherewithal 

to wage war. Within a very short time, only kings 

could scrape up enough cash to pursue the continuous 

rounds of warfare that had previously been endemic 

to Western Europe. As a direct result, Europe’s kings 

began centralizing political power, a process repeated 
38

by some of the greater barons, who also took the opportunity to increase their domains at the expense of 

poorer rivals. Europe was still a long way from the 

creation of true nation-states, but it is here that one 

sees their embryonic form. 

Despite this crushing expenditure, the First Crusade was only brought to a successful conclusion 

through the generosity of the Byzantine Empire and 

the seizure of Arab and Christian wealth along the 

Crusaders’ path of conquest. Once created, however, 

the Crusader kingdom operated on a shoestring budget, and constantly sought donations from the impoverished West. In fact, lack of money was the key 

factor in the Crusaders’ devastating defeat at the decisive Battle of the Horns of Hattin in 1187.80 England’s 

Henry II, under pressure from the Pope to assist the 

Crusaders, forwarded 20,000 pounds of silver to the 

Mid-East, which was kept in various Knights Templar 

and Hospitaller strongholds. Unfortunately for the 

Crusaders, Henry considered this silver part of his 

own reserves. Unwilling to part with a silver hoard 

he thought he may one day require for his own needs 

(possibly a Crusade of his own), Henry forbade anyone to spend any of his stored funds. So, at its moment 

of crisis, the Crusader Kingdom found itself strapped 

for the cash needed to buy allies and mercenaries, and 

unable to use the vast sums Henry had on deposit only 

a few miles from the King of Jerusalem’s household. 

Although Henry relented after the battle was lost and 

Jerusalem had fallen, it was too late to turn the tide.

One great benefit of the Crusades was the early development of a system for financial transfers. The crusading orders of knights, particularly the Templars, 

not only watched over Henry’s silver and pilgrims, 

but also offered a number of other financial services to 
39

people traveling to the Holy Land. Foremost among 

these was the transfer of funds. Rather than risk losing 

a lifetime of savings (and borrowings) on the perilous 

journey to the Holy Land, a lord, knight, or pilgrim 

would deposit his silver at a Templar stronghold 

in Europe and receive a demand note in exchange. 

This note would be presented at a Templar castle in 

the Holy Land and the appropriate funds would be 

given to the bearer, minus a percentage the Templars 

charged for this service. As a result of this and other 

services, many economic historians credit the warlike 

Templars as the driving force behind the emergence 

of modern banking in Europe. Whatever the merits 

of this argument, a new breed of merchant-banker 

soon adopted many of the Templar financial devices, 

first in Italy and later throughout Western Europe. 

These new financial methods provided the cash that 

propelled a huge upswing in economic activity and 

at the same time made it possible to fight wars on a 

previously unimagined scale.81

It was at this point that the expense of wars between 

proto-states increased enormously.82 By the start of 

Edward III’s reign in 1312, the feudal military organization was only a memory. In its place were “contract 

armies” that were maintained at the king’s expense.83

As a result of accelerating financial requirements and 

the corresponding need to raise as much revenue as 

possible without disturbing internal stability more 

than necessary, rulers began calling on parliaments 

(the English name—other states used different titles 

for similar organizations) to approve and assist in 

raising funds. So began a long process that eventually 

led to governments formed by and through the governed.84 Through their parliaments, rulers were able 

to increase taxation greatly, while limiting the chance 
40

of revolts. But when even this failed to produce the 

required revenues, kings were forced to borrow. 

In the century prior to this, the credit systems of 

European nations were barely developed and “based 

largely on dealings with the Jews.”85 “But in the second half of the 13th century,” as W. M. Ormond states, 

“the Italian merchant bankers began to establish themselves in the principal economic centers of Western 

Europe.”86 Kings in the late-Middle Ages quickly discovered that these new Italian sources with their advanced financing methods could provide a source of 

previously unexploited funds, and thus they no longer 

had to rely on what they could raise or extort at home. 

Going into debt to fight a war was not unknown, but 

the ability to raise substantial funds from distant foreign creditors was novel. Moreover, by going into debt, 

they could draw on what, at least initially, must have 

appeared to be unlimited foreign wealth. In the year 

1294 alone, one Italian banking family (the Franzesi 

Brothers) lent the French crown 200,000 livres tournois,

a sum greater than the annual revenues of the realm. 

Bankers soon became so important that they became 

a military objective in their own right. For instance, 

France’s Philip IV sent troops to imprison and seize 

the assets of the Riccardi of Lucca banking family so 

as to halt their financing of England’s Edward I’s military operations in France.87 Once captured, the bankers were of no further use to Edward I, so he promptly 

seized all of their English assets to help pay for his 

wars in France and Scotland.88

Later in the century, the opening phases of the 

Hundred Year’s War took financial requirements 

to new heights.89 One can get an idea of the cost of 

the war by comparing the conflict’s two great campaigns—Crecy and Agincourt. For Crecy, Edward III 
41

mustered over 1,500 ships to transport an army that 

may have numbered near 25,000 men. Despite strenuous efforts to fund the largest force possible, Henry 

V, only 60 years after the Battle of Crecy, was able to 

field a navy and army only about half the size of Edward’s. Much of the difference is accounted for by the 

huge economic dislocation caused by the Black Death. 

Still, a large portion of it is a result of the economic destruction caused by the war itself. These costs of war 

were measured not only by the devastation wrought 

throughout much of France (a substantial portion of 

which was English owned and therefore part of England’s tax base), but also by the damaged credit ratings of the participants and the financial wreckage it 

left across Europe. At one point, Edward III was so 

strapped for cash that he hocked the crown jewels to 

the Archbishop of Trier. When it was finally redeemed 

from Flemish merchants several years later, Edward had paid more than 500 percent interest on the 

original loan.90

To finance the war’s massive expenditures, Edward squeezed every possible source. At times he 

even allowed his most senior commanders to be held 

hostage or in prison due to bad debts.91 As his own 

nation was squeezed dry, he often went hat-in-hand 

to his Italian bankers, who exchanged hard cash for 

the right to trade English wool and promises of excess 

returns once the loans were repaid. Although Edward 

put the money to good use and won a series of victories over the French, his debts eventually became 

too great to manage. When he eventually defaulted 

in 1339, he took down Italy’s two largest banking 

concerns, the Bardi and Peruzzi families, and caused 

a depression that hung over Europe for more than a 

generation.92 This and other lesser defaults so wrecked 
42

English credit that pecuniary difficulties, rather than 

defeats in battle, became a primary cause of England’s 

defeat in the Hundred Year’s War. Within a decade 

of Henry V’s death in 1422, England could no longer 

afford to pay for sufficient mercenaries to stand up to 

a resurgent and relatively financially sound France.93

By the time the Hundred Years’ War ended in 1453, 

England was near financial destitution, and a newly 

unified France was the European Continent’s reigning 

military and financial power. As a final result of the 

war, Italian bankers substantially withdrew from international lending in general, and from loans to kings 

in particular.94

EARLY MODERN ERA

Toward the close of the medieval era, discoveries 

of large silver deposits in the Holy Roman Empire 

and the New World heralded a new epoch in warfare 

and ushered in the modern era. For the next couple 

of centuries, access to a tidal wave of bullion ensured 

wars would be, long, bloody, and extremely expensive. To pay for these wars, kings turned to a new 

breed of “merchant princes” whose financial acumen 

made them indispensible to ambitious rulers. One of 

the most dominant of these, but today almost forgotten, was the powerful Fugger family.95 Through their 

control of the Holy Roman Empire’s mines and other 

concessions, they first bought Charles V the Empire’s 

crown and then financed his wars for over a generation. The Fuggers also played a major role in arranging 

finance for other rulers, including Philip II of Spain. In 

comparative terms, Bill Gates would have to increase 

his personal wealth by a thousand times to even begin approaching the relative wealth of the Fuggers at 
43

their height. But even this vast wealth was no insurance against the vagaries of war and royal displeasure. The Fuggers were ruined when Spain could no 

longer afford its wars and became a serial defaulter on 

its loans, something it was to do with regularity for 

decades to come despite having the riches of the New 

World at its disposal. In fact, Spain’s inability to match 

its ambitions to its admittedly vast, but not inexhaustible, riches sped its fall from the ranks of Europe’s 

great powers. 

Even at the heights of its power, Spain’s precarious 

finances were seen as its Achilles’ heel. While Sir Francis Drake’s 1587 raid on the gathering Spanish fleet 

in Cadiz is often credited with delaying the Armada’s 

sailing for a year, this is only half the story. While 

Drake’s raid was undoubtedly destructive, the root 

cause of the delay was Philip II’s inability to borrow 

the funds required to repair the damage. His bankers 

in Genoa, who had replaced the nearly bankrupted 

Fuggers in royal financial circles, buckled under considerable pressure from English merchants, mobilized 

by the devious Sir Francis Walsingham, who demanded they not lend to Philip II.96 Because his Genoese 

bankers let him down, Philip’s Grand Armada failed 

to sail as planned, and England was given a year’s 

respite to prepare for the great trial ahead. 

Throughout this period, the Spanish empire also 

waged an 80-year war with tiny Netherlands, a war 

that became as much about credit ratings as it was 

about intrinsic military power. The Netherlands was 

eventually victorious because on a per-capita basis, 

it could sustain a debt level multiples above what 

Spain could afford. The reason was clear. Lenders 

had learned to distrust monarchs, who would default 

on a whim and leave them with no recourse. In fact, 
44

over the generations, many lenders learned that lending money to a king often led to prison or early death 

whenever a ruler decided such methods were more 

expedient than repaying loans. The Netherlands, on 

the other hand, was a Republic, possessed of institutions that would endure long after any of its members 

perished. Moreover, as many members of these governing institutions were merchants and bankers (the 

ones making the loans), they had a vested interest 

in making sure the government repaid its debts. Although lenders remained reluctant to lend to a single 

ruler; they showed fewer qualms about lending to a 

government with a ruling body such as a parliament 

or congress.

During the course of the 80 Years’ War (1568-1648), 

the Dutch “came to view war as a battle not only of 

soldiers and guns, but also credit ratings.”97 As James 

Macdonald relates from one Dutch participant in 

the war:

Even if the country has no money, it still has credit, and 

the enemy has neither funds nor credit, that I could 

not deny that we might wear out the enemy through 

this war, because this land has sufficient funds.98

While the Dutch made huge strides in harnessing 

capital for military purposes, it was left to the British 

to bring war finance into the modern age. Beginning 

with Holland’s William of Orange’s assumption of 

the crown in 1688 during the “Glorious Revolution,” 

Britain first imported and then vastly improved on 

Dutch financial methods. Faced with the enormous 

costs of the wars against France’s Louis XIV, which 

outstripped even the resources made available by the 

adoption of Dutch methods, the British were forced to 
45

develop methods of finance never considered before, 

and at that period in history, likely impossible for any 

nation not possessing long-standing democratic institutions. This was the start of a true financial revolution which created a system of capital mobilization 

that not only financed Britain’s wars on a previously 

unimaginable scale, but also ushered in the Industrial 

Revolution and the start of the modern era.99

The immediate impact of Britain’s entry into a long 

series of wars with France was a rapid 300 percent increase in public expenditures. Government expenses 

that were under £2 million a year in 1688 grew to £6 

million by 1702.100 At first, Parliament attempted to 

finance this huge expense the old-fashioned way—

increasing taxes and short-term loans. Soon, faced 

with financial collapse and an impending default 

that would have made Edward III’s experience with 

the Bardi and Peruzzi banking families pale in comparison, Parliament began casting for ways to convert 

short-term into long-term debt. After some trial and 

error, they fixed on the establishment of the Bank of 

England. 

Upon its creation, the Bank served a very different role than Britons today view as the Bank’s raison 

d’être. For, as the Bank’s original charter made plain, 

at inception and for many decades thereafter, its central role was to help Britain finance its wars through 

the creation of a “perpetual loan.” In fact, one of the 

first directors of the Bank, Michael Godfrey, took this 

part of the job so seriously that he joined William of 

Orange at the siege of Namur in 1692. In the midst of 

discussions over the king’s future financial needs, he 

was killed by a musket ball while visiting a front-line 

trench.101 No other Bank Director has ever again seen 

it as part of his job to inspect the battlefront person-
46

ally to see how wisely the Bank’s funds were spent.102

In any event, from that point forward, no British 

government ever again defaulted or had to meet the 

crushing economic burden of war by raising taxes to 

economically destructive levels. Instead, funds were 

raised only in amounts required to pay the incremental cost of the loan’s interest, producing a loan whose 

principal might never be paid off. At times, even this 

reduced burden appeared enough to doom Britain’s 

financial stability, but Parliament always muddled 

through. This was not true of most of the other nations 

of Europe.

At the end of what may be properly called the 

first truly world war—The War of Spanish Succession 

(1702-13)—every major nation in Europe was fiscally 

exhausted.103 For 3,000 years, wars had been limited by 

the inability of pre-modern states to raise the financial 

resources necessary to engage in conflicts on a grand 

scale. But, by the dawn of the 18th century, new financial methods were coming to the fore, hugely increasing both the scope and cost of warfare. For instance, 

William and Mary had been forced to issue £6,900,000 

in debt to fight the War of the League of Augsburg 

with France (1688-97). To fight the War of Spanish Succession, however, Britain issued £28,796,006 in new 

debt.104 The war was barely affordable to Britain, but 

proved ruinous to other nations’ fiscal positions, particularly France’s. Various nations attempted a wide 

variety of schemes to consolidate their debts, and then 

to follow the British lead in lengthening loan maturities (when they would have to pay them back). No 

nation was quite able to replicate the British achievement, as it was based on institutions (Parliament) 

other nations had yet to develop. The most notorious 

of these schemes was established in France by the 

Scotsman, John Law. It was Law’s idea that crashed 
47

most spectacularly, when the infamous “Mississippi 

Bubble” popped. 

