PART II
I characterized the rise of global finance, advanced an original hypothesis for the secular reduction of the bond spread, and investigated the effects of international financial control in part I. Evidence indicates that the global periphery had access to international capital at favorable terms relative to early-modern Europe and the developing world today. In part II, I examine the consequences of early access to external capital for short- and long-term fiscal capacity building.
War yields the biggest fiscal shock for any treasury, hence my focus on the connection between war finance and state making. In chapter 6, I revisit the occurrence of war in the developing world before 1914. In light of its frequency, intensity, and duration, I argue that war outside Europe was more consequential than often believed. I also show that military expenses of sovereign and nonsovereign countries were externally financed. Building on this evidence, I examine in chapter 7 the effect of waging war with and without access to international capital markets for short- and long-term fiscal capacity in more than 100 countries. I find that availability of external finance weakened incentives to build fiscal capacity, as shown by lower contemporaneous and long-term direct tax ratios as a percentage of total tax revenue and GDP.
Why are the effects of war finance long-lasting? I address this question in chapters 8 and 9. Chapter 8 advances statistical evidence of the activation of the political and bureaucratic mechanisms of transmission in conditions of capital exclusion. In chapter 9, I examine state building and external finance in Argentina, Chile, Ethiopia, Japan, and Siam to elaborate further on the political dilemmas of public finance and the lasting consequences of early fiscal decisions.
Overall, part II suggests that early access to cheap credit markets pushed many borrowers into debt traps characterized by weak state capacity and political immobilism. Counterintuitively, developing nations might have benefited from a less dynamic international credit market in the early stages of state formation.
6
War is the paramount example of a fiscal shock. To cover military expenses, rulers may put forward fiscal innovations that outlast wartime, growing state capacity in the long run. This chapter shows that interstate wars were common in the nineteenth century in the Global South and that they shared key characteristics with wars in early-modern Europe. Once the prevalence of war is established, I show that governments regularly floated loans overseas to cope with this fiscal shock. The evidence calls for a reinterpretation of the haute finance hypothesis, under which international bankers were reluctant to fund war because of its destabilizing macroeconomic consequences. In the final part of this chapter, I reflect upon the consequences of external war finance for long-term state capacity.
6.1 War or No War?
Before the expansion of the welfare state in the twentieth century, war was the main driver of fiscal innovation.1 The strong association between war and state making originates in the “military revolution,” occurring approximately in the second half of the sixteenth century, when new military technologies raised the cost of war to unprecedented levels.2 Monarchs were then compelled to tap into new sources of wealth, standardize measures and collection techniques, and create professional tax bureaucracies.3 The financial innovations and new bureaucracies made for war were seldom dismantled, creating a persistent or ratchet effect on taxation.4 States made war, and war made states.5
The so-called bellicist hypothesis of state formation draws heavily from the history of state building in Europe; however, evidence outside the European context is mixed. A positive relationship between warfare and state building is found by Cárdenas, Schenoni, and Thies in Latin America,6 by Stubbs in Asia,7 and by Thies in Africa.8 Others claim that the connection between warfare and state building outside Western Europe is conditional on initial factors, including the level of urbanization9 and social cohesion.10 A majority, however, conclude that the bellicist hypothesis gains no traction outside Western Europe. Centeno and Herbst are two prominent advocates of the latter position.11
In his 1990 piece, Herbst focuses on war in Africa in the second half of the twentieth century, the postcolonial world. He (rightly) claims that “African states have seldom fought interstate wars” after gaining independence, hence the absence of strong states.12 Herbst’s assessment of military conflict before and during the Scramble for Africa (1881–1914) is different: interstate war among native African states or agents of European aggressors were indeed frequent; however, war was often financed with revenue from the slave trade.13 This phenomenon, interestingly, resonates with the main thesis of this book: alternatives to taxation break the connection between war and state making. In addition, the slave trade exerts negative effects on long-term social trust,14 a key input for tax compliance.15
Offering an enlightening account of state building in Latin America in the nineteenth and twentieth centuries, Miguel Centeno claims that warfare on this continent was short and not capital intensive, limiting its contribution to state and nation building.16 Centeno draws this conclusion by comparing war in the nineteenth century to war in the twentieth17—a problematic comparison, however, because it includes the two world wars, which “severely skew our sense of what war is.”18 Historically, interstate war was shorter and seldom involved mass mobilization.
I suggest running a different and arguably fairer comparison between war in the nineteenth century in Latin America (and other regions) and war in Europe in early-modern times, when territorial states were still building core capabilities. The analysis that follows suggests that the Global South experienced levels of interstate war in the Bond Era comparable to European counterparts in the formative centuries of state formation—the fifteenth to the seventeenth.
6.1.1 WAR INTENSITY IN THE PERIPHERY
In order to draw an estimate of war intensity outside Western Europe, I rely on a war compendium compiled by Brecke, in which he coded every violent conflict between a central government and an armed party resulting in 32 or more battlefield deaths from 1400 to 2000.19 Conveniently, Brecke mapped military conflict into 12 different regions. For presentational purposes, I collapse these into five groups: Western Europe, where the bellicist hypothesis receives virtually unanimous support,20 as well as Eastern Europe (including Eurasia), the Americas, Africa, and Asia.
Brecke’s data include 3,682 military conflicts, 82 percent of which occurred before 1914. All types of conflicts are considered in that dataset: from relatively minor intrastate skirmishes to large interstate wars. The bellicist hypothesis suggests, however, that state making should follow significant resource mobilization. War makes states when rulers are compelled to enact institutional transformation to wage costly war. To size the intensity of war, I focus on war casualties, considering a war large if it falls within the top quartile of the historical distribution of casualties. This group includes wars resulting in 20,000 casualties or more.
TABLE 6.1. Large Military Conflicts by Region since 1400
|
Century |
Western Europe |
Eastern Europe |
Americas |
Africa |
Asia |
|
15th |
2 |
2 |
0 |
0 |
2 |
|
16th |
8 |
14 |
1 |
1 |
6 |
|
17th |
12 |
12 |
0 |
0 |
4 |
|
18th |
12 |
13 |
3 |
3 |
10 |
|
19th |
16 |
16 |
11 |
15 |
29 |
|
20th |
3 |
20 |
11 |
47 |
40 |
Source: Author’s calculations based on Brecke (1999). Note: A military conflict is considered to be large if it falls within the top quartile of the historical distribution of war fatalities, which starts at 20,000 casualties.
Table 6.1 reports the frequency of large wars across continents. The breakdown is consistent with the accepted understanding of military conflict in early-modern times—namely, that it was concentrated in Europe. Furthermore, some wars before the nineteenth century included unprecedented mass-scale war mobilization, including the Thirty Years’ War (1618–1648), the War of Spanish Succession (1701–1714), and the Seven Years’ War (1756–1763), all of which changed the scope of the European state for good. Outside the European context, only Asia experienced similar war before 1800. The nineteenth century represents a break in the series. After 1800, all regions in the world experienced major wars on a regular basis and did so at rates similar to their European counterparts in the formative centuries of state making.
