Central Banking’s Connection To Warfare Is Intimate
8797 Central Banking's Connection To Warfare Is Intimate

Central Banking’s Connection To Warfare Is Intimate

Why did nations start central banks? To finance the materiel needs of the nation-state in time of war. There is no other answer to this question that is as nearly correct as that answer. To provide a lender of last resort, to smooth out the cycle of boom and bust, to enable liquidity in the face of structural rigidities—all these common rationales popped up, usually ex post facto, as central banks in Europe (and Japan) sprouted from the 17th to the 20th centuries, but the real reason, widely understood and empirically valid, is the one already given.

The United States was a mild exception, in a very American way. One of the chief reasons the United States separated from Great Britain in 1776 was to rid itself of the entanglements of empire, of the old-time cycle of going to war. Therefore, the first central bank (and it was such a thing) of this country, the Congressionally-chartered Bank of the United States founded in 1791, was supposed to do the opposite of financing war. It was supposed to extinguish the debt from the war already fought, the Revolutionary war, and then come to an end.

King Charles had to call Parliament to ask for money & got the ax.

As the Constitution passed in 1789 the federal government assumed the massive state debts of the war. Congress chartered the Bank for twenty years, till 1811, as a place where Americans could pay their taxes and the federal bonds could be redeemed. After the term structure of the bonds had played out, the bank would no longer be necessary. So it ended in 1811.

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Then another war came—that of 1812. The government found it impossible to pay for the war through current resources, in the emergency printing money that bore interest. After that war ended in 1815, the government moved to sop up all that stuff. Congress chartered a second Bank of the United States for another twenty years to take care of that. The interest-bearing notes and all the other debt instruments were gone by 1834, so in 1836 the bank was not re-chartered.

That was it for a while. During, prior, and after the Civil War (1861-65), the U.S. decided to try going without a central bank. The Treasury committed to soaking up the non-gold greenbacks issued during the war and resuming the dollar’s convertibility to gold without the services of a national bank. All that happened.

Meanwhile, in Europe, war clouds gathered. Nations were congealing into larger entities, with empires to boot. The general sense, by the 1890s, was that some titanic contest was going to break out. Britain and Germany in particular were big on antagonism. Years before, Britain had shown that its central bank chartered in the 1690s was necessary to finance a crown bent on war. When Parliament had to be called to finance war earlier in the 17th century, the king occasionally had to pay for it with his head. France too, under the revolutionaries and Napoleon, had set up their institution to ease the way for aggressive war credits.

All sorts of smaller-fry central banks, such as that of Austria-Hungary, the country that was to lead everyone by the nose into the Great War of 1914, cropped up in the latter 19th and early 20th centuries. It was all set. Should war come, governments could print money and have banking branches up and down the nation, and around the empire and globe, to compel people to use the war notes.

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With a lurid dash of cluelessness, the United States thought it was being left behind. In his classic book on horrible European architectural influences in America, From Bauhaus to Our House (1981), Tom Wolfe noted that this country is often beset by a “colonial complex” that makes it feel that whatever seemingly sophisticated thing Europe has first is something we should strive to get too, right away if possible and without any questions. Otherwise we’ll be “left behind” or something.

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