Law’s notion involved replacing the use of gold 

with paper money, expanding government debt, and 

then transforming all of France’s old and new debt 

into equity (stocks) of private firms, the most magnificent of which was the Mississippi Company. Law also 

established the Banque Générale Privée (General Private 

Bank) to handle paper money transactions, which 

were issued in large volumes with the bank’s holdings 

of government debt (three-fourths of the bank’s total 

reserves) being used as capital. In 1720, Law combined 

the bank and the Mississippi Company, along with 

other ventures, into a single entity. Before the year 

was out, an inevitable run on the bank, coupled with a 

spectacular drop in Mississippi Company share prices 

collapsed the entire system, forcing Law to escape 

France dressed as a woman. The French government 

chose to walk away from its debt obligations, plunging France into economic turmoil for a generation and 

ruining the monarchy’s ability to secure international 

credit up through the Revolution that deposed it.105 In 

fact, France’s inability to regain its financial footing in 

succeeding decades is considered by many historians 

as the underlying cause of the French Revolution and, 

by extension, the rise of Napoleon.

Without going into details, Britain handled its War 

of Spanish Succession debt in manner quite similar to 

France, with one crucial difference—Britain did not 

walk away from the debt once the system came apart. 

In Britain’s case, the operations of the Bank of England 

were supported by the creation of the South Sea Company, which, over the course of a decade, absorbed 

most of the government’s war debt in exchange for 

equity in the company. When the company’s shares, 
48

which were propped up for a time by manipulations 

of the market, imploded in 1720, Britain faced an existential financial crisis similar to France’s in the wake of 

the bursting Mississippi Company bubble. But rather 

than default on its obligations, Parliament compensated debtholders: 

by splitting their claim on the capital of the South Sea 

Company in half; one-half to be a claim on the equity 

of a much reduced South Sea Company and whatever dividends it might produce in the future (never 

to include payments in stock as that method is what 

brought about the collapse in the first place), and the 

other half as a claim on perpetual annuities that the 

government pledged to pay 5 percent for 5 years before reducing payments to 4 percent.106

These perpetual annuities were a remarkable innovation. In practice, the British government never 

had to repay the principal on its debt. Rather, it was 

only required to pay the interest on these annuities—

named Consols—which by mid-century were being 

issued at a regular rate of 3 percent. So, if the British government was in debt for £30 million, it never 

had to worry about the day creditors would demand 

payment. As long as the government could fund the 

annual interest (£900,000), it could maintain the debt 

indefinitely, with plenty of maneuvering room for 

increases in times of emergency. In the event, debt 

accumulated rapidly as Britain engaged in a series 

of long and draining wars—the War of Austrian Succession, the American Revolution, and the Napoleonic 

Wars. By the turn of the 19th century, even the innovative “perpetual annuities” based system was under 

stress, forcing Parliament to find new revenue sources 

(the first income tax) just to keep up with the inter-
49

est charges. It remains a remarkable testament to the 

financial system Britain crafted, as well as to British 

fiscal probity, that the nation continues to pay interest 

on debt issued to finance the war against Napoleon.

Two other factors must be considered when discussing Britain’s ability to sustain a huge national 

debt. The first was the creation of a secondary market 

for debt. The creation of consols (perpetual annuities) 

made it possible for secondary markets to develop, 

where original debt holders could shed the risk of 

holding government debt by selling their consols to investors prepared to bear it. Economic historians Ann 

Carlos and Larry Neal marked this issuance of “perpetual annuities” and their ability to be traded on secondary markets as the “defining financial innovation” 

of Britain’s financial revolution.107 This secondary 

debt market, in turn, greatly assisted the concentration of capital that propelled the start of the Industrial 

Revolution. 

Moreover, it was this financial revolution that underpinned Britain’s ability to finance debts far beyond 

what contemporaries could have predicted based on 

the nation’s size and population. No matter how hard 

the tax collectors of other nations tried, they always 

had to deal with a basic economic fact: there was only 

so much wealth that could be taxed away from an 

agricultural-based economy before the economic base 

was destroyed. Typically, only a single-digit percentage of a nation’s “trapped” agricultural wealth was 

available to support wars. Anything more and “geese 

laying the golden eggs” died of fiscal exhaustion. Increasing global trade from the Reformation onwards 

did increase revenues for all that participated, but they 

paled in comparison to the wealth generated as fruits 

of the Industrial Revolution. As Britain slowly moved 
50

from an agrarian economy to one based on trade and 

industry, great concentrations of wealth were created 

within industrial and trading centers (cities). In a remarkably short time, Britain added a rich merchant 

class to her landed gentry, as well as a rapidly growing 

middle class—all of whom possessed incomes worth 

taxing. It was, in fact, William Pitt’s imposition of an 

“income tax” on these people that made it possible for 

Britain to support the interest on consols issued to finance the great wars with France in the late-18th and 

early-19th centuries.108

For the rest of the 19th century, Britain made 

good use of its financial innovations to take a consistent leading role in global affairs, far beyond what 

her size and relatively small population should have 

made possible. Britain was proving that in the modern 

world, size did not matter near as much as its sound 

finances. By the early-1800s, Britain could count on 

its superior financial and taxation systems not only to 

finance its own military, but also to carry a great deal 

of its allies financial burdens during the wars against 

Napoleon.109

As the century progressed, the harnessing of the 

financial revolution with the Industrial Revolution 

made it possible to create a true nation-in-arms, far 

beyond the dreams of the French revolutionaries and 

their levée en masse. Industry could now produce armaments in quantities that were entire orders of magnitude beyond what the artisans of the past were capable of manufacturing, while the Bank of England’s 

consols could pay for them. Britain no longer was 

forced to rely on storing vast treasuries so as to wage 

war. Rather, its entire financial wealth could remain 

working within the economy. By keeping as much 

specie in circulation as possible, rather than hoard-
51

ing cash and gold reserves for potential wars, Britain 

maintained within its economy the high levels of liquidity required for rapid growth. By creating reliable 

programs for emergency debt financing, peacetime 

Britain could invest its income back into growing the 

economy, while concurrently ensuring a ready source 

of cash in the event of war. 

Although the Napoleonic Wars placed a tremendous strain on British finances, they never cracked 

under the stress. Still, to maintain its forces, as well as 

the forces of many of its allies, the Exchequer had to 

resort to many tricks, such as issuing 3 percent consols

far below par, effectively increasing the interest on 

the total debt and offering consol holders huge capital 

gains if the consols were ever redeemed at par (something no minister thought possible, given the huge 

size of the debt). Also, for the first time, the propertied class, scared witless by the French Revolution, 

actually began to pay something approaching what a 

true assessment of their wealth would dictate. As one 

historian noted:

Thus only the armies of France and the possible collapse of public credit persuaded Englishmen to accept 

the income tax. Only the sustained threat to national 

security from Napoleon, and to their high stake in 

national wealth, persuaded the propertied classes to 

assess their liabilities to pay, under the law, within tolerable margins of accuracy and of fairness.110

Of course, this war-induced surge in patriotic giving passed quickly. In the wake of the Battle of Waterloo and the end of the French threat, wealthy Britons 

immediately began dismantling the fiscal underpinnings of the state (including the income tax).111
52

Britain, however, had shown the way forward. For 

almost a century after 1815—the Pax Britannica—Europe’s greatest nations pursued industrialization, state 

centralization, and the creation of fiscal and monetary 

institutions capable of funding renewed war. 

WORLD WAR I

Nevertheless, old habits die hard, and before the 

onset of World War I, many looked with trepidation 

at the German war reserves stored inside the Spandau 

Fortress. Rather than spend or invest a large segment 

of the reparations France paid after the Franco-Prussian War, Germany stored away ₤70 million in gold 

to defray the costs of a future war. When, on the eve 

of war, someone reminded British Chancellor of the 

Exchequer (and future wartime prime minister) Lloyd 

George of this apparently massive gold reserve, he 

responded, “A mighty sum, but England will raise 

the last million.”112 It was a remarkable testament to 

his faith in Britain’s capacity to finance a prolonged 

conflict, as well as proof that his government realized 

that the ability to raise massive sums of cash was the 

determining factor in war.113

In any event, no one in 1914 could have envisioned 

the colossal sums of cash 20th-century warfare would 

consume. The much-feared Spandau gold reserves 

proved insufficient to cover even a single month of 

war expenses. While methods of finance had improved 

considerably in the century and a half since Pitt the 

Elder, they still strained under the stress. Without the 

timely intervention of the United States and its mostly 

untapped financial resources, the Allied financial system would have collapsed.114 Accessing this American 

financial stream was by no means an easy task, and 
53

the scope of the effort involved was daunting. By 1916, 

Britain was spending five million pounds a day on the 

war, of which two million pounds was raised in the 

United States. Still, it was not until the British credit 

crisis of 1917 that the United States began providing 

government-to-government credits to Britain.115

While the Allied financial system adjusted to the 

demands of global war, industry also rapidly converted to meet new challenges. Though there were early 

shortages of materiel as the combatants either built or 

converted plants, once industry hit full stride, it easily 

met war demands, particularly after the United States 

added its massive production potential to the Allied 

pool.116 British Cabinet minutes of the period reflect 

continuous concerns about raising more millions of 

pounds, but nary a word about running short of production capacity. While finance had closed the gap on 

production, it had not yet caught up. As long as the 

cash held out, there were always sufficient munitions 

available for purchase. In fact, as Professor Hew Strachan points out, “Before 1914 the competition in arms 

had created such abundance that there seemed little 

need to consider wartime procurement. How the war 

would be paid for promised to prove much more intractable.”117 In fact, the pre-war orthodoxy held that 

the cost of modern war would be so prohibitive, nations would soon bankrupt themselves and the war 

would end, according to one politician, no later than 

July 1915, “when the means to pay for it would have 

been exhausted.”118

Such worries were exacerbated by the common belief among national leaders that they were starting the 

war with debt levels already approaching the maximum a nation could afford. When the war began, almost every major power was maintaining a debt level 
54

close to half of its gross domestic product (GDP), and 

debt service was already the largest item on government budgets. Only Britain, which had made a concerted effort to reduce its debt after the expense of the 

Boer War, was in a respectable debt position, at about 

a quarter of GDP and requiring only 10 percent of the 

government’s total budget for debt coverage.119 Britain’s wartime fundraising efforts also benefitted from 

the fact that Lloyd George, in his 1909 to 1911 budgets, 

had instituted progressive tax reforms that tapped 

large amounts of wealth the rich had not previously 

cared to contribute. These revenues were meant to 

pay for social welfare programs, but were turned for 

other purposes in 1914. As economic historian Glyn 

Davies states: 

[A] fiscal framework had therefore been fundamentally transformed on the eve of the First World War into 

a much more buoyant source of revenue, ripe for the 

insatiable demands of the military machine. What had 

been introduced . . . for welfare thus became a timely 

godsend for war.120

Even swelling tax revenues, with rates increasing 

by a factor of 4.5 by war’s end, could not begin to meet 

the voracious funding demands of global war on an industrial scale.121 Before the war ended, annual British 

government expenditures were 13 times greater than 

those of peacetime, similar to the burden all the other 

major warring states faced.122 To meet these huge fiscal demands, Britain and other nations resorted to all 

three major methods for advanced economies to raise 

revenues: taxes, debt, and printing money. 

Before the war ended, British national debt increased by a factor of 10, with the debt-to-GDP ratio 

increasing from 26 percent to 127.5 percent.123 This is 
55

remarkably close to the debt-to-GDP ratios set by the 

United States and Britain during World War II and 

might therefore be considered the limits of what a nation can afford, even in wartime.124 To finance this debt, 

Britain was forced to abandon the idea of perpetual 

annuities in favor of issuing bonds with varying maturities.125 The post-war requirement to rollover this 

debt placed tremendous strain on the British financial 

system throughout the 1920s. Moreover, Britain, accustomed in previous wars to subsidizing its allies 

(something it still did for France and others throughout the war), was forced to turn to others, particularly 

the United States, to fund a substantial portion of the 

war’s cost.126 When even all of this proved insufficient, 

the Exchequer turned to printing money, doubling the 

monetary base by war’s end. Some of this was inescapable, but as printing money was always an easy 

escape from immediate financial difficulties, it was 

kept at too high a volume for too long, stoking a near 

ruinous inflation.127

In the end, Britain’s fiscal system proved up to the 

task of funding a global war against other industrial 

powers; but in doing so, the nation’s sterling based 

fiscal system was placed under nearly unendurable 

strain. As a result, the United States, already emerging 

as a competitor for global financial leadership before 

the war, was able to enhance its position as a global 

financial center. U.S. financial might continued growing over the next 2 decades—albeit more in relative 

than real terms during the Great Depression—positioning the United States as a global financial titan just 

in time for World War II. 

Although, for much of its course, World War I appeared to prove that powerful nations could wage 

global war without money concerns, the reality turned 
56

out different when the war ended just as most warring nations were reaching the end of their financial 

rope. There still remained room to expand production 

of war materiel, but there was no money to pay for 

such an expansion. In the end, although governments 

had raised record amounts of cash, by 1918 the pattern 

that held true since the beginning of recorded history 

held firm: When the money runs out, the war ends. 

Although America, through the offices of J. P. Morgan & Company, provided substantial financial aid to 

Great Britain and other allies, it was not until America’s entry into the war in 1917 that the Unites States 

placed its entire financial might behind the Allied effort. As such a deeper examination of how America 

financed its own mobilization as well as a substantial 

portion of Allied expenses for the final year-and-a-half 

of war will illuminate how modern financial made 

prolonged industrial warfare possible.

The American Experience.