Unfortunately, Brecke’s data do not distinguish between interstate and intrastate conflict. This distinction is important because the bellicist hypothesis builds on the positive effects of war against external threats, namely, interstate wars. Fighting against a foreign enemy helps overcome domestic barriers to the monopoly of coercive power and fiscal centralization. By contrast, the effect of civil war on state building is disputed.21 Because civil war might undo local institutions, decentralize coercive power, and disintegrate the fiscal apparatus, I assess the incidence of the bellicist hypothesis outside Western Europe by focusing on interstate war. To that end, I distinguish what proportion of war in table 6.1 is interstate from what is intrastate by relying on Wimmer and Min’s war compendium,22 who revise and augment three standard datasets in war research— Clodfelter’s, Richardson’s, and Sarkees and Wayman’s, also known as Correlates of War (COW).23
FIGURE 6.1. War outside Western Europe from 1816 to 2001. These plots show the total number of military conflicts in the world on a yearly basis. Author’s calculations based on Wimmer and Min (2009).
Wimmer and Min list the location of and participants in war around the world from 1816 to 2001 for wars with more than 1,000 battle deaths. This dataset projects the location of conflict into current geographic units, and it lists war participants regardless of having sovereign status and international recognition by the time they went to war. It offers, in sum, an exhaustive list of interstate and civil war around the globe since the early nineteenth century.
Using these data, I plot the average yearly incidence of interstate and civil war from 1816 to 2001 outside Western Europe in figure 6.1. The frequency of both types of warfare was relatively even until the turn of the nineteenth century (notice the change in scale). For instance, in 1890 approximately three interstate as well as three civil wars were ongoing somewhere outside of Europe. Gradually, interstate war became infrequent and turned rare in the twenty-first century. In contrast, civil war never lost impulse in the developing world. Coinciding with the beginning of decolonization, civil war grew more frequent, reaching a historical maximum in the late 1990s. Based on casualties and frequency, if interstate war is meant to make states in the periphery, the nineteenth century should be the focus of attention.
Another critique of the nature of war in the nineteenth century speaks to its duration: wars were short, the argument goes, and did not require sustained resource mobilization to fund new infrastructure and administration.24 Based on Wimmer and Min’s (2009) data, the mean and median duration of interstate war in 1816 and 1913 was 6.6 and 4 years, respectively. These values are significantly larger than Tilly’s calculation of the mean duration of war in Europe from 1400 to 1900, always under 2 years.25 War efforts outside Europe were also more technological than is often understood. Jonathan Grant compiled statistics of cruiser, battleship, armored vessel, and ironclad exports delivered by European and North American firms by region between 1863 and 1914. Out of the 83 units exported during this period, 31, 37, and 15 were delivered to Asia, South America, and Eastern Europe, respectively. Torpedo boats and gunboats were also exported to these regions. Out of 371 orders, 121 went to South Asia, 86 to South America, and 164 to Eastern Europe.26 These and other military exports (e.g., rifles, guns, ammunition) were overwhelmingly financed with European capital.
6.1.2 WAR HISTORIOGRAPHIES
The previous section suggests that interstate warfare in the periphery in the nineteenth century was more prevalent and capital intensive than generally understood if judged by casualties, frequency, duration, and technology. Still, some of these numbers may be statistical artifacts if they confound war efforts from imperial campaigns led by European powers, particularly in colonial Africa and Asia. To address this question, one can turn only to war historiographies.
Multiple accounts of Latin America and Asia suggest that war and military modernization were substantial in these regions during the nineteenth century. Since independence, Latin American countries tried to emulate the armies of European countries by purchasing military equipment from European powers.27 Consistent with this generalization, the world’s second encounter between armored ships took place in 1879 between Chilean and Peruvian vessels, which were, in fact, purchased from Europe.28
Until the turn of the nineteenth century, Latin American governments had few functions other than building a national army and monopolizing coercive use of power.29 Even developmental states like Argentina were using vast amounts of the national budget for military purposes. As late as 1895–1899, Argentina was spending 34 percent of its ordinary budget on the army and the navy. These funds were used to raise a standing force of 105,000 and to acquire new artillery and vessels from German manufacturers.30 Although external loans did not officially finance much of the military expenses in the last decades of the nineteenth century,31 the massive armies that Argentina and other Latin American countries assembled at the time would have been impossible to afford without relying on external finance to pay for nonmilitary expenses: that is, infrastructure and debt obligations. The fungibility of external funds is indeed fundamental to understand why focusing only on explicitly military loans is not a productive enterprise to evaluate the consequences of external finance for war and state making in the Bond Era.
The new military equipment acquired by Latin American governments was not reserved for military parades. They put it to work, waging roughly the same number of wars as European states in the nineteenth century, only longer and deadlier.32 Roberto Scheina’s detailed surveys of Latin American wars during this time leave little doubt of how frequent and fatal military conflict was in that corner of the world.33 “Looking at nineteenth-century South America, then, one sees patterns of peace and war, intervention, territorial predation, alliances, arms-racing, and power-balancing quite similar to those found in eighteenth-century Europe”34—a fairer comparison than to the two world wars.
War in Asia in the nineteenth century was also prevalent, and it involved war against neighboring countries and European powers. Butcher and Griffiths quantify the occurrence of interstate and intrastate war in this and other peripheral regions between 1816 and 1895. They show that South and Southeast Asia had higher rates of interstate war incidence and onset than Western Europe during the same period.35 Some states resisted European aggression (e.g., Siam36); others succumbed but not without putting up a fight (e.g., Burma37). To respond to external threats, armies and navies were modernized across the region.38 External debt issued in Persia, China, and Japan was used to hire European military instructors, build new arsenals, and acquire military equipment from British, German, and French armorers and shipyards.39 Some of those loans carried negative consequences for state capacity building, as the late-Qing China example in chapter 5 shows. Meiji Japan, on the other hand, suggests that external finance was not necessarily detrimental. I return to this case in chapter 9, where I argue that succesful state building in Japan was grounded on a preexisting credit market, a rarity in the developing world.
Compared to Latin America and Asia, war historiographies for Africa and the colonial world are scarce. Most accounts of colonial war focus on the colonizers’ experience.40 Offering an exhaustive account on this matter is impossible, but next I present an overview of war in Africa before and after the Scramble for Africa, as well as in key Asian colonies: India (British), Indochina (French), and Indonesia (Dutch). These accounts suggest that war was prevalent in Africa and Asia throughout the nineteenth century and that military efforts were financed with a combination of local resources (not necessarily modern taxation), external debt, and imperial subsidies—hence the modest effect on state building. Readers familiar with war in these parts of the world may skip to section 6.2, where I elaborate on war loans specifically.
