University of Pennsylvania ScholarlyCommons Publicly Accessible Penn Dissertations 2012 The Political Economy of War Finance Rosella Cappella University of Pennsylvania, [email protected] Follow this and additional works at: https://repository.upenn.edu/edissertations Part of the Economic History Commons, Finance Commons, Military History Commons, Military, War, and Peace Commons, Political Science Commons, and the Taxation Commons Recommended Citation Cappella, Rosella, "The Political Economy of War Finance" (2012). Publicly Accessible Penn Dissertations. 1175. https://repository.upenn.edu/edissertations/1175 This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License (CC BY-NC- SA). This paper is posted at ScholarlyCommons. https://repository.upenn.edu/edissertations/1175 For more information, please contact [email protected]. The Political Economy of War Finance Abstract What explains the variation in how states pay for war? Leaders must choose between four primary means of war finance: taxation, domestic debt, external extraction, and printing. Each alternative has different political and economic costs and benefits. Borrowing compounds the cost of war through high interest rates; printing can result in disastrous inflation; taxation combats high inflation and minimizes cost yet can be politically damaging; while garnering money from abroad invites outside influence and fosters dependency. Conventional wisdom suggests that regime type dictates war finance strategy. However, based on statistical analysis of a novel data set and in-depth case studies, I demonstrate that regime type plays at best only a small role in a state's war finance story. I argue that there are four primary influences shaping war finance outcome: support for the war effort, fear of inflation, bureaucratic capacity, and the ability to cope with a balance of payments problem. To test these hypotheses, my dissertation presents the results of the first large-scale statistical analysis of war finance. It utilizes an original data set on interstate war finance from 1823 to 2003. I augment my statistical analysis with six case studies, three paired comparisons. First, I compare the financing of the United States' war effort in the Korean and Vietnam Wars. I then compare the Russian and Japanese financing of the Russo-Japanese arW . Lastly, I compare British financing of its war efforts in the Crimean War and World War II. The study ultimately finds that a larger percentage of the war effort is financed by taxation when there are one or more of the following conditions: high support for the war, inflationary fears, or high bureaucratic capacity to extract tax revenue. In contrast, higher levels of borrowing and printing are likely to fund wars when support for the war is low or the state has low bureaucratic capacity. Moreover, the state will borrow from abroad when it is facing low currency reserves. Degree Type Dissertation Degree Name Doctor of Philosophy (PhD) Graduate Group Political Science First Advisor Edward Mansfield Keywords debt, inflation, tax, war cost, war finance Subject Categories Economic History | Finance | Military History | Military, War, and Peace | Political Science | Taxation Comments This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License (CC BY-NC-SA). This dissertation is available at ScholarlyCommons: https://repository.upenn.edu/edissertations/1175 THE POLITICAL ECONOMY OF WAR FINANCE Rosella Cappella A DISSERTATION in Political Science Presented to the Faculties of the University of Pennsylvania in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy 2012 Supervisor of Dissertation ______________________ Edward Mansfield, Professor, Department of Political Science Graduate Group Chairperson _______________________ Nancy Hirschmann, Professor of Political Science Dissertation Committee Edward Mansfield, Professor, Department of Political Science Avery Goldstein, Professor, Department of Political Science Michael Horowitz, Associate Professor, Department of Political Science Alex Weisiger, Assistant Professor, Department of Political Science ! ! THE POLITICAL ECONOMY OF WAR FINANCE COPYRIGHT 2012 Rosella Cappella This work is licensed under the Creative Commons Attribution- NonCommercial-ShareAlike 3.0 License ACKNOWLEDGMENT It takes a village. This dissertation could not have been completed without the intellectual, emotional, and financial support of many people and institutions. As an advisor, Edward Mansfield was tough and I thank him for it. This work would in no way be as well constructed, thoughtful, or persuasive without Ed continually setting the bar higher (It should be noted one of my fondest memories of writing this dissertation was when he said, “I believe you”). Avery Goldstein always took the time to ease my fears and entertain my intellectual ideas. Michael Horowitz was the taskmaster; always keeping me on track and suggesting how to better present my work. While all my advisors always had their door open to me, I walked through Alex Weisiger’s the most. Alex was my sounding board for new ideas and provided helpful comments on many drafts. The support received at the University of Pennsylvania extended beyond my committee members. This dissertation could not have been written without the support of Rudy Sil, Eileen Doherty-Sil, Matthew Levendusky, and Ellen Kennedy. Since my first year of graduate school, Rudy has been encouraging, supportive, and unselfishly devoted a whole summer to teach me organization theory. Eileen Doherty-Sil made office life enjoyable and her caring presence was comforting. Matthew Levendusky provided critical guidance and feedback for my statistical chapter. Two of my favorite semesters at Penn were with Ellen Kenney. Her Money and Markets and War and Peace classes provided stimulating conversation and broadened my intellect. I consider myself lucky to have shared my graduate student journey with three amazing and talented women: Allison Evans, Meredith Wooten, and Barbara Elias- """! ! Sanborn. Anyone who has written a dissertation knows that it feels like a constant battle. While in the trenches, these women made me laugh and gave me the courage to keep going. I owe particular thanks to Barbara who got stuck with me as an officemate for three years and a roommate for one. She made the rough years fun. Writing a dissertation is an isolating experience. I owe particular thanks to my California family for keeping me grounded. My sister, Roxy Adlesh, endured many stressed out phone calls as I pined for California sunshine. My best friend of fifteen years, Janna Velasquez, kept me grounded and while we were thousands of miles apart and had a knack for making it seem like she was next to me. The motivation for this dissertation began long before graduate school when I was an undergraduate at the University of Southern California. I would like to thank John Odell and Peter Rosendorff who encouraged me to pursue my research. Every Christmas when I came home to Los Angeles to visit my family, I always looked forward to stopping by Professor Odell’s lovely home in Pasadena to share my tales of graduate school. In addition, The School of International Relations and the Center for International Studies fostered my early research projects with grants to conduct field research in Geneva, Switzerland. This dissertation could not have been written without the financial support of the Browne Center for International Politics, the Fontaine Society at the University of Pennsylvania, and the Harry S. Truman Presidential Library. I would also like to thank the helpful archivists at the Truman and Johnson Presidential Libraries who made an incredibly daunting task feasible. ! "#! ! Three other people deserve notable mention. The first is Stephen Seibert who is brave enough to marry a graduate student. Finally, I thank my parents, Michael and Rosa Cappella. Growing up as the daughter of two public high school teachers in Los Angeles, I learned to value education at an early age. My mother, an immigrant from El Salvador, and my father, a child of a Sicilian immigrant and an Irish mother, instilled in me that life is hard and while we should always be trying to better ourselves, it is important to help others along the way. I hope that the lessons from this work make life a little easier for others and I will continue to do my best. This work is dedicated to them. ! #! ! ABSTRACT THE POLITICAL ECONOMY OF WAR FINANCE Rosella Cappella Edward Mansfield What explains the variation in how states pay for war? Leaders must choose between four primary means of war finance: taxation, domestic debt, external extraction, and printing. Each alternative has different political and economic costs and benefits. Borrowing compounds the cost of war through high interest rates; printing can result in disastrous inflation; taxation combats high inflation and minimizes cost yet can be politically damaging; while garnering money from abroad invites outside influence and fosters dependency. Conventional wisdom suggests that regime type dictates war finance strategy. However, based on statistical analysis of a novel data set and in-depth case studies, I demonstrate that regime type plays at best only a small role in a state’s war finance story. I argue that there are four primary influences shaping war finance outcome: support for the war effort, fear of inflation, bureaucratic capacity, and the ability to cope with