World War I began just as the United States began feeling its way toward becoming a global financial power. For most of its history, the United States 

had been a heavy importer of capital, with almost no 

investment outflows to other nations. Soon after the 

American Civil War, however, these huge capital inflows—instrumental in the building of the nation’s 

railroads, canals, and financing industrial start-ups—

began tapering off. By the second half of the 19th 

century, the United States was generating sufficient 

excess capital to more than replace external financial 

flows, making the nation’s economic growth self-financing. In fact, by the end of the century, the United 

States was a large capital exporter, and loans to China, 
57

Germany, Sweden, Canada, and South America were 

being floated in New York’s capital markets. In making these loans, “The United States was gaining experience for handling the creditor position it would 

assume during World War I.”128

Adjusting to the new fiscal realities brought on by 

accelerating industrialization, rapidly increased trade 

flows (the first great process of globalization), and increasing GDP growth was not easy, and there were 

many stumbles along the way. The financial panics of 

1857, 1873, 1893, and 1907 had caused great hardship 

and greatly undermined faith in the U.S. financial system. It was the Panic of 1907, however, which finally 

and fully revealed to the general public the impotence 

of the U.S. Government to deal with a financial crisis. 

In the face of this crisis, government actions were always a combination of late, insufficient, or ineffectual 

ones. In the end, the financial system was rescued by 

J. P. Morgan, who locked 50 top financers in his library 

and forbade them food or drink until they agreed to 

provide enough liquidity to fund the banking system 

and to shore up the foundering U.S. financial infrastructure. As one contemporary noted: 

But for the influence of J.P. Morgan, it is probable that 

no united action would ever have been taken. It is certainly an element of weakness in our central money 

market that influential credit institutions should have 

to be dragooned into doing what is after all in their 

own interests as well as to the general advantage.129

Unwilling to further entrust the U.S. financial future to the good graces of any single individual, Congress embarked on a number of reform measures over 

the following years. The most notable of these, the imposition of an income tax (soon after the ratification of 
58

the 16th Amendment) and the creation of the Federal 

Reserve System proved crucial to U.S. funding efforts 

during the war. The income tax was levied for the first 

time in the year before the war (1913). Approximately 

368,000 persons from a total population of over 100 

million paid just over $28 million into the treasury. By 

1916, the income tax was yielding $68 million, which, 

when added to the corporate tax ($57 million), was 

enough to cover half of the nation’s defense budget in 

that year. Unfortunately, it was only about 1/50th of 

the annual cost of the budget, once the United States 

entered into hostilities.130

The creation of the Federal Reserve (Fed) gave the 

United States a powerful tool for the management of 

the nation’s finances. Although the Fed experienced 

substantial teething pains during its first months of 

operations, it immediately made itself felt during the 

war.131 The Fed, which began operations in 1914, was 

established to overcome the problem with monetary 

inelasticity. That is, at the start of every financial difficulty, persons and corporations immediately withdrew their money from the banking system and started 

hoarding cash, gold, and silver. Such a rapid contraction of the money supply was usually enough to push 

a minor hiccup in the system into a full-fledged crisis. 

The Fed, through open market operations, and a host 

of lesser means that became even more sophisticated, 

became the lender of last resort. Rather than rely on 

J. P. Morgan to force bankers to add liquidity to the 

system, the Fed provided the U.S. Government the 

means for boosting the money supply at the first sign 

of a credit crunch.132

At the start of World War I, London, despite impressive gains by New York City, remained the financial capital of the world. “Sterling remained the 
59

world’s dominant currency,” and as Lloyd George 

boasted, London was “transacting far more than the 

whole of our business: we were transacting half the 

business of the world as well, by means of paper transactions.”133 On the other hand, the United States was 

mired in a recession at the outbreak of war, a situation 

that rapidly reversed as European orders for food and 

munitions began pouring in. By 1914, however, this 

British dominance was already receding, as the United 

States, whose GDP had grown seven times since the 

Civil War, began replacing the “weary titan,” first in 

its home markets and then abroad.134 Within months 

of World War I’s eruption, exports exploded, and gold 

flowed into the United States as payment. At the start 

of the war, the United States held 19 percent of the 

world’s gold stock. At war’s end, it had absorbed an 

additional 16 percent of the world’s pre-war money 

gold and increased its own stock by 88 percent.135 In 

addition, Europeans sold $2 billion in U.S. securities, 

while borrowing $2.4 billion during the first year of 

the war alone. For the first time in its history, the United States became a creditor nation.

At the start of World War I, U.S. Government 

spending averaged about $65 million a month, or on 

an annual basis 2.3 percent of GDP. By the start of 1917, 

spending had increased by $20 million a month, but as 

inflation was roaring, the total expense as compared 

to GDP fell (2.2 percent). After America’s entry into 

the war, monthly expenses increased rapidly.136 By the 

end of the war, the government was spending over $2 

billion a month, about 32 percent of GDP on an annual 

basis.137 Like all modern wars, the United States had 

three main options for financing the war—increasing 

taxes, raising debt, or printing new money.138 As it 

turns out, the majority of the war effort was financed 
60

by borrowing (58 percent).139 The rest was paid for by 

taxes (22 percent) and by printing money.140 As a result of these financing operations, what is now called 

“high-powered money,” or the monetary base, more 

than doubled.141 As the United States had yet to develop the measures to sterilize this excess cash, the 

resulting inflation had a severe negative impact on the 

economy.

Figure 5. Real GDP and Price Levels.

The total cost of the war was immense ($33 billion), equaling over 40 times the amount the government brought in from all sources in the year before 

America’s entry. At first, the government was at a loss 

as to how to meet such a vast expense, as no one had 

any clear understanding of the best methods for war 

financing on so vast a scale. There was, however, a 

widespread consensus that most or as much as possible of the cost should be paid for through taxes. Sec-
61

retary of the Treasury William Gibbs McAdoo strongly advocated that taxes pay for at least 50 percent of 

the war, dropping it to 33 percent later in the war. 

As Hugh Rockoff points out, “There was no precise 

theory behind these figures, but rather an intuition 

that too much borrowing or too high a level of taxes 

would be bad for the economy.”142 In the end, the U.S. 

Government, similar to every other war participant, 

combined a number of different approaches, including: increasing the income tax (the top rate went from 

1.5 percent to over 18 percent), increased excise taxes 

(alcohol and tobacco), and an increase in luxury taxes. 

These tax increases on “sinners” and the rich were a result of President Woodrow Wilson’s adamant support 

for the idea that the rich should pay for as much of the 

war as possible.143 Surprisingly, the nation’s wealthy 

industrialists, unwilling to risk being branded as war 

profiteers, were strong supporters of increasing their 

own tax burden.144

But tax changes are slow to take hold and rarely 

popular with electorates. As a result, this war, like 

every major war of the modern eras, was still largely 

financed through increasing debt. To sell this vast 

amount of debt, the Department of the Treasury drew 

on the lessons from the Civil War. In that war, Secretary of the Treasury Samuel Chase enlisted the services of the firm of Jay Cooke to help sell national bonds 

to as wide a spectrum of the American population as 

possible. There is no doubt that Cooke was effective 

in siphoning off funds from a large segment of the 

middle class, but this time around, Secretary McAdoo thought the Treasury could do better on its own, 

while also saving on the commissions that would be 

incurred if the debt was sold through third parties. In 

his unceasing efforts to sell debt to the masses, Sec-
62

retary McAdoo traveled the country while simultaneously enlisting the aid of Hollywood and any other 

influential groups that could help drum up support 

for Liberty Bonds and later, Victory Bonds. This campaign exerted enormous social pressure to purchase 

bonds, but its necessity remains an open question.145

At an average interest rate of 4 percent, coupled with 

preferential tax treatment, these wartime issues of 

debt were highly competitive with any other investment vehicle. Patriotism may have been part of the 

selling technique, but purchasers were making a 

hardy profit on their patriotic feelings. If these bonds 

were purchased primarily to demonstrate support for 

the war effort one would expect to see purchases below the prevailing market rates (patriotic duty). This, 

however, did not occur at any point during the war. 

Americans in general were apparently only willing 

to financially support the war if forced to through increased taxes, or if rewarded through high investment 

returns.146 Through such measures, some 20 million 

persons—almost a quarter of the population—purchased Liberty Bonds in one form or the other.147

Unfortunately, the methods used by the Treasury 

and the Fed proved to be highly inflationary.148 There 

were many causes for this, but the primary one was 

that the Fed “encouraged” its member banks to make 

loans to individuals, which they could then use for the 

purchase of war bonds. Investors could take out cheap 

loans from banks and then buy bonds paying a higher 

interest rate than what the banks were charging them 

on the loans, thereby locking in a guaranteed (often 

tax-free) profit equal to the spread between the two. In 

practical terms, the Fed, by giving the banks the money to loan out for this purpose, was printing money, 

although it went to great efforts to disguise this fact. 
63

The government tried a number of expedients to 

combat inflation during the war, but met with only 

limited success. By 1918, the cost of bread had doubled, as did the cost of clothing. Some items, such as 

sugar, quadrupled in price, while the overall cost of 

maintaining the pre-war living standard increased by 

two-thirds for the average household in just 2 years.149

The best that can be said for government efforts to 

control inflation is that it probably curtailed it from 

hitting ruinous proportions. Still, it was the overall 

ineffectiveness of these anti-inflation programs that 

cued policymakers to pay careful attention to price 

levels for the much bigger financial effort required for 

World War II. 

By the end of the war, America had financed $33 

billion of its own war costs, as well as over $10 billion 

in war loans to other allies. By doing so, the nation 

greatly expanded the depth and sophistication of its 

capital markets, not to mention the size and scope of 

the federal government.150 More importantly, the war 

put the final nail in the coffin of British global financial supremacy. From this point forward, that position 

would be occupied by the United States.151

WORLD WAR II

The American Experience.

For over 3 millennia, money had been the determining economic influence on war. As long as a ruler 

or state had the equivalent of cash on-hand or someone 

who was willing or could be forced to lend it to him, he 

could continue prosecuting any war of his choosing. 

There were always sufficient armories to produce war 

materiel and enough men whose service was for sale. 
64

In every case examined to this point, a state’s money 

gave out long before its productive capacity. This all 

changed in World War II. For the first time, every major warring power ran out of production capacity long 

before it ran out of money.152 As U.S. Secretary of War 

Henry Stimson said after the war:

The one thing upon which the whole country was 

agreed was that the services must have enough money. At no time in the whole period of the emergency, 

did I ever have to worry about funds; the appropriations from Congress were always prompt and generous. The pinch came in getting money turned into 

weapons.153

As further evidence that modern financial methods had closed the funding gap, the week after the 

United States entered the war, head of the Fed Marriner Eccles announced he would throw the entire 

power of the Fed behind the war effort, and that there 

were more than sufficient funds available to pay for 

the total mobilization of the country for war.154

In Britain, a new financial model—the Keynesian 

Miracle—made it possible to borrow huge amounts at 

record low rates. On the eve of war in 1939, Britain 

temporarily abandoned the cheap money policy (offering only low interest rates to lenders) that had been 

financing Depression Era deficits. The bank rate was 

doubled from 2 percent to 4 percent, but when war 

broke out and there was no sign of financial panic, it 

was reduced to 3 percent, and then a month later back 

to 2 percent.155 There the rate remained throughout the 

war, only hitting 3 percent for short periods. In effect, 

Britain fought World War II at only 40 percent of what 

it would have cost if it had adopted the policies used 

in World War I and, in relative terms, for about a third 

cheaper than what it paid to fight Napoleon. 
65

To accomplish this, Britain adopted some rather 

drastic methods, such as capital controls and rationing 

of essentials (food and clothing), and made it nearly 

impossible to purchase expensive nonessentials (cars 

and refrigerators). To calm public opinion that some 

industries (so-called war-profiteers) were making a 

killing while they suffered, Britain first imposed a 60 

percent excess profits tax. When that failed to impress 

anyone, it was raised to 100 percent.156 The other crucial element of the British plan was to control what 

Keynes called the ‘inflation gap” by taking excess cash 

from consumers’ pockets through increased taxes.157

In 1939 alone, Britain raised income taxes by almost 

20 percent for virtually the entire working population 

(not just the wealthy). All of Britain’s indirect taxes 

(on such non-necessities as sugar, alcohol, and tobacco) also rose sharply. 

Despite these increases, revenues in the first year 

of the war barely covered 50 percent of expenditures, 

leaving a deficit of nearly a billion pounds.158 But as 

Britain was financing the war at a mere 2 percent interest rate, even this huge and growing debt load appeared manageable, particularly after America began 

its Lend Lease program. It also helped that, because of 

both voluntary and forced measures, Britons had few 

options for storing their money other than purchasing 

government debt. This was particularly true after the 

government got the banks to agree not to offer more 

than 1 percent interest on savings accounts, making 

purchasing government debt (bonds) twice as attractive to the average saver.159 Moreover, to better tap the 

funds banks still had on hand (and deny the banks 

opportunities to lend their funds for higher rates elsewhere), the government forced the banks to accept 

Treasury Deposit Receipts in return for forced loans to 
66

the government. By the end of the war these receipts 

(IOUs) made up over 40 percent of total bank assets.160

In the final analysis, Britain was able to finance 

a huge global war remarkably cheap compared to 

all other modern wars. It was the culmination of a 

financial revolution begun by the Dutch in the 17th 

century. For a time, in fact, it appeared that the iron 

laws of economics had been repealed. In all previous 

debt-financed wars, the more you borrowed, the more 

interest you had to pay. In World War II, however, 

Britain borrowed far more than ever before, at interest rates lower than ever before.161 Its national debt 

rose from £7.25 billion in March 1939 to £23.75 billion by the time Germany surrendered. Yet, despite 

the growth of inflationary pressures throughout the 

war, Britain had entered a period of fiscal nirvana.162

Fortunately, the war ended before inflation broke 

through the stringent controls and methods keeping 

it in check. One is therefore left to wonder how much 

longer this system of deficit spending could have gone 

on before inflation brought it crashing down. As an 

example of what might have happened if inflation 

had escaped its binds, one need look no further than 

Weimar Germany.