War in Africa
Reid and Vandervort offer illuminating surveys of warfare in the nineteenth century, ones that challenge conventional wisdom. They show that African states were immersed in a military revolution before the arrival of the Europeans.41 Ideological-religious war (e.g., the Ethiopians fought in the name of Christianity) was exceptional and limited in time and space. War was waged first and foremost to gain control over global trade routes.42 American and European rifles flooded African markets: an estimated 16 million guns were acquired by African native armies in the course of the nineteenth century.43 The old muzzleloader was gradually replaced by the faster and lighter breechloaders, the rifle used by European colonizers.44
Before the Scramble for Africa, war had transformed the African continent. New military technologies were incorporated, including the professionalization of the military corps, the use of camouflage and siege tactics, and in some cases (e.g., Ethiopia and Tukolor) the manufacture of firearms. Local economies were transformed for the purpose of war. Specialization was required to finance the purchase of new military equipment and to secure enough agricultural produce to sustain the military state. The army became an elevator of social status. Militarized societies gave rise to new collective identities or the reinforcement of existing ones.45
Regional interstate war was common in the first half of the nineteenth century. Because of greater contact with Europeans, armies in the North modernized the most. In Egypt, Muhammad Ali (r. 1805–1849) imported manufacturing technologies to produce weapons locally. Increased defense expenses required simultaneous economic reform. The fiscal-military state put forward by Ali allowed him to raise a powerful army of 200,000 men.46 Taking advantage of military superiority, Ali forcibly took over Syria, the Sudan, and Palestine.47
In western sub-Saharan Africa, the Yoruba, the Dahomey, and the Ashanti were immersed in an imperial race that required sustained war mobilization.48 The Yoruba invested in fortified urbanization and imports of European weaponry: first matchlocks and flintlocks and after 1870 breechloaders as well. The Ashanti army was made up entirely of infantry, and its troops were equipped with standard European trade muskets.49 The Tukolor and the Samori invested in local gunsmiths, who were able to repair and modify imported firearms.50 Tukolor elite troops were also supported by artillery—although their weapons were seized in early skirmishes with the French.51 The Samori acquired firearms from British traders, but eventually they learned how to manufacture them locally.52 In the East, Ethiopia surpassed all other African states in terms of social complexity and military capacity, developing its own military industry while adopting Western military techniques. Unlike in Egypt, the new arsenal was paid for mostly with domestic resources, which proved crucial to minimize exposure to foreign interference. I return to this case in chapter 9.
European presence in sub-Saharan Africa before 1880 was limited to the coastline. Before the Suez Canal was inaugurated (1869), African ports were crucial to securing trade routes to Asia. European interests in the hinterland accelerated in the 1880s.53 Despite the advances of African militaries, native armies could not compete with the structure, organization, and tactics of European powers, let alone with their state-of-the-art weaponry (e.g., the Maxim gun). The Ashanti and the Zulu initially resisted European conquest, eventually succumbing just as every other native state had.54 The technology differential was too great for any sustained military engagement. Local armies, if active, retreated to the mountains and forests and engaged in guerrilla warfare, a type of combat that deviates from the type of sustained war mobilization that Hintze or Tilly associate with state building.
Following the Berlin Conference of 1884, a new opportunity to build capacity was presented under colonial rule. Because the cost of deploying permanent European armies in Africa was prohibitive, the bulk of colonial conquest of the hinterland was executed by African soldiers under European command.55 African regiments emulating the European model were created by poaching from local armies. The British set rule in modern-day Uganda by recruiting Ganda soldiers and making them fight against their old regional rival, the Bunyoro.56 Imperial African regiments were formed in Gambia, Sierra Leone, and the Gold Coast.57 Following suit by recruiting Bambara soldiers to conquer Southern Sahara, the French raised a locally financed army in French Equatorial Africa to expand colonial rule into the hinterland and put together the Tirailleuers Senegalais in modern-day Senegal to defeat the Muslim Tukolor Empire.58 Eventually, these regiments were integrated into the imperial defense system and used to fight domestic and foreign enemies.59
Encyclopedic accounts by Reid and Vandervort suggest striking similarities between the interstate competition in sub-Saharan Africa in the nineteenth century and that experienced in Western Europe in early-modern times. If Africa similarly experienced a military revolution, why did war not translate into more capable states? Reid and Bates argue that European colonization in the 1880s put a stop to endogenous state building. The Scramble for Africa interrupted interstate competition, a key (although brutal) way to forge authority and build legitimacy and eventually strong states.
In addition to colonial interference, I draw attention to how war was financed before and after the scramble. Before colonial conquest, native warfare was largely funded by slave (and ivory) exports. Despite being a banned practice in Europe, illicit slave trade persisted in West Africa and grew stronger in East and Central Africa over the course of the century. Raids and the sale of slaves for weapons was a common practice among native African states.60 The Yoruba financed the imports of European weapons with slave exports;61 so did the Dahomey state, the Sokoto, and the Tukolor caliphates (in the African savanna), as well as the sultanate of Zanzibar and the kingdom of Mirambo (modern-day Tanzania) in the East.62 Slave soldiers played an important role in local armies and on plantations in peacetime. For the purpose of state building, the use of slaves to generate revenue and populate the army does not necessarily translate into more capable states. For one, slave raids are likely to generate lasting negative social and economic consequences.63 In addition, the use of slave soldiers might have enabled rulers to dodge negotiations over taxation with economic and regional elites, impeding the articulation of power-sharing institutions.64 After the scramble, regional war continued; but it was disproportionally financed with external funds, mostly imperial subsidies, thereby the modest effect on state building. At the end of this chapter, I illustrate the negative consequences of colonial war for local tax mobilization with a specific example from South Africa.
War in British India
Militarism on the Indian subcontinent has a long tradition. By 1600, several Indian states (the Delhi sultanate, the Rajput states, the Deccan sultanates, and the Vijayanagara Empire) had acquired military prowess forged through sustained interstate competition.65 The next long century was dominated by the Mughal Empire, which put together fiscal-military machinery comparable to the European model.66 The empire fragmented in the eighteenth century, but its constituent parts kept growing their military capabilities. In 1795, the Dutch East India Company relinquished all their colonies to the British to prevent occupation by the French, a mutual enemy. By the early nineteenth century, the British were the only European power on the subcontinent. Resistance and military disputes between the British and indigenous states remained the norm until the completion of annexation in the late 1850s.67
Precolonial fiscal militarism was inherited and reinforced under British rule.68 Although the bulk of the officer corps was European, the army was staffed with local soldiers.69 The strength and size of the Indian army posed a constant threat to British dominion, especially following the Indian Mutiny, or Indian Rebellion of 1857, after which the British engineered a meticulous recruitment system to raise barriers to collective action and avoid further rebellion.70 Likewise, the British never again supplied the Indian army with the latest technology.71 War making in India, however, remained the rule rather than the exception. Unlike the vast majority of colonies, India met the principle of self-sufficiency and paid for most of its military expenses. Despite being a net contributor to the empire, it was granted virtually no fiscal autonomy, remaining “legally at the mercy of whatever policies its British governors and the authorities in Whitehall might devise.”72
The Indian army had three major purposes: keeping domestic order, fighting frontier wars, and participating around the world as part of the imperial army. Indian troops fought three proxy wars with Burma and two with Afghanistan. The first Anglo-Burmese war in the 1820s and the second Anglo-Afghan war in the late 1870s were particularly expensive. The former cost £5 million (equivalent to £370 million in 2015), the latter £25 million (£2 billion in 2015)—80 percent of it financed locally.73 Indian troops also played a key role in imperial defense, deployed overseas on a regular basis: the Abyssinian campaign (1868), the Boxer Rebellion (1899–1901), East and Central Africa (1897–1898), the East African and Somaliland campaigns (1902–1904), Egypt (1882–1885), Persia (1856–1857), the Second Boer (1899–1902), and Tibet (1903–1904).74 Most of the expenses associated with war overseas was funded by Indian taxpayers, and the subcontinent remained financially self-sufficient and militarily active under colonial rule.75
War in French Indochina and Dutch Indonesia
Following the Franco-Spanish expeditions of 1858–1862, the French began the conquest of modern-day Vietnam, moving from south to north. The French built upon the military efforts of Emperor Minh Mạng, who tried during his rule (1821–1841) to build a modern army, mirroring Western technologies, uniforms, and discipline;76 but his efforts fell short matched against the European military might.