Similar to how it took over the financing of the Allied war effort in World War I, the United States acted 

in much the same role after the attack on Pearl Harbor, 

HI. As such, the fourth and final case study provides a 

more in-depth examination of how America financed 

4 years of global war.

The Financial Revolution Fulfills Its Promise.

The Roman statesman, Cicero, once noted, “Endless money forms the sinews of war.”163 However, 

it was not until the 20th century that governments 
67

finally mastered the procedures necessary for tapping 

their economic systems so as to provide these “endless” streams of money.164 Although the three historical methods of financing government spending (raising taxes, borrowing, and printing money) remained, 

governments had become substantially more sophisticated in wielding these tools.165 In spite of, or maybe 

because of, the nation’s experience in World War I, orthodox economic thinking at the beginning of World 

War II still held that taxes should finance wars, on a 

pay-as-you-go basis.166 This viewpoint had wide support across the political spectrum, as most politicians 

considered printing money inflationary and debt financing as a burden on future generations. Moreover, 

most believed that adding additional debt to the national balance sheet was particularly reprehensible 

because the initial burden of paying it off would fall 

on the same young men who had fought the war.167

Economists also believed that turning on the printing 

presses would, at best, serve as an emergency stopgap 

measure, which would rapidly lose its effectiveness as 

hyperinflation outpaced the presses.168

An examination of World War II’s financing, 

however, indicates that the printing press played a 

much greater role than commonly assumed, particularly in the early war years.169 For at least the first 2 

years of the war, the Fed’s printing presses worked 

overtime, and the money supply expanded accordingly.170 Such a rapid expansion, if kept up for too 

long a period, would, of course, have crippled the 

economy as inflation took hold. But in the exigency 

of the moment, it was the only method fast enough to 

fund the jump-start and rapid growth of production 

necessary to meet immediate war needs.171 In the first 

place, the government-instigated monetary contrac-
68

tion, which had extended the length and depth of the 

Depression more than any other single factor, had not 

been rectified by the time the United States entered 

the war.172 So, there was room to expand the stock of 

money without sparking inflation, particularly as the 

government had halted the production of high ticket 

durable consumer items. Leon Henderson, head of 

the Office of Price Administration, began instituting 

relatively effective price controls.173 Moreover, if businesses were going to expand, they required immediate working capital, and there was plainly not enough 

of it available in the economic system in 1941.174 In 

short, the in-circulation monetary base (cash or nearcash equivalents) in 1941 was too small to support the 

daily activities of the massive American economy as 

it mobilized for war.175 Unless the government added 

cash to the system quickly, there was a real possibility 

the entire mechanism would seize up.176

The Federal Reserve Bulletin for December 1942 

noted that the government had financed 75 percent of 

its expenditures in the first year of the war through 

borrowing, with the remaining 25 percent through 

taxation.177 This was somewhat disingenuous because 

it failed to reflect how the Federal Reserve System 

creates money. Since the start of the Federal Reserve 

System in 1913, the primary method of adding liquidity to the monetary system was by altering the reserve 

requirement that members of the system had to keep 

on deposit with the Federal Reserve. In peacetime, 

this is a highly effective method, but several overlapping factors often led to lag times between reserve rate 

changes and expansion of the monetary base. In the 

emergency of global war when the funds necessary to 

finance rapid expansion are needed immediately, the 

government could not tolerate this lag.178
69

In the spring of 1942, the Federal Reserve changed 

its method of injecting liquidity (cash) into the system by hugely increasing its reliance on “Open market Operations”—buying government bonds directly 

from member banks. This was initially accomplished 

by setting a fixed buying rate on Treasury bills.179

Under this policy, as the Federal Reserve Bulletin 

stated, “member bank reserves are almost automatically supplied, with the initiative being taken by the 

member banks rather than by the Federal Reserve 

System.”180 What this meant in reality was that member banks were allowed, and encouraged, to buy as 

much government debt as they wanted, or purchase 

other securities (commercial debt), or make loans as 

they desired, provided that, among the securities they 

acquired, were sufficient treasury bills to exchange 

at Federal Reserve banks for whatever additional reserves were needed to meet the accompanying expansion in reserves.181 That is, the government turned the 

formulation and execution of monetary policy over to 

the commercial banks, with a blanket authorization 

to produce as much wartime monetary expansion as 

they found profitable.182 In short, the Fed gave banks 

a license to print money . . . all they wanted!

How did this work in practice? As the public purchased government securities, the payments were 

credited to U.S. Government accounts in various commercial banks. This process automatically reduced 

the amount of cash reserves banks were required to 

keep on hand. Eventually, Treasury transferred these 

excess reserves to the various regional Federal Reserve banks, which then used them in payment for 

the purchase of war supplies and other government 

expenditures. The government’s admonition to keep 

these reserves fully invested at all times, coupled 
70

with the natural desire of profit-making institutions 

to increase their holdings of interest-bearing investments, encouraged banks to use their reserves to purchase large amounts of government bonds, both during bond drives and on the secondary market.183 The 

banks made most such purchases directly from the 

Treasury when possible; otherwise, they were bought 

from private investors. The need to keep reserves employed until they were called for by the Central Bank 

also caused banks to make sizable loans to customers for the purchase of government securities, most of 

which these customers later sold to banks. Both the direct purchase of government debt and the funding of 

customers to do so tended to increase a bank’s future 

reserve requirement. This increase showed up several 

months later, when the Treasury spent its new deposits and the funds reappeared in the accounts of banking customers. However, the announced policy of the 

Federal Reserve System to purchase Treasury bills at 

a fixed rate eliminated any fear that the bank might 

have trouble meeting future reserve requirements. 

As long as this policy continued, any bank could purchase any volume of U.S. Government securities for 

its own account, or could loan any volume of money to its customers for any purpose without fear of 

inability to meet future reserve requirements. 

So why did this license to print money not lead to 

the ultimate financial devastation of the system? In 

time, of course, it would have, but two things stopped 

the banks from undertaking an immediate unbridled 

monetary expansion that would have led to hyperinflation and ruin. First, the U.S. banking system remained largely fragmented, with over 16,000 national 

and state-chartered banks across the country.184 Most 

of these banks and bankers across the country simply 
71

lacked the economic sophistication to spot the opportunity presented to them. More important, though, 

were memories of the Great Depression and the numerous banking panics of previous decades. Though 

on a practical basis the new Federal Reserve wartime 

policies had eliminated the need for reserves, most 

of the Depression-scarred banking community still 

thought it prudent to hold sufficient reserves on-hand 

for emergencies.185

The Government was issuing debt in quantities 

so huge that it would be impossible for the economy 

to digest those sums without massive interest rate increases to make bond purchases attractive. To clear 

the debt, the Federal Reserve became the buyer of last 

resort and purchased as much of the debt as necessary to keep the price and interest rate at a previously 

agreed pegged rate—called monetizing the debt.

186

These purchases created government-owned deposits 

on the books of the Fed, which equated to the banking system’s receiving additional reserves, which its 

banks then used to expand their asset holdings (making loans) while creating additional deposit money.187

Thus, one must consider the portion of the debt issued 

by the government that banks or private investors, using bank financing, bought back as printed money, 

although the Federal Reserve resisted such thinking 

at the time. 

This means that 75 percent of the government’s 

expenditures in 1942 was not, in reality, financed 

through debt securities. Instead, the government 

funded a substantial portion of its purchases through 

money creation.188 Estimates are that as much of 42 

percent of wartime spending in 1942 was the result of 

turning on the printing presses, while actual nongovernment financed bond sales paid for approximately 
72

34 percent, with taxes paying the remaining 24 percent. This situation reversed by 1944, when taxes and 

a much reduced amount of debt sales sufficed to cover 

expenses.189

If politicians and economists were in agreement 

that creating money was the worst possible way to finance the war, and raising taxes was the best, how did 

the reverse become policy, at least in the United States 

in the early war years? The overriding problem facing 

the U.S. Government during World War II was how 

to raise the staggering amounts of money required 

by war.190 If it performed the job well, the government could stabilize the economy, which would make 

preserving the soundness of the currency immeasurably easier. If done badly, it might have destroyed the 

entire economy. 

For example, most historians agree that Germany’s 

failure to adequately address its war financing needs 

was a contributing factor to the general disruption of 

its economy in the aftermath of World War I. By failing adequately to tax its economy to meet wartime 

expenditures, the Germans left it up to their central 

bank to raise the necessary funds on a credit basis. 

This negligence, plus military defeat, contributed to 

the ruinous inflation that wiped out the value of most 

of German society’s economic assets in the early postwar period—The Great Weimar Inflation.191

During World War II, the Treasury Department 

had the responsibility of raising sufficient funds to 

wage the war. In this regard, it focused on keeping 

interest rates low and thereby minimizing the cost of 

servicing the debt.192 The Federal Reserve’s principal 

concern was to ensure that the means used to raise 

funds were as noninflationary as possible. To the extent that these funds did not come from taxation or 
73

borrowed savings, the United States had to raise its 

financial wherewithal through the banking system. In 

other words, the federal government used the banks 

to create sufficient credit.193

In the process, the Federal Reserve confronted a 

dilemma. On the one hand, the system had to supply 

the banks with the reserves required to support credit 

expansion (give the banks money so they could buy 

government bonds). On the other, it was the Fed’s responsibility to neutralize the inflationary potential of 

newly created money (usually done by taking money 

away from banks). However, there was no satisfactory 

way to neutralize the money that would not, at the 

same time, either raise the cost of debt substantially 

or contract available credit (if you take the banks’ 

money away to control inflation, you have to raise 

interest rates to attract the limited amount of money 

banks still have thereby increasing the cost of funding 

the war). The most the Federal Reserve could do was 

to go about its business with sufficient care to slow 

the impact.194

That inflation remained low, or at least within reasonable limits, was the result of three things. The first 

was creation of the Office of Price Administration in 

1942. That organization possessed sweeping powers 

to control prices and establish rationing programs on 

products in short supply. The second was the fact that 

conversion to wartime production brought a halt to 

the manufacture of almost all big-ticket consumer durables, such as automobiles and refrigerators.195 The 

wartime boom may have given consumers more cash 

than they had previously, but they did not have much 

on which to spend it. Third, and in many ways the 

most important, was the self-restraint consumers exhibited due to their post-war expectations. Virtually 
74

all Americans had vivid memories of the Great Depression and believed that the current prosperity was 

a wartime boom. There was widespread trepidation 

that the Depression would return as soon as the war 

ended. Many, therefore, took the sensible precaution 

of saving, rather than spending, their windfall.

Was it necessary to go this route? During the 6 fiscal years from July 1, 1940, to June 30, 1946, the federal 

government spent $387 billion, of which $330 billion 

was for national defense (approximately three times 

the annual spending rate for World War I). The Treasury raised $397 billion, of which taxation garnered 

$176 billion, or 44 percent (most of this in the second 

half of the war).196 Moreover, politicians were aware 

that taxation provided many benefits over the other 

two methods of finance. First of all, taxation distributed the cost of the war while it was being fought, 

rather than imposing the costs on future generations, 

and was therefore considered more ethical and fair. 

Taxation also fought inflation, as it had an almost 

dollar-for-dollar impact on inflation, because consumers cannot spend dollars the government has taken 

from them. Finally, taxation alleviated many negative 

post-war economic effects. This was because greater 

amounts of wartime borrowing meant greater postwar taxation in order to service the resulting debt. 

Furthermore, large amounts of government securities 

in private hands at the end of a war could easily provide sufficient liquid assets to stoke serious inflation, 

as was to happen in 1947-49.197

So why did the government not raise tax levels to 

cover the expense of war? First of all, there was the 

need to provide incentives to workers. During the 

war, the government wanted every worker to make a 

maximum effort to increase production levels. Taxes 
75

not only discourage workers by making them feel 

poorer, they also have a negative impact on the human desire to earn extra dollars, which they believe 

will only end up in the hands of the government. 

Moreover, politicians are reluctant to place tax burdens on constituents to whom they will eventually 

find themselves accountable. When faced with a vote 

on a tax increase, politicians can easily forget about 

the burden to future generations, in favor of keeping 

today’s voters happy.198

The major determining factor in financial decisions 

by far was the one that receives little coverage from 

the economic historians of the period, namely time. 

The emergency was now, and the need to pay for the 

war was immediate. This need was particularly pressing in the first year of major rearmament, when the 

American economy had to provide resources to build 

or expand factories and construct the infrastructure 

on which the expansion of the military establishment 

depended. Passing new tax laws through Congress 

and then establishing the apparatus on which to assess and collect those taxes would have been a timeconsuming affair. Though Congress authorized a new 

tax structure in April 1942, it was almost a year before 

substantial new revenues began to find their way into 

the Treasury.199 Bond drives that focused on sales to 

private individuals had the same problem: they took 

months to organize and publicize.

The maturity of the Federal Reserve System, born 

in the early days of World War I, provided an already 

in-place and efficient system to raise vast amounts of 

cash in a remarkably short period of time. It was not 

without risks, but, properly managed, the system provided a stopgap until taxation and bond drives could 

begin to provide the bulk of governmental funding re-
76

quirements. Even after taxation had reached its maximum wartime limit, the Federal Reserve continued 

to guarantee sufficient bank liquidity to ensure that 

bond drives always met their goals without ever going over the 3 percent interest cost on offered bonds. 

By any measure, the American banking system, controlled by the Federal Reserve System, provided the 

allies with a financial engine that relatively easily 

assumed the burdens of war finance. Although the 

strains on it were enormous, every indication is that 

the Federal Reserve could have created substantially 

greater funding, without collapsing the system, even 

if the war had continued for several more years.200

The Federal Reserve banks themselves absorbed 

approximately $22 billion of the public debt, while 

creating a favorable environment for absorption of 

roughly $95 billion more by commercial banks. Moreover, from June 1941 through December 1945, investors other than Federal Reserve commercial banks 

absorbed approximately $129 billion of government 

securities.201 In sum, this was close to all of the government’s spending on the war, and even in 1945, 

these sources were far from tapped out. In fact, the 

continuing high levels of savings that propelled the 

post-war boom could easily have provided additional 

war funds if required. For the first time in history, a 

government exhausted production capabilities long 

before it exhausted the funding sources required to 

pay for new munitions. Such a state of affairs could 

not have continued forever, but it lasted long enough 

to win the war.

The Federal Reserve held true to the promise it 

had made almost immediately after Pearl Harbor, 

when it issued the statement that the “system’s powers would be thrown completely behind the war ef-
77

fort,” and that there were “sufficient funds available 

to prosecute the war on a massive scale until victory.” 

At the time, there were many politicians who doubted 

this was possible.202 However, there is no record that 

any economist during the period doubted that the system could fulfill the Federal Reserve’s boast.203 Government had, for the first time in 3,000 years, devised 

methods to pay for total war over an indefinite period 

of time. When the test came, these methods proved 

effective at managing the fiscal machine.204

CONCLUDING THOUGHTS

Throughout history, the ability to mobilize huge 

amounts of capital has been the true sinew of power 

and the most important ingredient in waging successful war. For 2,500 years, since the Battle of Marathon, 

Western rulers have been on a continuous search for 

new sources of capital, and better methods of getting 

their hands on it. By the middle of the 20th century, 

major states appeared to have finally found and mastered the techniques of tapping the greater portion of 

their nation’s financial resources. During World War 

II, national leaders might be forgiven for believing 

they had finally found the inexhaustible golden goose. 

But by 1945, it was clear that for most of these nations, 

the goose was on his last legs. Only the United States 

still possessed the financial resources to continue the 

conflict at the intensity of the prior several years, but 

even in America signs of strain were developing.

The post-war economic surge revived the geese for 

a time. But 7 decades later, it is apparent that many nations are arriving at what might be called a “Keynesian limit,” and will find it progressively more difficult 

to place further debt on their balance sheets. Many 
78

economists, addressed this long-run problem—debt 

growing beyond a nation’s ability to service the interest—to Keynes when he first voiced his idea of using 

debt financing to jump-start economic growth. His famous reply was: “In the long-run, we’re all dead.”205

Well, Keynes is long gone, as are all of those that began 

this Keynesian experiment with him. Unfortunately, 

for the rest of us, the long-run, if has not arrived, is on 

the visible horizon. 

Everyday, the world is witnessing Europe’s increasingly desperate attempts to shore up its Eurobased financial systems. Although a series of patches 

may hold the system together for a few years, such 

fixes are likely to only postpone the final, probably 

catastrophic, reckoning. Moreover the U.S. financial 

system, unless policy changes are enacted in the near 

future, may not be far behind. The nation’s per-capita 

debt-to-GDP ratio is already worse than Greece’s and 

set to nearly double over the next 15 years. Worse, 

over the next few decades, the nation faces approximately $100 trillion in unfunded liabilities—seven 

times the current GDP. There is a law of economics 

that states: “What cannot happen, will not happen.” At 

some point, therefore, the United States will default. 

Whether such a default will be a catastrophic financial 

collapse (through outright default or hyperinflation) 

or a default of expectations (entitlements curtailed) is 

yet to be determined.
79

Figure 6. America’s Per Capita Government Debt 

Worse than Greece.

As far as national security and America’s ability 

to wage a large war is concerned, the nation’s current 

debt burden places the country in uncharted territory. 

During World War II, we learned that the nation could 

support its military endeavors by growing the national debt from 40 percent of GDP to approximately 120 

percent. In a future national emergency it remains an 

open question of how much higher the debt to GDP 

ratio can go. To wage World War II, we tripled the 

debt to GDP per capita ratio. Is such a feat possible 

if the nation starts any future tripling at debt already 

over 100 or 200 percent of GDP? We are entering uncharted territory. In the past, nations accrued debt to 

finance wars. Now that debt is being accrued to finance domestic programs. Because the United States 

has a massive economy and remains the world’s reserve currency, it has the capacity to manage its current debt load. It remains an unanswered question if 
80

it could handle a doubling of that debt to finance the 

reaction to a national emergency. Though no one is 

certain what the nation’s financial breaking point is, 

there most certainly is a breaking point, and we are 

racing toward it.

When Paul Kennedy wrote The Rise and Fall of 

Great Powers 25 years ago, he predicted a U.S. financial collapse brought about by excess defense spending—“Imperial Overstretch.” Kennedy, of course, diagnosed the right disease, but he selected the wrong 

patient. Imperial overstretch was an actual phenomena, but it was the Soviet Union it was killing. If Kennedy was to rework his manuscript today, he would 

surely note that it was not imperial overstretch that 

threatens U.S. fiscal health. Rather, it is “entitlement 

overstretch,” a phenomenon he could not have been 

expected to note 25 years ago as there was no historical parallel to alert him to the danger. Now, however, 

that danger is all too visible. In some future national 

emergency, it is quite likely that the United States may 

find itself in a position where it cannot raise the funds 

required to defend the nation, a state of affairs that has 

been all too common over the long sweep of history.

Today’s strategists and policymakers must take 

this financial limit into account, as in a future national 

emergency the U.S. debt position will start at approximately where the nation finished World War II. It is 

therefore uncertain whether the financial revolution 

that began in the late-17th century can be extended 

into the next. There is a very real possibility that we 

are approaching a “Keynesian Limit” that will negatively impact the nation’s ability to finance a major 

mobilization, if one should prove necessary.
81

ENDNOTES

1. Paul Kennedy, The Rise and Fall of Great Powers, New York: 

Vintage Books, 1987.

2. M. Tullius Cicero. The Orations of Marcus Tullius Cicero, C. D. 

Yonge, trans., London, UK: George Bell & Sons, 1903, p. 95. This 

quote may be an adaptation of the original, “First of all the sinews 

of war is money in abundance.” A copy is available from www.

perseus.tufts.edu/cgi-bin/ptext?doc=Perseus%3Atext%

3A1999.02.0021.

3. A strong case can be made that Mao’s ultimate victory was 

a direct result of post-war hyperinflation, which destroyed the 

Chinese currency and financial system. This result might have 

been avoided were it not for the machinations of a Soviet spy in 

the U.S. Treasury, Harry Dexter White. In May 1945, White held 

up a promised shipment of gold bullion that could have stabilized 

the Chinese currency and given the government a stable footing 

on which to carry out the war against Mao’s communist forces. 

This is one example of how wars are often decided by finance. 

4. In recent years, there have even been a number of excellent works that focus primarily on the logistical aspects of war. 

See Martin van Creveld, Supplying War: Logistics from Wallenstein 

to Patton, Cambridge, UK: Cambridge University Press, 2004; 

Donald W. Engels, Alexander the Great and the Logistics of the Macedonian Army, Berkeley, CA: University of California Press, 1980; 

John A. Lynn, Feeding Mars: Logistics in Western Warfare from the 

Middle Ages to the Present, Boulder, CO: Westview Press, 1994; and 

Ian Malcolm Brown, British Logistics on the Western Front: 1914-

1919, Westport, CT: Praeger, 1998. 

5. The term “dismal science” itself originated in Thomas 

Carlyle’s essay, “Occasional Discourse on the Negro Question,” 

Fraser’s Magazine for Town and Country, Vol. XL, February 1849, 

p. 531, available from cepa.newschool.edu/het/texts/carlyle/carlodnq.

htm. It states, “It is not a gay science like some we have heard of; 

no, a dreary, desolate, and indeed quite distressing one; what we 

might call the dismal science.” 
82

6. This case study is an expanded version of the author’s earlier work. See Jim Lacey, The First Clash, New York: Bantam, 2011.

7. For purposes of this analysis, the author focuses on Athens, 

as it faced the Persian assault at Marathon alone, I will add in 

Plataea’s 1,000 hoplite contribution. If this analysis was made for 

Xerxes’ invasion 10 years later, there would be justification for 

including a larger number of Greek cities in these estimates.

8. It is notoriously hard to find any convincing figures for Attica’s population. I have discounted Arnold Gomme, The Population of Athens in the Fifth and Fourth Centuries B.C., Oxford, UK: 

Clarendon Press, 1933, in favor of Peter Garnsey’s analysis. See 

Peter Garnsey, Cities, Peasants and Food in Classical Antiquity: Essays in Social and Economic History, Cambridge, UK: Cambridge 

University Press, 2004. I have extrapolated the numbers Garnsey 

presents back to 490 BC, using an estimate population growth rate 

of 3 percent.

9. These calculations are the author’s own, based on various 

estimates of the size of the Roman military establishment compared to estimated populations over time. These numbers do not 

hold up during the Republic, where Rome was able to mobilize 

a far larger percentage, as the Greek city-states also were, during 

times of stress. According to Goldsmith, even at the height of its 

power, Rome’s total expenditures, of which approximately half 

went to the military) equaled between 3 and 4 percent of GDP. 

In times of crisis, such as at the end of the Antoine Period, Rome 

managed to raise a bit over 5 percent of GDP. This is about the 

average revenues any agricultural society was able to produce, 

equal to the United States in 1820. Still, the Persians typically did 

better, raising an average of 6 percent Empire-wide and as much 

as 8 percent in fertile areas, such as Mesopotamia. For Roman revenues, see Raymond W. Goldsmith, Premodern Financial Systems, 

Cambridge, UK: Cambridge University Press, 1987, pp 48-49. For 

Persian revenues, see Peter Bedford, “The Persian Near East,” 

Walter Scheidel, Ian Morris, and Richard Saller, eds., The Cambridge Economic History of the Greco-Roman World, Cambridge, UK: 

Cambridge University Press, 2007, pp. 326-328.
83

10. As discussed in the previous note, the Persians were able 

to gather a greater percentage of their GDP as tax revenue, as a 

greater proportion of their inhabited territory was more fertile 

than that found within the Roman Empire, on average.

11. Again, Rome had an advantage in this regard over other 

ancient civilizations. As its Egyptian and North African fields 

were highly productive and produced a tremendous annual 

wheat surplus, Roman society could maintain a large military establishment and still feed itself. In an average year during the early Empire, Rome consumed 200,000 tons of grain a year, almost all 

of it transported from Northern Africa in 800 ships dedicated to 

the trade. See Elio Lo Cascio, “The Early Roman Empire: The State 

and the Economy,” Scheidel et al., p. 639.

12. The Persian kings’ policy of hoarding revenues would 

have limited annual military expenditures.

13. This is exclusive of taxes paid in kind, such as the wheat 

shipments from Egypt and North Africa, the Annona.

14. I reject out of hand that it was possible for the Persians to 

manage or logistically support any force much larger than this. 

For some reason, the historical community has come to a consensus that Xerxes marched with 250,000 troops. Consider that the 

Romans only put more than 200,000 men in the field once, and 

to do that they had to supply both armies, The Battle of Philippi, 

during The Civil Wars. According to Richard Gabriel, Alexander the Great’s 65,000 men required 195,000 pounds of grain and 

325,000 pounds of water to sustain it for a single day, plus 375,000 

pounds of forage per day to sustain its animals. It strains credulity to believe that the Persians were able to supply four times 

this amount for a sustained period, particularly when they moved 

away from their established magazines within the empire. Moreover, expert calculations place the column length of a six-legion 

army at 22 miles. Extrapolating this for a Persian army of 250,000 

gives a column length of over 160 miles. Given an average day’s 

march, that means the first troops made contact at Thermopylae, 

while the rear of the army was still 2 weeks march from the battlefield, assuming they were all marching along the coast road. Even 

in multiple columns or in compressed formations, this size army 

would be a nightmare to manage and supply.
84

15. Sailors were relatively easy to mobilize, as the established 

merchant marine could always be conscripted. Of course, if it was 

away for any length of time, it would wreck the trading economies of the coastal cities. 

16. Herodotus gives the number of male citizens as 30,000, 

Herodotus 5.97.

17. It will be remembered that these were the colonists that 

Athens sent after it defeated Thebes and Chalcis on the same day, 

at the time of the first Persian expedition. The author makes the 

assumption that the 4,000 number would have represented the 

heads of households, and that almost all of them would have been 

of military age.

18. It helps to think of the purchase of a person’s own armor 

and weapons as a form of tax. It is doubtful that any able-bodied 

man who could afford it would have been able to avoid the obligation. Even if the state did not require it, the social pressure must 

have been irresistible.

19. Typically the entire hoplite panoply would cost 75-100 

drachmas, or about 3 months’ salary for a skilled worker. See 

Hans van Wees, Greek Warfare: Myths and Realities, London, UK: 

University College, 2004, p. 52. 

20. A. H. M. Jones, “The Economic Basis of the Athenian 

Democracy,” Past and Present, No. 1, February 1952, pp. 13-31. 

This article covers the period through the Peloponnesian War, 

but delivers a number of insights for the period covered in this 

work. The thetes class consisted of any Athenian citizen who held 

wealth of less than 2,000 drachmas.

21. Rachel L. Sargent, “The Use of Slaves by the Athenians 

in Warfare,” Classical Philology, Vol. 22, No. 2, April 1927, pp. 

201-212. For a good discussion of specifically dealing with the 

use of slaves at the battle of Marathon, see James A. Notopoulos, 

“The Slaves at the Battle of Marathon,” The American Journal of 

Philology, Vol. 62, No. 3, 1941, pp. 352-354.

22. Sargent, p. 203.
85

23. J. B. Bury, The Cambridge Ancient History, Cambridge, UK: 

Cambridge University Press, 1960, p. 248.