The colonization of Indochina commenced in early 1862, when the French took over the three eastern provinces of Cochin China. The annexation of the northern territories required raising a local army, so native ranks were poached from preexisting regiments, conscription, and volunteers.77 Native troops, who served alongside French soldiers, were first tested in the Sino-French War (1884), repelling Chinese troops from the northern frontier. The colonial army was crucial to forcibly annexing the northern provinces—Tonkin and Annam—and creating the Indochinese Union in 1887. The majority of military and administrative expenditures during the French occupation were assumed locally,78 and Cochin China remained a net contributor—one of the few—to French imperial defense until independence.
Following the example of the British and French, the Dutch raised local armies to expand their Asian dominions. The Dutch colonial army in Indonesia, the most important colony, saw a gradual expansion of local soldiers, from 52 percent in 1815 to 61 percent in 1909.79 These troops were employed in numerous wars in the region, contributing to its gradual militarization; however, the military expenses remained heavily subsidized by the metropole.
Taking Stock
Both the quantitative and qualitative accounts above suggest that interstate war in the nineteenth century was a common phenomenon outside Western Europe. Figure 6.2 offers one final overview of war in this period by plotting the number of war years in modern-day state borders (darker color indicates higher occurrence). This figure clearly shows that no region was safe from military hostilities. By will or force, old and new states, colonies, and dominions waged numerous wars in the long nineteenth century, 1816–1913. Consistent with the Hundred Years’ Peace, relatively few wars took place in Western Europe. Beyond the European frontiers, the Hundred Years’ Peace appears more like a myth reflecting the Eurocentric bias of the time.
In the context of regional military competition and imperial threat, states outside Western Europe, sovereign or not, put their efforts into strengthening armies and navies by adopting new technologies and organizational structures. The modernized militaries were soon activated, participating in wars that, based on casualties, frequency, and duration, were arguably similar to conventional warfare in the formative centuries of the European states—fifteenth to seventeenth.
FIGURE 6.2. Geography of Warfare in the Long Nineteenth Century. This figure presents the geography of warfare—namely, the location of war—mapped into state boundaries as of 2000. The figure includes interstate war as well as independence or “nationalist secessionist war,” that is, war intended to create a modern nation-state, as determined by Wimmer and Min (2009). Categories in the figure legend denote the total number of war years in any given territory between 1816 and 1913, with 0 and 27 being minimum and maximum, respectively. Darker colors indicate more years of war in a given territory.
If war were really meaningful, why has existing research shown no robust relationship between war and state building in the periphery? I argue that external finance weakened incentives to expand tax capacity, hence disconnecting war efforts from long-term state building. The remainder of this chapter provides evidence that war was indeed financed externally, and in chapters 7–9, I analyze the consequences for state building.
6.2 Haute Finance?
When studying war finance, distinguishing between public and private creditors is necessary. International law banned government loans from neutral countries to belligerent countries; however, no such limit existed for loans from private investors.80 In light of this crucial distinction, I focus on private lending, which happened to monopolize international lending during the Bond Era.
Although permitted, private financing of war may not have been possible for two other reasons: geopolitical interests and macroeconomic stability. Officially, British and French investors were banned from lending to countries fighting their troops or jeopardizing their geopolitical interests. Circumstantial evidence, however, suggests that investors found ways to escape official constraints. Large issuing houses had franchises in the various financial centers of Europe. Whenever a loan conflicted with municipal foreign policy, the float would be pushed to another financial capital in the continent.81
Blatant negation of national policy, even by respected houses, also occurred. The Rothschilds contravened the British government embargo on Russia in 1853 and marketed a Russian bond when Russia was fighting the British and their allies in Crimea.82 Four years earlier, the Barings and the Rothschilds had floated another series of Russian and Austrian loans despite knowing the intent of those funds was to finance a war to suppress the Hungarian revolutionaries sponsored by the British Foreign Office. Similar examples can be found in France. For instance, Japanese bonds were marketed in the Paris Bourse in 1903–1904, when Japan was at war with Russia, a key ally of France. A few years later, French capitalists issued a loan to Turkey to fund the Balkan Wars, causing a new diplomatic incident between France and Russia.83 In foreign lending, private interest often found its way.
International investors may have been reluctant to lend for military purposes if they expected participants to default after war. Military expenses could lead to fiscal strain, inflation, and currency devaluation, putting service of debt at risk. In anticipation of capital exclusion, states did not wage war, hence the Hundred Years’ Peace—Polanyi claimed.84 The so-called haute finance hypothesis was recently expanded by Kirshner, who emphasizes the negative macroeconomic consequences of war in international capital markets, affecting war participants as well as nonparticipants.85 Anticipating such negative shocks, international investors would punish warring states with increased difficulty in borrowing abroad.86 Following this logic, one should see hardly any war financed with foreign capital.
Some facts are inconsistent with a strict interpretation of the haute finance hypothesis. First, Shea and Poast find no systematic relationship between war and sovereign default.87 Second, the Hundred Years’ Peace did not really hold outside European soil, as I showed earlier in the chapter. Third, a close reading of Polanyi suggests that the investors’ opposition to financing war was specific to war between the Great Powers:
The chief danger, however, which stalked the capitalists of Europe was not technological or financial failure, but war—not a war between small countries (which could be easily isolated) nor war upon a small country by a Great Power (a frequent and often convenient occurrence) but a general war between the Great Powers themselves.88
All things considered, the haute finance hypothesis faces several credibility challenges, particularly in relation to war in the Global South. What is more, the lending euphoria in the Bond Era could have been a prime outcome of the globalization of military markets. British, French, and German rifles, cannons, and warships were exported around the world. African armies fought the British and French armies with European rifles,89 as did Indonesian troops against Dutch colonizers.90 Latin America, Eastern Europe, the Ottoman Empire, Japan, China, and India were prime purchasers of European armaments. No doubt contraband played an important role,91 but so did European governments, which brokered loans to third nations as long as they purchased military equipment from national producers.92 In studying the global arms trade in the Bond Era, Jonathan Grant concludes that the military industry in Europe was indeed a crucial push factor in sovereign lending: “The armament manufacturers led the financial interests, not vice versa.”93
6.3 War Finance in the Bond Era
The evidence of external finance of war is abundant but fragmented. Centeno, Feis, Marichal, Suzuki, and Thies, among others, have shown that war outside Western Europe was financed with European capital.94 A comprehensive war-specific database on war finance (i.e., what percentage of a given war was funded with tax, debt, and other instruments) is, however, missing in the literature; and it is probably impossible to produce, given the scarcity of historical data, changing accounting techniques, and fund fungibility.
The best approximation to this ideal dataset is offered by Cappella Zielinski.95 Based on rigorous triangulation and case-by-case qualitative accounts, she establishes whether a war participant borrowed overseas to pay for some fraction of the war, namely, the extensive margin. Drawn from a sample of 17 sovereign countries and 19 interstate wars before 1914, Cappella Zielinski’s data indicate that 56 percent of country wars in the Bond Era were at least partially financed with external capital.96 To shed further light on the prevalence of external war finance in the Bond Era, I first identify explicit war loans floated in European markets and then quantify capital inflows during wartime regardless of their denomination.
6.3.1 EXPLICIT WAR LOANS
Flandreau and Flores revisit the haute finance hypothesis by delving into the lending decisions made by prestigious intermediaries or underwriters in London.97 Their data, drawn from primary sources at the Rothschild Archives, lend support to some aspects of haute finance. They find that prestigious intermediaries were rarely interested in financing war: they had little to win and much reputation to lose in the eyes of small bondholders. Selected underwriters had enough market power to impose conditional lending clauses prohibiting borrowers from diverting funds to war purposes. The 1831 loan to France, for instance, required its finance minister to publicly announce that the French government had no intention to wage a new war.