24. Readers of Donald Kagan’s master work on the Peloponnesian War will see different weightings than given here, as his 

calculations needed to account for the tremendous inflation that 

war sparked.

25. Donald Kagan, The Peloponnesian War, New York: Free 

Press, 2003, p. 61.

26. Bury, p. 200.

27. Thucydides, The Landmark Thucydides: A Comprehensive 

Guide to the Peloponnesian War, New York: Free Press, 1996, p. 415.

28. Glyn Davies, A History of Money From Ancient Times to the 

Present Day, Cardiff, Wales, UK: University of Wales, 2002, p. 86. 

In 356 BC, Philip of Macedon established a new mint at Crenides 

to mint gold and silver pouring out of new discoveries at Mount 

Pangaeus. By the end of his reign, these mines alone were producing 1,000 talents a year. Assuming most of these talents were 

gold, as that is what Pangaeus is known for, and a 10:1 conversion rate with silver, typical of the early years of Alexander’s rule, 

then these mines alone could support almost the full costs of Alexander’s army. Unfortunately, these ores were mostly still in the 

ground, and Alexander’s father, Philip II, had been a spendthrift, 

leaving his son an empty treasury. As Arrian reports Alexander 

told his generals (Arrian, 7.3): 

For though I inherited from my father only a few gold and 

silver goblets, and there were not even sixty talents in the 

treasury, and though I found myself charged with a debt 

of 500 talents owing by Philip, and I was obliged myself to 

borrow 800 talents in addition to these, I started from the 

country which could not decently support you. 

29. Converting ancient money into modern terms is notoriously difficult. As a rough measure, however, one can assume 

that one talent could pay the expenses and salaries of a 200-man 

trireme for a month, or 20 of Alexander’s infantry for a year.
86

30. The Persian silver and gold horde captured by Alexander 

could have financed all of his military expenses for 3 decades.

31. From his initial take at the Persian treasuries, Alexander 

coined 5,000 tons of silver and gold, about the same that is stored 

at Fort Knox. 

32. T. A. Rickard, “The Mining of the Romans in Spain,” The 

Journal of Roman Studies, Vol. 18, 1928, pp. 129-143. Also see Titus 

Livy, The History of Rome, Book XXXI, English Trans., Cambridge, 

MA: Harvard University Press, and London, UK: William Heinemann, Ltd., 1935; and Polybius, The Histories of Polybius, Book 

XXXIV, Kenneth Sacks, trans., Berkeley, CA: University of California Press, 1981. 

33. Polybius 1.59.

34. Livy 23.21.

35. Ibid., 23.48.

36. Ibid.

37. See Keith Hopkins: “Taxes and Trade in the Roman 

Empire,” The Journal of Roman Studies, Vol. 70, 1980, pp. 101-125.

38. Suetonius, The Lives of the Twelve Caesars, Book XXI, March 

29, 2009, available from www.fordham.edu/halsall/ancient/suetoniusjulius.html.

39. Tenny Frank, An Economic Survey of Ancient Rome, Vol. I, 

Paterson, NJ: Pagent, 1959, pp. 320-345. According to Frank, during the Civil War, Caesar raised approximately HS600 million 

from requisitions of silver and gold from Spain. For perspective, 

the HS600 million revenue in 50 BC was equal to about 600 million grams of silver or some 6.4 million troy ounces. This would 

be equivalent to about 23,000 Athenian talents, 829.5 ounces per 

talent. In other words, Caesar collected from Spain roughly 12 

times the peak revenues of the Athenian Empire.

40. Ibid., p. 355.
87

41. From Merriam-Webster Dictionary, Origin of “soldier”—

Middle English soudeour, from Anglo-French soudeer, soudeour 

mercenary, from soudee shilling’s worth, wage, from sou, soud 

shilling, from Late Latin solidus solidus.

42. See Peter Heather, Empires and Barbarians, Oxford, UK: Oxford University Press, 2010; and Chris Wickham, The Inheritance of 

Rome, New York: Penguin, 2010, for two recent outstanding studies of the cause for Rome’s fall.

43. This case study is adapted from an unpublished book 

chapter by the author on the “Grand Strategy of the Roman 

Empire.”

44. Hopkins, pp. 101-125.

45. Richard Duncan-Jones, Structure and Scale of the Roman Economy, Cambridge, UK: Cambridge University Press, 

2002, p. 30.

46. Ibid., p. 30.

46a. Hopkins, pp. 101-125.

47. The author recognizes that the offensive impulse toward 

conquest was not extinguished for at least several centuries. Still, 

it is clear that the great conquests were over by the time Tiberius 

assumed the purple. Any conquest from that point on typically 

failed to recoup the cost of the invasion. Exceptions, such as the 

influx of gold after Trajan’s conquest of Dacia, or various conquests in the East eventually also proved such a drain on the Empire’s resources that they were abandoned.

48. Goldsmith, p. 48. For an analysis of Goldsmith’s conclusions that led to further adjustments to Roman GDP and expenditures, see Angus Maddison, Contours of the World Economy 1-2030 

AD: Essays in Macro-Economic History, Oxford, UK: Oxford University Press, 2007, pp. 11-62. Maddison places the average percapita GDP within the Empire at $540, 1990 G-K dollars, as compared to England during the Glorious Revolution (1688) of 1,411.
88

49. See Hopkins for a discussion of Rome’s capability to raise 

taxes by installing a much larger administrative infrastructure, 

akin to that of China at the time, within the Empire. Whether such 

an infrastructure could have been installed or tolerated among 

such diverse populations as made up the Roman Empire is open 

to doubt. In any event, there is a good likelihood the administrative infrastructure would have captured most of the additional 

revenues for its own purposes, as eventually happened in China. 

50. Willem M. Jongman, “The Early Roman Empire: Consumption,” Walter Scheidel, Ian Morris, and Richard P. Saller, 

eds., London, UK: Cambridge University Press, 2006, p. 611. 

51. In an appendix to “Taxes and Trade in the Roman Empire,” Hopkins presents calculations for the size of the Roman 

military establishment that are accepted here. However, Hopkins only accounts for the cost of pay. He leaves out the costs of 

such things as supplies, armaments, military fortifications, ships, 

ports, and many other items necessary for a functioning military 

system. These costs are unquantifiable, at present, but they must 

have been substantial. 

52. This table is built from a paper by Elio Lo Cascio and Paolo 

Malanima, which provides an excellent summary of the various 

estimates for Roman GDP and the methodologies used to achieve 

them. See Elio Lo Cascio and Paolo Malanima, “Ancient and PreModern Economies: GDP in the Roman Empire and Early Modern 

Europe,” Venice, Italy, 2011, available from www.paolomalanima.

it/default_file/Papers/ANCIENT-PRE-MODERN-ECONOMIES.pdf, 

accessed March 5, 2012.

53. Elio Lo Casico, “The Early Roman Empire: The State and 

the Economy,” Walter Schiedel et al., The Cambridge Economic 

History of the Greco-Roman World, Cambridge, UK: Cambridge 

University Press, 2007, p. 623.

54. Ibid., p. 631.

55. This graph and the information in the preceding paragraph can be found in James MacDonald, A Free Nation Deep in 

Debt, New York: New York University, 2003, pp. 65, 109.
89

56. Angus Maddison, The Contours of the World Economy, Oxford, UK: Oxford University Press, 2007, p. 54.

57. Over the past 2 decades, a number of scholars have fundamentally redefined our knowledge of these events and the entire 

era. For the best summaries of this recent scholarship, see Peter 

Heather, The Fall of the Roman Empire: A New History of Rome and 

the Barbarians, Oxford, UK: Oxford University Press, 2006; Peter 

Heather, Empires and Barbarians, Oxford, UK: Oxford University 

Press, 2010; Chris Wickham, The Inheritance of Rome: Illuminating 

the Dark Ages 400-1000, New York: Viking, 2009; Adrian Goldsworthy, How Rome Fell, New Haven, CT: Yale University Press, 

2009; and, Bryan War-Perkins, The Fall of Rome: And the End of 

Civilization, Oxford, UK: Oxford University Press, 2006.

58. Michael Grant, The Collapse and Recovery of the Roman 

Empire, New York: Routledge, 1999, p. 67.

59. Wickham, The Inheritance of Rome, p. 78.

60. Ibid., p. 78.

61. The Eastern Empire’s survival was only possible because 

Constantinople stood as a bulwark against any barbarian incursions across the Dardanelles. As such, the rich provinces in Anatolia, Syria, Palestine, and Egypt were unmolested. Upon this 

wealth, Constantinople would survive for another 1,000 years, 

despite losing much of it during the great Arab invasions of the 

7th and 8th centuries. 

62. Over the past couple of generations, a great historical 

falsehood, claiming that the period between the fall of Rome 

and the start of what is commonly called the Middle Ages was 

not marked with widespread ruin and destruction of the social 

order, has become generally accepted in much of academia. In 

this interpretation, this was a period of transition marked by the 

smooth transfer of the social and economic systems of the Classical Period to a new rebirth and flowering of civilization several 

centuries later. For some recent antidotes to this prattle, see Peter 

Heather, The Fall of the Roman Empire: A New History of Rome and 

the Barbarians, Oxford, UK: Oxford University Press, 2006; Peter 

Heather Empires and Barbarians, Oxford, UK: Oxford University 
90

Press, 2010; Wickham, The Inheritance of Rome; Goldsworthy; and 

Bryan War-Perkins, The Fall of Rome: And the End of Civilization, 

Oxford, UK: Oxford University Press, 2006.

63. Peter Spufford, Money and its use in Medieval Europe, Cambridge, UK: Cambridge University Press, 1988, p. 9. For the definitive volume on medieval coinage, see Philip Grierson and Mark 

Blackburn, Medieval European Coinage, Vol. 1, “The Early Middle 

Ages,” Cambridge, UK: Cambridge University Press, 2007. 

64. Ibid., pp. 10-11. 

65. Chris Wickham, Framing the Early Middle Ages, Oxford, 

UK: Oxford University Press, 2005, p. 105. 

66. The Carolingian Kingdom under Charlemagne is not covered in this piece, but will be part of any expanded work on this 

subject. While much is made of Charlemagne’s military prowess, 

it must be noted that his military success (as is always the case) 

was built upon a firm financial footing. In 794, Charlemagne instituted a wide-ranging monetary reform that established a uniform 

currency for the entire kingdom. At the height of his power, Charlemagne had 40 mints scattered throughout his empire, producing a uniform silver coin that became the basis of a revitalized 

economy and financed Charlemagne’s military adventures. This 

financial system was destroyed by the fragmentation of the empire by the four sons of Louis the Pious. Europe was not to have 

a unified currency again until the birth of the Euro, as a financial currency in January 1999 and, later, as banknotes and coins 

in 2002. See Mark Blackburn, “Alfred’s Coinage Reforms in Context,” Alfred the Great: Papers from the Eleventh-Centenary Conferences, Farnham, Surrey, UK: Ashgate Publishing, 2003.

67. Spufford, p. 16. 

68. This section of the book focuses on the British experience, but the Viking demands for Danegeld also greatly weakened Royal power in France, ensuring that feudal lords would be 

strong enough to contest royal power for centuries to come. It cost 

Charles the Bald 7,000 pounds of silver to buy off a Danish army 

in Seine Valley in 845. A further payment of 5,000 pounds was 

made in 861 and another 6,000 in 862. Before the Vikings settled 

down, they may have taken as much 120,000 pounds of silver out 
91

of France, for all intents and purposes bankrupting that state for 

generations. See Spufford, pp. 63-64. The authoritative source for 

the effects of the Danegeld on France remains Einar Joranson, The 

Danegeld in France, Rock Island, IL: Augusta Book Concern, 1923.

69. Prior to the Domesday Book, there is little documentary 

evidence on the basis of the English financial or taxation system. 

For more detailed analysis, see M. Blackburn and D. N. Dunville, 

Kings, Currency and Alliances, Woodbridge, Suffolk, UK: Boydell 

Press, 1998. 

70. The outlines of this administrative system can still be 

found in the Brughal Hidage, which lists the 33 burhs that comprised Alfred’s fortified network. The document was likely created after Alfred’s death, but there is good reason to believe it 

reflects his plans for defense, as well as how the system would be 

paid for and maintained. See Frank Stenton, Anglo-Saxon England, 

Oxford, UK: Oxford University Press, 1971, pp. 64-267.

71. Mark Blackburn, “Alfred’s Coinage Reforms in Context,” 

Timothy Reuter, Alfred the Great” Papers from the Eleventh-Centenary Conferences, Farnham, Surrey, UK: Ashgate Publishing, 2003, 

pp. 199-218.

72. See Stephen Dowell, A History of Taxation and Taxes in England from the Earliest Times, London, UK: Longmans, Green Publication, 1888, p. 9. The English paid 10,000 pounds of silver in 991, 

24,000 pounds in 1002, 36,000 pounds in 1007, and 48,000 pounds 

in 1011. This final payment was on the eve of Cnut’s invasion and 

likely financed his expedition. That, however, did not stop Cnut 

from levying a geld of 72,000 pounds of silver once he sat on the 

English throne. At least, this final payment was spent in England 

and not on the Continent. 

73. Still, there is little doubt that it was a huge drain on England’s resources during the period, attested to in that more English silver currency has been found in hordes in Denmark than 

has been found in England. In fact, one may say with a large degree of confidence that England, through the Danegeld, financed 

its own conquest by Cnut. 
92

74. The debasement of English coins during this period is a 

reflection of increased demands for silver coins by the monarchy, 

an unfavorable trade balance, which caused silver to leave England in payment for imported goods, and a general reduction in 

the amount of silver available in Europe as the German mines that 

had been producing at high levels since the 9th century began 

slowing down. 

75. Nicholas Mayhew, Sterling: The History of Currency, New 

York: Wiley, 2000, p. 11. The original source is the Annales Monastici 1:11, only in Latin. At least one person—Brand of Chichester—escaped this penalty by paying a large fine. Also see Judith 

Green, The Government of England Under Henry I, Cambridge, UK: 

Cambridge University Press, 1989, p. 90.

76. Mayhew, p. 12.

77. When Henry’s son, King John, tried to add increased feudal dues to what he collected in scuttage, it led to the Barons’ 

Revolt and the signing of the Magna Carta.

78. This graph and the information in the preceding paragraph can be found in James MacDonald, A Free Nation Deep in 

Debt, New York, 2003, pp. 65, 109.

79. Spufford, p. 99.

80. For an account of the Battle of Hattin, see James Lacey, 

“Crushed on the Horns of Hattin,” Military History Magazine, 

April 2008. 

81. Several of the Italian city-states also took advantage of 

the Crusades to greatly increase their wealth, and establish themselves as powerful players on the European scene during this 

time. For instance, Venice charged more on an annual basis to 

transport Crusaders to the Holy Land than the kings of England 

earned in annual revenues. See Charles Tilly, Capital and European 

States: AD 990-1992, New York: Wiley-Blackwell, 1992, p. 145. 

This period also marks the widespread use of “bills of exchange” 

to finance trade. But as this development was an outgrowth of 

Templar activities and had little effect on military affairs, it is not 

discussed in this book. 
93

82. For an idea of the rising cost of warfare as Europe began 

its transition to the modern period, see W. M. Ormond, “The West 

European Monarchies in the Later Middle Ages,” Richard Bonney, ed., Economic Systems and State Finance, Oxford, UK: Oxford 

University Press, 1995, pp. 122-160.

83. For a short but excellent analysis of this transition, see 

Philippe Contamine, War in the Middle Ages, Oxford, UK: Blackwell Publishers, 1984, pp. 150-172.

84. For those interested in the process of state formation in 

Europe, see Tilly.

85. Ormond, p. 127.

86. Ibid.

87. Philip IV may have hurt his own later financing attempts 

both by garnering the mistrust of all Italian bankers and by neglecting the fact that the Riccardis were one of his own creditors. 

88. For a superb study of this relationship, as well as Edward 

I’s financing methods for a prolonged Continental war, see Richard W. Kaeuper, Bankers to the Crown: The Riccardi of Lucca and 

Edward I, Princeton, NJ: Princeton University Press, 1972. Other 

works that shed considerable light on the financing of states and 

war during this period include G. L Harriss, King Parliament and 

Public Finance in Medieval England to 1369, Oxford, UK: Oxford 

University Press, 1979; Bonney, ed., Economic Systems and State 

Finance, pp. 53-100.

89. For a good accounting of the economics of the war for the 

English, see M. M. Postan, “The Cost of the Hundred Years’ War,” 

Past & Present, No. 27, April 1964, pp. 34-53. For the French viewpoint, see John B. Henneman, Jr., “The Black Death and Royal 

Taxation in France, 1347-1351,” Speculum, Vol. 43, No. 3, July 1968, 

pp. 405-428; and John B. Henneman, Jr., “Financing the Hundred 

Years’ War: Royal Taxation in France in 1340,” Speculum, Vol. 42, 

No. 2, April 1967, pp. 275-298.

90. E. B. Fryde, Studies in Medieval Trade and Finance, London, 

UK: Hambledon Press, 2003, p. VII 1165.
94

91. Ibid., p. VII 1164.

92. Edwin S. Hunt, The Medieval Super-Companies: A Study 

of the Peruzzi Company of Florence, Cambridge, UK: Cambridge 

University Press, 1994; and Edwin S. Hunt, “A New Look at the 

Dealings of Bardi and Peruzzi with Edward III,” The Journal of 

Economic History, Vol. 50, No. 1, March 1990, pp. 149-162. Hunt 

demonstrates that there was more to the Bardi-Peruzzi crash then 

Edward III’s default, but this remained a major factor. 

93. Even as England’s ability to raise cash was waning, a surging France was able to call on substantial new funds to prosecute 

the war. In fact, in the years immediately after the Battle of Crecy, 

French government revenues were triple what they had been before the war, as the French population awakened to the mortal 

threat England was presenting.

94. The Medici Family grew rich with a simple rule that they 

never lent to kings, as they had no leverage to force repayment. 

In the end though, political pressure forced them to lend to some 

rulers, who, when they inevitably defaulted, ruined the House 

of Medici. Italian financiers did not totally vacate this sometimes 

lucrative market. For instance, Genoese bankers were very active 

in financing the wars of Spain’s Phillip II, probably assuming that 

New World gold and silver were a guarantee of repayment. They 

too were ruined by Spain’s serial defaults during the 80 YearsWar with the Netherlands.

95. For two excellent studies on the Fuggers and state financing during this period, see Richard Ehrenberg, Capital & Finance 

in the Age of the Renaissance: A Study of the Fuggers and their Connections, London, UK: J. Cape, 1928; and Jacob Strieder, Jacob Fugger 

the Rich: Merchant and Banker of Augsburg, 1459-1525, Whitefish, 

MT: Kessinger Publishing, 2010.

96. Davies, p. 233.

97. MacDonald, p. 152.

98. Ibid, p. 152; sourced from an anonymous pamphlet 

dated 1632. 
95

99. For a comprehensive look at this entire process, see P. G. 

M. Dickson, The Financial Revolution in England: A Study of the Development of Public Credit 1688-1756, New York: St Martin’s Press, 

1967. Other works include Peter Mathias and Patrick O’Brien, 

‘Taxation in Britain and France: 1715-1810: A Comparison of the 

Social and Economic Consequences of Taxes Collected for the 

Central Governments,’ Journal of European Economic History, Vol. 

5, pp. 601-650; Patrick O’Brien, ‘The Political Economy of British 

Taxation 1660-1815,’ Economic History Review, 2nd ser. xli, 1998, 

pp. 1-32; J. F. Wright, ‘British Government Borrowing in Wartime, 1750-1815,’ Economic History Review, Vol. 52, No. 2, 1999, 

pp. 355-361.

100. Dickson, p. 46.

101. Henry Dunning Macleod, The Theory and Practice of 

Banking, Vol. II, London, UK: Longman, 1856, p. 24.

102. For an excellent history of the Bank of England, see John 

Francis, History of the Bank of England: Its Time and Traditions—2 

Vols., London, UK: Longman & Co., 1847. A digital version of 

this work is available from books.google.com/books?id=eIlCAAAAI

AAJ&printsec=frontcover&dq=bank+of+england+francis&hl=en#v=

onepage&q=bank%20of%20england%20francis&f=false. For a thorough history of the bank’s modern activities, see R. S. Sayers, The 

Bank of England—3 Vols., Cambridge, UK: Cambridge University 

Press, 1976.

103. Many due to their participation in the War of Spanish 

Succession; others as a result of other great wars of the period, 

such as The Great Northern War, 1700-1720 between Sweden and 

Russia; after which, Sweden gave up its pretensions as a great 

state, as Russia emerged onto the European stage as a military 

and economic power. 

104. See Economic Historian’s Conference 2005, Ann Carlos, 

Larry Neal, and Kirsten Wandschneider, “The Origin of the National Debt: The Financing and Refinancing of the War of Spanish 

Succession,” p. 7. 
96

105. A complete account of the Mississippi Bubble and other 

major financial panics is beyond the scope of this book, but may 

be of interest to readers who want to examine the parallels to our 

recent financial crisis. For those interested, see Charles P. Kindleberger, Manias, Panics, and Crashes: A Financial History of Crises, 

New York: Wiley, 2005; and Edward Chancellor, Devil Take the 

Hindmost: A History of Financial Speculation, New York: Plume, 

2000. For the best scholarly analysis of financial crises and their 

aftermath, see Carmen M. Reinhart and Kenneth Rogoff, This 

Time Is Different: Eight Centuries of Financial Folly, Princeton, NJ: 

Princeton University Press, 2011.

106. Carlos, Neal, and Wandschneider, p. 15.

107. Ibid.

108. For two excellent books on this period’s financial innovations, see John Brewer, The Sinews of Power: War Money and 

The English State 1688-1783, New Haven, CT: Harvard University 

Press, 1988; and James C. Riley, International Government Finance 

and the Amsterdam Capital Market, 1740-1815, Cambridge, UK: 

Cambridge University Press, 1980. Brewer, who makes much of 

the institutions of the states as the key factor in successful longterm debt finance, also points out how the efficiency of collecting 

taxes through a state centralized administrative apparatus ensured that a far higher percentage of collected revenues actually 

made it to the government, as compared to states that used the 

inefficient tax-farming systems—France, Prussia, and, for a time, 

the United Provinces, p. 127.

109. For those interested in how Britain financed itself and 

its Allies during the Wars of the Revolution and the Napoleonic 

era, see John M. Sherwig, Guineas and Gunpowder: British Foreign 

Aid in the Wars with France 1793-1815, Cambridge, UK: Cambridge 

University Press, 1969.

110. Patrick K. O’Brien, and Philip A. Hunt, “England 1485-

1815,” Bonney, ed., p. 89.

111. Ibid., p. 90.
97

112. B. M. Anderson, ‘Effects of the War on Money, Credit 

and Banking,’ Washington, DC: Carnegie Endowment for International Peace, 1919, p. 6. The Germans began storing additional 

gold in the Reichsbank in 1912, but ceased collecting reserves at 

about $360 million when they apparently considered they had 

enough to finance a major war. In reality, it was enough to pay 

for, at best, a single month of heavy fighting in 1915. See also 

J. Laughlin, Credit of Nations: A Study of the European War, New 

York: C. Scribner’s Sons, 1918, pp. 202-205. Laughlin places the 

total of Spandau gold at $51 million and goes into great detail on 

Germany’s (and other European nations) financial preparation for 

war, noting: “The high regards for the efficacy of gold to be kept 

in a ‘war chest,’ although rather medieval and contrary to modern 

ideas of keeping money in productive use persisted in Germany.”

113. According to Niall Ferguson, “. . . the British revenue 

side was exceptionally robust: as a consequence of the reforming 

budgets of 1907 and 1909/10—which had a far more decisive fiscal outcome than the comparable German finance bill of 1913.” 

See Niall Ferguson, ‘Public Finance and National Security: The 

Domestic Origins of the First World War Revisited,’ Past and Present, Vol. 142, 1994, p. 142. For those interested in a deeper study 

of Allied finance during World War I, see Martin Horn, Britain, 

France, and the Financing of the First World War, Montreal, Canada: 

McGill-Queen’s University Press, 1993.

114. Laughlin, pp. 133-189. 

115. For an analysis of the scope and consequences of this 

effort, see Kathleen Burk, Britain, America and the Sinews of War, 

1914-1918, London, UK: Allen & Unwin, 1985. Some of this is also 

summarized in her easier to obtain new book: Kathleen Burk, 

Old World, New World, New York: Atlantic Monthly Press, 2007, 

pp. 380-460.

116. N. F. Dreisziger, Mobilization for Total War, Waterloo, Ontario, Canada: Wilfrid Laurier University, Royal Military College 

of Canada, 1981, pp. 15-45. See also Kevin Stubs, Race to the Front: 

The Material Foundations of Coalition Strategy in the Great War, 

Westport CT: Praeger, 2002. 
98

117. Hew Strachan, The First World War, Oxford, UK: Oxford 

University Press, 2001, p. 815.

118. Ibid., p. 816.

119. Ibid., p. 817.

120. Davies, p. 369.

121. Throughout the war, Britain adopted what became 

known as the McKenna Rule; collecting enough in tax revenues 

to pay for normal peacetime expenditures and to cover the interest on ever increasing war loans. This policy was criticized for 

leaving too much money in people’s hands and therefore stroking 

wartime and postwar inflation. However, given the political realities of the period and the negative incentives of too progressive a 

tax policy, this was likely the best option available.

122. Stephen Broadberry and Peter Howlett, “The United Kingdom During World War,” Stephen Broadberry and 

Mark Harrison, The Economics of World War I, Cambridge, UK: 

Cambridge University Press, 2005, p. 215.

123. Broadberry and Howlett, p. 219.

124. The modern Japanese economy is demonstrating that a 

nation can sustain a much higher debt-GDP ratio without collapsing. Japan, however, has enforced a national savings (confiscation) 

system that may make it a special case. Still, in the event of a future major conflict, nations who start the conflict with Debt-GDP 

ratios over 100 percent, might want to carefully examine Japanese 

methods for financing debt levels over 200 percent of GDP. 

125. This was a result of attempts to bring down the interest 

rates at which the government was financing the war. The Exchequer aimed at financing the war as close to the 3 percent Napoleonic average as possible, but ended up financing the war at 

over 5 percent. This massive additional cost was likely unnecessary, as every war loan was oversubscribed and likely could have 

been sold at a much lower interest rate. This reflects a significant 

degree of mismanagement by British bureaucrats. 
99

126. In fact, the total of funds Britain raised overseas almost 

equaled the amount of money they sent to their allies. In effect, Britain was a pass-through for mostly American money to 

her allies, using its good credit rating to allow allies to borrow 

funds overseas.

127. For an explanation of the importance of printing money 

and how it works to grease the system, particularly early in the 

war, see the appendix on U.S. financing of World War II. 

128. Margaret G. Myers, A Financial History of the United States, 

New York: Columbia University Press, 1970, p. 246.

129. Jerry W. Markham, A Financial History of the United States, 

New York: M. E. Sharpe Publishing, 2002, p. 33. This work quotes 

Leon T. Kendall’s The Chicago Board of Trade and the Federal Government, Chicago, IL: Callaghan & Co., 1920.

130. See Series Y 605-637, “Federal Government Expenditure, 

by Function: 1902 to 1970” in the Census Bureau’s “Historical Statistics of the United States: From Colonial Times to 1970,” Washington, DC: U.S. Bureau of the Census, 1975.