Whereas prestigious intermediaries did not lend to warring states (with important exceptions, including the Franco-Prussian War, the largest war on European soil), second-tier underwriters did. Flandreau and Flores identify 15 wartime loans between 1845 and 1913, equivalent to 20 percent of the 51 interstate wars considered in their sample.
Following Flandreau and Flores’s example, one could search for loans that were explicitly issued for war and military purposes. By explicitly, I mean that borrowers were open about the end use of foreign capital. In that spirit, table 6.2 lists more than 40 of these loans drawn from secondary sources. This could be sufficient evidence to prove that war in the nineteenth century was often financed with external capital; however, if the haute finance hypothesis is right or even partially right, some hesitancy should be anticipated among investors about buying bonds earmarked explicitly for war purposes. Governments could be expected to obfuscate their true intentions by floating loans for war that officially served other purposes. Take Greece, for instance. Almost the entire proceeds of the 5 percent Greek loan of 1890 for £3.6 million were diverted from its “expressly assigned purpose”—the railway from Piraeus to Larissa—and spent on more pressing budgetary needs, including the mobilization of the army against Turkey.98 To account for this or other accounting tricks, next I examine foreign capital inflows regardless of their official (i.e., explicit) purpose.
6.3.2 CAPITAL INFLOWS DURING WARTIME
Examining foreign capital inflows during wartime presents three advantages: First, it allows the study of the intensive margin of war finance, that is, how much capital borrowers were able to mobilize from international sources. Second, governments might issue loans to finance war while camouflaging their intentions to investors—if only because war could be penalized with higher spreads.99 Consistently, the expression “war loan” is exceptionally rare in the prospectuses circulated among British investors. Third, even if some sovereign loans were statutorily banned for war purposes, local treasuries could still redirect domestic revenue to war and finance contemporaneous nonmilitary spending with external capital. All things considered, focusing on capital inflows can capture any systematic relationship between international emission and war that would otherwise be overlooked.
TABLE 6.2. Explicit War and Military Loans
|
1822 Colombia 6% |
War loan (Marichal 1989) |
1867 Chile 7% |
War (Marichal 1989) |
|
|
1822 Chile 6% |
Chilean Navy (Marichal 1989) |
1868 Argentina 6% |
War expenses (Sicotte and Vizcarra 2009) |
|
|
1822 Peru 6% |
Military expenses (Vizcarra 2009) |
1863 Confederate 7% |
US Civil War (F&F 2012) |
|
|
1824 Buenos Aires 6% |
Government and military (Marichal 1989) |
1870 France 6% |
Franco-Russian War (F&F 2012) |
|
|
1824 Colombia 6% |
Government and military (Marichal 1989) |
1873 Chile 5% |
Railways and military (Marichal 1989) |
|
|
1824 Mexico 5% |
Government and military (Marichal 1989) |
1877 Turkey 5% |
Russian War (Birdal 2010) |
|
|
1824 Greece 5% |
Independence War (Reinhart and Trebesch 2016) |
1882 Argentina 6% |
Military (Marichal 1989) |
|
|
1825 Peru 6% |
Military expenses (Vizcarra 2009) |
1885 China 7% |
Sino-French War (F&F 2012) |
|
|
1825 Mexico 6% |
Government and military (Marichal 1989) |
1888 Turkey 5% |
Military equipment (Birdal 2010) |
|
|
1825 Peru 6% |
Government and military (Marichal 1989) |
1894 China 7% |
Sino-French War (F&F 2012) |
|
|
1825 Greece 5% |
Independence War (Reinhart and Trebesch 2016) |
1895 China 6% |
Sino-French War (F&F 2012) |
|
|
1852 Brazil 4.5% |
Argentina-Brazil-Uruguay War (F&F 2012) |
1896 Turkey 5% |
Military equipment (Birdal 2010) |
|
|
1854 Turkey 6% |
Crimean War (Birdal 2010) |
1898 Sierra Leone |
Hut Tax War (Gardner 2017) |
|
|
1855 Turkey 4% |
Crimean War (Birdal 2010) |
1904 Japan 6% |
Russo-Japanese War (1st loan) (F&F 2012) |
|
|
1855 France 3.75% |
Crimean War (Fenn 1869) |
1904 Japan 6% |
Russo-Japanese War (2nd loan) (F&F 2012) |
|
|
1864 Venezuela 6% |
War expenses (Sicotte and Vizcarra 2009) |
1905 Japan 4.5% |
Russo-Japanese War (1st loan) (F&F 2012) |
|
|
1864 Mexico 6% |
Military (Marichal 1989) |
1905 Japan 4.5% |
Russo-Japanese War (2nd loan) (F&F 2012) |
|
|
1865 Mexico 6% |
Military and refinance |
1905 Turkey 4% |
Military equipment (Birdal 2010) |
|
|
1865 Brazil 5% |
Triple Alliance War (F&F 2012) |
1913 Turkey 5.5% |
Military equipment (Birdal 2010) |
|
|
1865 Chile 6% |
Military (Marichal 1989) |
1913 Romania 4.5% |
2nd Balkan War (F&F 2012) |
|
|
1865 Chile 6% |
Military (Marichal 1989) |
1914 Turkey 5% |
Libyan and Balkan Wars (Birdal 2010) |
|
|
1865 Peru 5% |
War expenses (Sicotte and Vizcarra 2009) |
|||
|
1866 Chile 6% |
Military (Marichal 1989) |
|||
|
1866 Argentina 6% |
Triple Alliance War (F&F 2012) |
Note: Sources in parentheses. F&F stands for Flandreau and Flores 2012a.
I draw capital emissions from Stone, who lists loans issued in Britain to government and private ventures in 25 countries from 1865 to 1913.100 I focus on government loans only because I am interested in sovereign borrowing. Stone’s data overrepresent Europe and South America, yet selected economies in Africa and Asia are included.101 For each country in the sample, I establish whether interstate war took place in any given year between 1865 and 1913. War data are drawn from Wimmer and Min’s dataset, which expands the universe of interstate warfare by including the war participation of nonsovereign countries.102
The resulting dataset includes 1,125 country-years. A bivariate analysis shows that of the 41 interstate wars in the dataset, 17, or 41 percent, were waged while the government received foreign capital flows. These wars are listed in table 6.3. Of the 24 wars remaining, 7 were fought while the government was in default (hence excluded from capital markets); in 2, Great Britain was an opponent—another cause of exclusion; in 11, participants were France and Germany, which could rely on domestic lending. The rest—4 wars in total—could have been financed with German or French credit (recall that Stone’s data are limited to British capital) or not financed with foreign capital at all. The general pattern is nevertheless consistent with the theoretical expectation: if external finance is available, warring countries will try to secure foreign capital inflows. Even if loans do not cover all war costs, they alleviate budget constraints and subsidize other expenses.
Next, I reexamine the same data under a multivariate regression format. This technique models capital inflows as a function of war while factoring out time-invariant, country-specific characteristics (e.g., friendly relationship with Great Britain), secular trends in capital markets (i.e., booms and busts in capital markets), and the three pull factors discussed in chapter 4: the gold standard, reputation (proxied by episodes of recent default), and the empire effect.