131. As the methods used by the Federal Reserve are detailed 

in Case Study IV of the paper. They are not delved into here. 

132. The Federal Reserve Act gave the Fed other duties and 

responsibilities, but for the purposes of this work, its ability to 

increase the money supply through the purchase of government 

debt is the most crucial. At the start of the war, the 1908 Emergency Currency Act was employed for the printing of over $340 

million in new currency, which was removed from circulation 

as the Federal Reserve began functioning. See Alexander Noyes, 

The War Period of American Finance 1908-1925, New York: G. P. 

Putnam’s Sons, 1926.

133. Markham, p. 65.

134. There was a mild financial panic in the opening weeks of 

the war, but it was rapidly resolved.
100

135. Allan H. Metzler, A History of the Federal Reserve, Vol. 1, 

Chicago, IL: The University of Chicago Press, 2003, p. 83.

136 . Stephen Broadberry and Mark Harrison, The Economics of World War I, Cambridge, UK: Cambridge University Press, 

2005, pp. 314-315.

137. During the Civil War, the North actually printed money—“Greenbacks”—to pay salaries and for the purchase of war 

materiel. Such blunt means were no longer necessary, as the Federal Reserve could “print” money through indirect means—placing excess reserves in its member banks.

138. This, however is a bit of illusion, as the government gave 

the government substantial amounts of funds that they loaned 

out for individuals to purchase government debt. In effect, the 

government was disguising the fact that it was printing money.

139. Broadberry and Harrison, pp. 314-315.

140. Ibid., p. 317.

141. Ibid., p. 320. Many of the arguments as the best way to 

finance World War I are presented in Case Study IV, World War 

II. In the interest in brevity, they are not included here.

142. Ibid., p. 321- 324.

143. If avoiding such accusations was their intent, then they 

failed miserably. See the World War II case study for a brief outline of how this affected our early attempts at industrial mobilization for World War II.

144. Markham, p. 77. 

145. Some 2 million individuals volunteered to sell the bonds. 

Movie stars, including Charlie Chaplin and Douglas Fairbanks, 

were used to promote sales. Over a million newspaper articles 

supported the sale of the bonds. Some 2,700 editorials, and over 

1,000 cartoons, approximately 16,000 columns of newspaper publicity, and over 1,500 pages of newspaper advertisements were 

devoted to Liberty Loan sales.
101

146. Secretary McAdoo often insisted on keeping the cost of 

the debt below the market rate, but this was typically done by no 

more than a few basis points (1/100 of a percent) and therefore 

negligible. Once enticements such as tax-free interest are included 

in the analysis, the cost differential disappears. 

147. Markham, p. 77.

148. See Allan H. Metzler, pp. 83-90, for a brief but detailed 

description of the methods employed and the results. For a more 

in-depth and detailed examination of U.S. war financing, see 

Charles Gilbert, American Financing of World War I, Santa Barbara, 

CA: Greenwood Press, 1970.

149. Myers, p. 286.

150. In fact, by the end of the war, the Bureau of Internal Revenue had more than quadrupled in size and was collecting more 

than 30 times the revenue it collected prior to the war.

151. For an account of the transfer of financial power between 

the United States and Great Britain, see Kathleen Burk, Britain, 

America and the Sinews of War 1914-1918, London, UK: George Allen & Unwin, 1985.

152. This is obviously not true of the early years of the war 

when Britain ran down its reserves and liquidated most of its 

overseas investments to pay for war materiel produced in the 

United States. Still, it must be noted that England had exhausted 

its own production capacity long before it began to run low on 

cash. Its cash problems were a result of having to procure dollars 

or gold to pay for the use of American productive capacity. Once 

Lend Lease began, and more so after America entered the war, no 

Allied nation had to worry about funding, only about production 

resources.

153. Henry Stimson, On Active Service in Peace and War, New 

York: Harper & Bros., 1971, p. 352.

154. This claim was repeated in the Twenty-eighth Annual 

Report of the Board of Governors of the Federal Reserve System, 

1941, St. Louis, MO: Federal Reserve Bank, pp. 7-8.
102

155. Davies, pp. 390-391.

156. W. K. Hancock and M. M. Gowning, British War Economy, 

London, UK: His Majesty’s Stationery Office, 1949, p. 163.

157. John Maynard Keynes first mentioned the inflation 

gap in his pamphlet, How to Pay for the War, London, UK: Royal Economic Society, 1940. In general it is a result of real GDP 

growing faster than potential GDP, and this is being propelled 

by an expansionary monetary policy, printing money to pay for 

war munitions.

158. Hancock and Gowning, p. 170. See pp. 501-511 for an assessment of Britain’s wartime fiscal policies.

159. Another measure to make the debt attractive was to have 

any government department with excess funds use them to purchase bonds, thereby propping up the price. Moreover, the government closely monitored the rate of debt issuance so as not to 

swamp the market and drive down prices.

160. Davies, p. 392.

161. How the United States performed a similar financial feat 

is detailed in Appendix IV.

162. Davies, p. 393.

163. Cicero, Philippics.

164. This case study is adapted from the author’s earlier work. 

See Jim Lacey, Keep From All Thoughtful Men, Annapolis, MD: U.S. 

Naval Institute, 2010.

165. Focusing on these three methods, of course, generally 

ignores other possible funding sources in war such as commandeering assets, both at home and in conquered areas, liquidation 

of existing assets, as Britain did to purchase American industrial 

output, or voluntary contributions. However, for the most part, 

such additional methods played a miniscule role in the financing 

of the Allied war effort, particularly in the United States.
103

166. Hugh Rockoff, in Mark Harrison, The Economics of World 

War II: Six Great Powers in International Comparison, Cambridge, 

UK: Cambridge, 1998, p. 109. This position was articulated by Secretary of the Treasury John W. Snyder in a December 1951 speech 

at the Industrial War College. Snyder was a former director of the 

office of War Mobilization and Reconversion and previously was 

in charge of the Defense Plant Corporation, which financed the 

construction of new wartime production facilities. The Speech, 

“The Role of the Federal Reserve In Financing War,” is available 

from www.ndu.edu/library/ic1/L46-101.pdf. It should be noted that 

Maynard Keynes’ pamphlet, “Paying for the War,” also advocated using taxes as the primary funding method, as did most 

other economists’ writings at the time. A large number of these 

writings are archived on the website for the National Bureau of 

Economic Research and are available from www.nber.org/nberhistory/, accessed on October 1, 2007.

167. Secretary of the Treasury Snyder in a speech 1 year earlier than the one noted previously to the Industrial War College, 

with the same title, “The Role of the Federal Reserve In Financing 

War.” It is also available from www.ndu.edu/library/ic1/L46-101.pdf. 

168. It should be kept in mind that every economist in government had witnessed the hyperinflation in Germany, which contributed to Hitler’s rise, and hence they were predisposed to view 

hyperinflation as one of the worst economic disasters possible.

169. Milton Friedman and Ann Schwartz, A Monetary History 

of the United States: 1867-1960, Princeton, NJ: Princeton University 

Press, 1971, pp. 546-550. 

170. The author recognizes that “turning on the printing 

presses” is a bit of a colloquialism and has nothing to do with the 

actual procedure by which the U.S. money supply is expanded.

171. Milton Friedman and other economists blame the rapid 

wartime expansion of the monetary stock for the immediate postwar spike in inflation. 

172. Despite the later popularity of Keynesian spending, during the Great Depression, most policymakers still held a strong 

attachment to balanced budgets and a low government debt load. 
104

Even in the midst of the Depression, the government raised taxes 

in 1936, which immediately killed off renewed signs of economic 

growth and brought on the 1938 “Roosevelt Recession.”

173. Removing durable items (cars and refrigerators) gave 

consumers fewer choices to spend their new found wealth on, 

while price controls had the same effect by limiting the amount of 

supply vendors were willing to part with at artificially low prices.

174. Gerald White, Billions for Defense: Government Finance by 

the Defense Plant Corporation During World War II, Tuscaloosa, AL: 

University of Alabama Press, 2005, p. 45.

175. For an excellent study conducted in 1942 of the funding 

methods being considered by the government and an analysis of 

their likely effect on the economy, see “Alternatives in War Finance,” Washington, DC: Department of Commerce, October 1942, 

available from library.bea.gov/cdm4/document.php?CISOROOT=/SC

B&CISOPTR=3443&REC=9&CISOSHOW=3435.

176. Interesting statistics and graphs showing the amount 

of money in circulation, the gold stock, and reserve bank credit 

throughout the war period can be found in Federal Reserve Bulletins from the war. All of these reports and the statistics have 

been gathered in several volumes, which are available from fraser.

stlouisfed.org/publications/. A good synopsis of the financial situation of the United States can be found in Anna Youngman, “The 

Federal Reserve System in Wartime,” Our Economy at War, Occasional Paper No, 21, New York: Financial Research Program, 

National Bureau of Economic Research, January 1945. Reprints 

of this wartime research study can be ordered from the National 

Bureau of Economic Research, New York. 

177. Charles Whittlesey, “The Banking System and War Finance,” Our Economy at War, Occasional Paper, New York: Financial Research Program, National Bureau of Economic Research, 

February 8, 1943, p. 29. Reprints of this wartime research study 

can be ordered from the National Bureau of Economic Research. 

178. Ibid., p. 12.
105

179. Treasury bills typically have very short durations as 

opposed to bonds which do not come due for years or decades.

180. Federal Reserve Bulletin, July 1942, p. 592.

181. Clark Warburton, “Monetary Policy in the United States 

in World War II,” American Journal of Economics and Sociology, Vol. 

4, No. 3, April 1945, p. 378.

182. Ibid.

183. The secondary market consisted of all the people who 

bought war bonds just before reselling them, at a profit, to a local 

bank, which, in turn, sold them back to the Federal Reserve for 

case . . . also at a profit. This is the well-hidden equivalent of turning on the printing presses and handing out money, as was done 

with Civil War greenbacks.

184. According to Secretary of the Treasury Snyder, Speech 

to Industrial War College, of these 16,000 banks, only 6,300 were 

members of the Federal Reserve System, although these 6,300 

banks did control over 75 percent of U.S. financial assets.

185. Warburton, p. 380.

186. For an excellent primer on debt monetization and its potential impact, see Daniel L. Thornton, “Monetizing the Debt,” St. 

Louis, MO: Federal Reserve Bank of St. Louis, December, 1984, 

available from research.stlouisfed.org/publications/review/84/12/

Monetizing_Dec1984.pdf. Most of this should be familiar to the 

modern readers, as the Federal Reserve has been doing the exact 

same thing (to the tune of about $4 trillion) since the start of the 

2008 financial crisis. In fact, the Fed recently announced it would 

hold short-term rates where they are for at least 2 years; something it can only do by “printing money” to keep buying excess 

bonds in the market.

187. Hugh Rockoff, in Mark Harrison, The Economics of World 

War II: Six Great Powers in International Comparison, Cambridge, 

UK: Cambridge University Press, 2000, p. 107.
106

188. As we have seen, the debt was issued but immediately 

repurchased from the banks by the Federal Reserve, which is 

how the United States creates/prints money in its open market 

operations.

189. Rockoff, in Harrison, p. 108. Freidman also shows rather conclusively that the monetary stock continued to increase 

throughout the war. However, this is a reflection of the multiplier effect that earlier government security purchases had coupled with an increased monetary velocity, concepts we will not 

belabor in this work.

190. Speech given by Thomas B. McCabe, Chairman, Board 

of Governors of the Federal Reserve System, on the ‘Role of the 

Federal Reserve in Wartime,’ to the Industrial War College on 

January 10, 1951.

191. Ibid.

192. The Treasury and the Federal Reserve agreed to hold the 

interest rate on long-term bonds at 2.5 percent, with a sliding scale 

for shorter term notes, depending on their maturity. The pricing 

of bonds was a complex problem all through the war. For those 

interested in the complexities of the debt market during the war, 

the best place to start is Henry C. Murphy, The National Debt in 

War and Transition, New York: McGraw-Hill, 1950.

193. McCabe.

194. Whittlesey, p. 18.

195. Donald Marr Nelson, Arsenal of Democracy, San Diego, 

CA: Harcourt, Brace and Company, 1946, pp. 212-238.

196. Alan Gropman, The Big L: American Logistics in World 

War II, Washington, DC: National Defense University Press, 

1997, p. 160. 

197. See “Alternatives in War Finance.”

198. For a more thorough discussion of taxation and debt in 

wartime, see Murphy.
107

199. Harold G. Vatter, The U.S. Economy in World War II, New 

York: McGraw-Hill, 1985, pp. 102-111.

200. Elmus Wicker, ‘The World War II Policy of Fixing a Pattern of Interest Rates,” The Journal of Finance, Vol. 24, No. 3, June 

1969, p. 449.

201. Youngman, pp. 49-50.

202. “Twenty-eighth Annual Report of the Board of Governors of the Federal Reserve System,” pp. 7-8.

203. A relatively thorough reading of the literature at the time 

shows that economists had no doubt that the United States could 

raise almost unlimited amounts of money. What concerned them 

was what methods the government would adopt to sterilize this 

massive growth in the monetary base in order to stifle inflation.

204. For an excellent study on the Federal Reserve during 

World War II, see Edward C. Simmons, “Federal Reserve Policy 

and National Debt During the War Years,” The Journal of Business 

of the University of Chicago, Vol. 20, No. 2, April 1947, pp. 84-95.

205. A comment he might have considered more carefully 

had he had children of his own.
U.S. ARMY WAR COLLEGE

Major General William E. Rapp

Commandant

*****

STRATEGIC STUDIES INSTITUTE

and

U.S. ARMY WAR COLLEGE PRESS

Director

Professor Douglas C. Lovelace, Jr.

Director of Research

Dr. Steven K. Metz

Author

James Lacey

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Dr. James G. Pierce

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Mrs. Jennifer E. Nevil