TABLE 6.3. War and External Capital Inflows from 1865 to 1913
|
Borrower |
War years |
War name |
|
Interstate war |
||
|
Mexico |
1865 |
Franco-Mexican |
|
Peru |
1865 |
Spanish-Chilean |
|
Brazil |
1865 |
War of the Triple Alliance |
|
Brazil |
1866 |
War of the Triple Alliance |
|
Russia |
1866 |
Russia vs. Kokand and Bokhara |
|
Chile |
1866 |
Spanish-Chilean |
|
Argentina |
1866 |
War of the Triple Alliance |
|
Argentina |
1868 |
War of the Triple Alliance |
|
Argentina |
1869 |
War of the Triple Alliance |
|
Argentina |
1870 |
War of the Triple Alliance |
|
Brazil |
1870 |
War of the Triple Alliance |
|
France |
1870 |
Franco-Prussian |
|
Germany |
1870 |
Franco-Russian |
|
France |
1871 |
Franco-Prussian |
|
Germany |
1871 |
Franco-Prussian |
|
France |
1873 |
Franco-Tonkin |
|
France |
1875 |
Franco-Tonkin |
|
China |
1876 |
Franco-Tonkin |
|
China |
1877 |
Franco-Tonkin |
|
China |
1878 |
Franco-Tonkin |
|
Turkey |
1877 |
Russo-Turkish |
|
Turkey |
1878 |
Russo-Turkish |
|
France |
1881 |
Franco-Tonkin |
|
France |
1881 |
Franco-Tunisian |
|
France |
1882 |
Franco-Tonkin |
|
France |
1882 |
Franco-Tunisian |
|
France |
1882 |
Franco-Indochinese |
|
China |
1885 |
Franco-Tonkin |
|
China |
1885 |
Sino-French |
|
France |
1886 |
Mandingo War |
|
China |
1894 |
Sino-Japanese |
|
China |
1895 |
Sino-Japanese |
|
United States of America |
1898 |
Spanish-American |
|
South Africa |
1899 |
Boer War |
|
South Africa |
1901 |
Boer War |
|
South Africa |
1902 |
Boer War |
|
Japan |
1904 |
Russo-Japanese |
|
Japan |
1905 |
Russo-Japanese |
|
Secessionist war |
||
|
Spain |
1870 |
Spanish-Cuban |
|
Spain |
1871 |
Spanish-Cuban |
|
Spain |
1872 |
Spain vs. Carlists |
|
Spain |
1873 |
Spain vs. Carlists |
|
Turkey |
1875 |
Ottoman Empire vs. Christian Bosnians |
|
Turkey |
1877 |
Ottoman Empire vs. Christian Bosnians |
|
South Africa |
1880 |
Boer War |
|
South Africa |
1881 |
Boer War |
|
Greece |
1888 |
Ottoman Empire vs. Cretans |
|
Greece |
1889 |
Ottoman Empire vs. Cretans |
|
Turkey |
1889 |
Ottoman Empire vs. Cretans |
|
United States of America |
1899 |
Philippine-American |
Note: This table lists interstate and secessionist wars waged while belligerents received external loans. Calculation is based on Stone (1992) and Wimmer and Min (2009). The sample contains 25 countries and covers the period from 1865 to 1913. Further details appear in the text.
I allow war loans to occur in preparation for, during, or after war (for instance, to pay for demobilization costs or reparations). I capture all these possibilities by fitting two lags of warfare and two leads alongside current war:
where i, t stand for country i in year t, respectively. The distribution of government loans is highly skewed, with 62 percent of country-year observations having a value of 0. A logarithmic transformation does not normalize the distribution of the outcome variable while attenuating any financial shock derived from war. Hence, I work with the original variable. To capture any latent propensity to obtaining loans and going to war, I fit a first lag of the outcome variable plus country fixed effects. I also add a battery of year fixed effects to account for common shocks in international market liquidity.
Figure 6.3 plots the estimates for β1 − β5 with 95 percent confidence intervals (I do not report the remaining covariates in expression 6.1). The height of the bars denotes deviations in loan inflows from the sample average when war takes place, all other controls being constant. Figure 6.3 suggests a systematic association between warfare and external government funds. In particular, capital flows precede hostilities by one year, arguably in preparation for future hostilities. The effect is substantial: capital inflows increase by £0.9 million right before war, almost a 100 percent increase relative to the yearly sample mean, £1.03 million. Interestingly, too, none of the lags and leads are negative, a pattern seemingly inconsistent with the haute finance hypothesis, according to which a significant reduction in capital flows should be expected before and after war.
Next, I consider a second type of conflict: independence or “nationalist secessionist” war, in which one of the contenders plans to create a new, separate nation-state.103 Both the central government and secessionist territories might receive loans to fund war expenses, as did Greece in 1824 and 1825 before becoming a sovereign country.104 Wimmer and Min’s data list 12 secessionist wars between 1865 and 1913 in the 25 countries considered. Of these 12 conflicts, 5 of them were waged while external funds flowed into the coffers of the war participants. These wars are listed at the bottom of table 6.3. Results for the regression model are also plotted in figure 6.3 (light gray). They confirm average effects while improving the efficiency of the estimates.
FIGURE 6.3. Marginal Effect of War on External Capital Inflows. Both models include a first lag of the dependent variable, a battery of country and year fixed effects, gold standard, default within last 10 years, and time-varying colonial status. 95% CI. Errors are clustered at country level.
The statistical analysis reveals that a substantial number of the sampled interstate and secessionist wars, 41 percent and 42 percent, respectively, were waged while receiving international flows from London. By expanding the time and country coverage and focusing on the intensive margin of capital inflows, these results offer a more precise account of the frequency and size of foreign finance of war in the nineteenth century. In fact, these values represent just a lower-bound approximation of external war finance because the data refer to British capital exports only. Belligerents might well have floated loans in Paris, Berlin, or Vienna in substitution for or addition to those issued in London. Results do not necessarily raise questions about the haute finance hypothesis on European soil (although important exceptions apply) but cast profound doubts on its applicability outside the old continent.
6.4 War Finance in the Colonial World
The quantitative analysis samples sovereign states and British offshoots, but how did dependent colonies finance war? Although similar statistical data do not exist for these countries, qualitative evidence suggests that war by European colonies was largely subsidized by the metropole, hence the modest effect on fiscal capacity.
Colonial war was often waged along the imperial border. Some of these wars were small by twentieth-century standards: the Ashanti War of 1873–1874 cost £1 million, as did the Zulu War of 1879; the Ninth Frontier War of 1877–1879 in Southern Africa cost £2 million, and the Gun War two years later £4.3 million.105 At the time, however, these wars were not considered small and consumed more resources than the metropoles were willing to admit.106
British and French colonies and dominions were required to pay for their security (army and police) and administrative expenses;107 however, financing military expenses was often a cause of disagreement between the metropole and the colony. Colonial authorities did not feel compelled to fund imperial wars because they believed them to be alien and imposed.108 In the British Empire, the initial expenses of war were covered by an imperial fund created by the British treasury—a government-to-government loan. The colonies resorted to this fund and later negotiated the terms under which the loans were repaid; however, “the British treasury usually enjoyed but small success in recouping its monetary advances.”109
Officially, colonies could not issue war loans, but exceptions occurred: for instance, a £2 million loan at zero interest rate was granted to India to finance part of the Second Afghan War of 1878–1880.110 Sierra Leone and Gold Coast, British colonies, also financed frontier wars with zero interest rate loans floated in London. At other times, colonies received advances from Crown agents to balance budget shortages. Once the hostilities were over, the agents recovered the money with the proceeds of new issues.111 Metropolitan subsidies or grants-in-aid were also common. For instance, the equipment of the Egyptian and Sudanese soldiers in the imperial campaigns led by Herbert Kitchener were heavily subsidized by British taxpayers.112 So were the military efforts of the Cape in the Second Boer War, a case I return to below.
With multiple options to finance war externally, colonial officials exerted little effort in mobilizing domestic resources for war. The disproportional burden of military expenses is manifested when examining per capita expenditures: between 1860 and 1912, British taxpayers paid £0.64 per capita in imperial defense; those in self-governing colonies paid £0.12 and in dependent colonies £0.02 (£0.15 if police expenses were included); for reference, developing sovereign nations in the same period spent £0.22 per capita.113
Leaving India aside, five colonies (of more than 160) assumed two-thirds of the total colonial contribution to the military maintenance of the British Empire: the Straits (now Singapore), Hong Kong, Ceylon (now Sri Lanka), Mauritius, and Egypt.114 Not coincidentally, the few colonies that paid for war with domestic resources have relatively strong states today, consistent with the argument of the book. For the vast majority of colonies, however, imperial war was heavily subsidized by Britain. In the opinion of Davis and Huttenback, “of all the subsidies enjoyed by the colonies, none was more lucrative than that for the defense.”115
Paris faced similar challenges, if not worse. France colonized poorer and less economically integrated territories than the British, hence a thinner tax base. Between 1830 and 1891, France’s military expenses in imperial dominions were almost three times larger than total local receipts—3.5 billion francs compared to 1.3 billion.116 Not until 1893 did the French government impose a tax on the colonies to share local expenses, and not until 1900 did they impose the cost of troops on each colony.117 Still in 1901, colonies paid only 11 percent (of a total of 101 million francs) of local military expenses.
Exceptions also occurred within the French Empire. All early revenue in Gabon was spent on the conquest of the northern territories of Chari (modern-day Central African Republic) and Chad—which together formed the French Equatorial Africa Federation.118 In Southeast Asia, the pacification of Tonkin and Annam (today, northern and eastern Vietnam, respectively) were paid with substantial contributions from the budget of Cochin China (now South Vietnam);119 however, these cases were uncommon. Most often, military expenses were subsidized by the French Ministry of War and the Ministry of the Colonies.120
In sum, colonies forcefully participated in imperial and colonial wars, but (understandably) mobilized few domestic resources to pay for them. Colonial authorities relied on access to external capital, mostly in the form of soft loans and subsidies. Although the form and mechanisms to secure foreign capital differed,121 it weakened colonial authorities’ incentives to mobilize resources for war in a similar fashion that regular loans did for rulers of sovereign countries. The Second Boer War offers a good illustration of that.
6.5 Colonial War in Southern Africa: A Tale of Two States
The Second Boer War (1899–1902) pitted Britain and two British colonies, Cape of Good Hope and Natal, against the two neighboring Boer Republics, the Transvaal (officially the South African Republic) and the Orange Free State (see map in figure 6.4). The war was won by Britain, and the two republics were incorporated into the empire in 1902. Eight years later, the four territories formed the Union of South Africa, retaining significant revenue and expenditure powers.
FIGURE 6.4. South African Provinces until 1976. Source: Wikipedia, Htonl/CC BY-SA/ Creative Commons.
Access to external capital was secured for the four territories before and after the war, but the Transvaal and the Orange Free State were excluded from international credit markets during the war years. I take advantage of that to examine responses to fiscal shocks caused by war in colonial and sovereign countries with and without access to external finance. To simplify the analysis, I focus on the Transvaal and the Cape, the two wealthiest territories on each side of the conflict. The Transvaal had unlimited access to gold, and the Cape to diamonds.
The Second Boer War had multiple causes, chief among them the disagreement around installing a customs union between the Cape and the Transvaal. The latter was landlocked, and it needed to export gold via either Capetown (to the south) or Lourenço Marques (Mozambique) to the east, under Portuguese control. For years, the Transvaal and Cape governments and various British high commissioners negotiated ways to split the Transvaal’s customs revenue (collected at port of entry) if the tariff union came to exist. The Transvaal disagreed with all proposals. In 1895, the Cape government tried a different path, orchestrating a conspiracy against the highly popular Transvaal president, Paul Kruger. The so-called Jameson Raid calamitously failed and put the four colonies on a collision course.
Before the war, the two Boer Republics had issued a small amount of debt in London.122 Most of the external capital, however, came from Germany and the Netherlands, and it was used to build the public railway from the goldfields to the Delagoa Bay.123 In 1899, the Germans concluded that their interests would be better protected under British rule and sided with the British.124 Interestingly, the policy switch was a by-product of extreme conditionality. The 1898 British-German agreement brought the two Great Powers together to extract concessions from Portugal in return for fresh loans. Specifically, Portugal would hand off its African possessions if it defaulted on its foreign debt, and Lourenço Marques would be handed over to Germany. As a gesture of goodwill with its circumstantial ally, the Germans agreed not to interfere with British affairs in South Africa, de facto abandoning the Boer Republics to their own fate.125
By the time the war broke out, the Transvaal was diplomatically and financially isolated. “Its strength lay, above all, in its self-sufficiency,”126 and they did not waste time. Kruger put together an army of 50,000 men, a few thousand foreign volunteers, and 5,000 Cape rebels.127 These men were armed with imported weapons from Germany,128 which had been flowing in at least since the Jameson Raid.129 The government reconverted the dynamite monopoly into a wartime industry, producing firearms and bullets and distributing supplies by taking control of the railways.
Given the precarious position of customs revenue and exclusion from capital markets, the government of the Transvaal had to elevate pressure on domestic taxes: it raised the alcohol excise (between 6 and 10 percent per gallon, compared to 4 percent in the Cape),130 the land tax, and revenue from dynamite, cement, and brick monopolies—key inputs for gold extraction. Most importantly, it passed a new 5 percent tax on the profit of gold mines, and a 2.5 percent tax on the gross yield of gold from mynpacht (leased) areas.131 The monthly £100,000 raised from the new direct taxes virtually paid the entire cost of the war.132
FIGURE 6.5. Fiscal Performance in the Cape and the Transvaal in the Second Boer War. Data are drawn from Gwaindepi and Siebrits (2020).
When the war was over, some of these taxes remained in place, including the land tax and the gold mine profit tax, which the new colonial authorities raised to 10 percent.133 As reflected in figure 6.5, strong domestic mobilization of resources allowed the Transvaal Republic to maintain a balanced budget despite engaging in a war against the most powerful army in the world and losing it. The fiscal effect, measured in nominal and per capita tax burden, persisted for at least 10 years after the war.
The Cape’s fiscal trajectory was remarkably different. The colony traditionally relied on customs revenue to finance colonial expenditures. Trade taxes represented 51 percent of revenue before the war.134 Instead of pushing for new taxes, the Cape would finance new expenses with debt. Because the domestic credit market was underdeveloped, these loans were floated in London.135
Despite being a key instigator of the war, the Cape (or Natal) made no significant effort to finance the Second Boer War. This had been a regularity for almost every military engagement of the Cape. The occupation of Rhodesia in 1896 had been heavily subsidized by British taxpayers.136 Before that, the Zulu War of 1879, the Ashanti War of 1873, and the Ninth Frontier War were also financed with British capital.137
Per capita tax ratios in the Cape remained virtually flat before, during, and after the war. At the same time, the Cape’s external debt increased from £24 million before the war, to £31 million during the war, and to £52 million after the war,138 figures that contrast with the meager £2.5 million in outstanding external debt of the Transvaal in 1903.139 Income taxes were passed in the Cape and Natal only after the war, in 1904 and 1908, respectively; however, they were eliminated in 1910 because they did not raise any significant money.140 Most of the £218 million cost of the Second Boer War was eventually assumed by the British taxpayer. As Robert Lower (later Lord Sherbrooke), Gladstone’s first chancellor of the Exchequer, wrote: “Instead of taxing them [South African colonies] as our forefathers claimed to do, we, in the matter of this military expenditure, permit them in a great degree to tax us.”141
The paired comparison in South Africa illustrates the different incentives to mobilize tax revenue depending on external capital access and colonial status. When countries wage war excluded from capital markets, even retrograde leaders like those in the Transvaal are compelled to undertake tax reform to secure government funds, enabling lasting gains in fiscal capacity. Such efforts are harder to observe when local authorities, sovereign or colonial, rely on external finance in the form of loans and imperial subsidies.
6.6 Conclusion
Historically, interstate war is the main driver of state building. Based on this premise, this chapter pursued two goals: First, I documented the incidence and magnitude of war around the world over the last two centuries for both sovereign and nonsovereign countries. Descriptive statistics of historical war data suggest that interstate warfare outside Europe was a pervasive phenomenon in the nineteenth century—not so much after 1914. If interstate war is a cause of state building, evidence of such in the nineteenth century, not later, should be apparent.
Chapters 3 and 4 showed that external finance was readily available for countries around the world regardless of their economic fundamentals. Chapter 5 showed that loans to the developing world were often repaid in specie, not tax money, unraveling the long-term equivalence between loans and taxes for public finance. This chapter showed that consolidated and recently created countries and colonies in the Bond Era seized the lending frenzy to pay for war. Now that all ingredients are aligned, I investigate the short- and long-term consequences of the external finance of war for state building in the next three chapters.
1. See Lindert (2004) for the expansion of welfare spending after 1914, and Mares and Queralt (2015, 2020) and Beramendi, Dincecco, and Rogers (2019) for nonbellicose drivers of fiscal capacity before 1914.
2. Hoffman (2015); Rogers (1995).
3. Ardant (1975); Brewer (1988); Ertman (1997); Dincecco (2011); Hintze (1975); Mann (1984); O’Brien (2001).
4. Peacock and Wiseman (1961); Rasler and Thompson (1985).
5. Tilly (1990).
6. Cárdenas (2010); Schenoni (2021); Thies (2005).
7. Stubbs (1999).
8. Thies (2007).
9. Karaman and Pamuk (2013).
10. Kurtz (2013); Soifer (2015); Taylor and Botea (2008).
11. Centeno (1997, 2002); Herbst (1990, 2000). Comprehensive surveys of the bellicist hypothesis by Sørensen (2001) and Goenaga, Sabaté Domingo, and Teorell (2018) are illustrative of the mixed results.
12. Herbst (1990, p. 123).
13. Herbst (2000, pp. 42–43).
14. Nunn and Wantchekon (2011).
15. Besley (2020).
16. Centeno (1997, 2002). See Kurtz (2013), López-Alves (2000), and Soifer (2015) for related arguments.
17. Centeno (2002, ch. 2).
18. Fazal and Poast (2019, p. 7).
19. Brecke (1999).
20. See Abramson (2017) for an important exception.
21. See the special issue of the Journal of Peace Research, edited by Sobek (2010), for a discussion of civil war and state capacity.
22. Wimmer and Min (2009).
23. Clodfelter (2002); Richardson (1960); Sarkees and Wayman (2010).
24. Centeno (2002); Sørensen (2001).
25. Tilly (1990, table 3.1).
26. Grant (2007, pp. 147–148).
27. Dawson (1990); Grant (2007); Marichal (1989).
28. Sater (2007, p. 21).
29. Rouquié (1989, ch. 3).
30. Resende-Santos (2007, pp. 196–200).
31. Marichal (1989, table 3.1).
32. Schenoni (2021, p. 408).
33. Scheina (2003a, b).
34. Holsti (1996, p. 152); emphasis added.
35. Butcher and Griffiths (2015).
36. Ingram (1955).
37. Bruce (1973)
38. Black (2009).
39. Cronin (2008); Feis (1930); Ralston (1990).
40. A survey of colonial wars in Africa and Asia can be found in edited volumes by Wesseling (1978) and Moor and Wesseling (1989).
41. Reid (2012); Vandervort (1998). See Bates (2014) for a concise account.
42. Reid (2012, p. 112).
43. Reid (2012, p. 108).
44. For details on the arms trade, see Grant (2007).
45. Reid (2012, p. 142).
46. See Ralston (1990, ch. 4) for details on military modernization under Ali and his successors.
47. Reid (2012, p. 130).
48. The Yoruba were based in modern-day Nigeria, Benin, and Togo; the Dahomey in modern-day Benin; and the Ashanti in modern-day Ghana.
49. Vandervort (1998).
50. The Tukolor were based in modern-day Senegal, Mali, and Mauritania; and the Samori were spread into modern-day Guinea, Sierra Leone, Mali, Ivory Coast, and Burkina Faso.
51. Reid (2012, p. 127).
52. Black (2009, ch. 9).
53. Herbst (2000).
54. Vandervort (1998). The Zulu were based in modern-day KwaZulu-Natal in South Africa.
55. Robinson (1978).
56. Reid (2012, p. 139).
57. Reid (2012, p. 148).
58. Reid (2012, p. 140) and Black (2009).
59. The Tirailleuers Senegalais regiment was deployed in Western Europe during WWI, a sign of their military competence.
60. Herbst (2000).
61. Reid (2012, p. 111).
62. Reid (2012, pp. 111–115). The Ashanti gradually moved out of the slave trade. This may have been the only major sub-Saharan state not raising significant revenue from slave exports.
63. Nunn and Wantchekon (2011).
64. Blaydes and Chaney (2013) for the effect of slave soldiers on political institutions in the Muslim world before 1500 CE.
65. Roy (2013, ch. 2).
66. de la Garza (2016); Richards (1995).
67. Lee (2017); Iyer (2010).
68. Dincecco, Fenske, Menon, and Mukherjee (2019); Stein (1985).
69. Wilkinson (2015, p. 39).
70. Wilkinson (2015, pp. 38–44).
71. Black (2009, ch. 9).
72. Davis and Huttenback (1986, p. 14).
73. War cost estimates drawn from Webster (1998, pp. 142–145).
74. Davis and Huttenback (1986, p. 154) and Robinson (1978, p. 149).
75. O’Brien (1988).
76. Black (2009, ch. 6).
77. Taylor and Botea (2008, p. 40).
78. López Jerez (2020, pp. 112–117).
79. Bossenbroek (1995, p. 29).
80. Borchard (1951, p. 151).
81. Jenks (1927, p. 284).
82. Jenks (1927, pp. 285–286).
83. Viner (1929, pp. 437–447).
84. Polanyi (2001).
85. Kirshner (2007).
86. Kirshner (2007, p. 206).
87. Shea and Poast (2018).
88. Polanyi (2001, p. 15).
89. Vandervort (1998); Killingray (1989).
90. de Moor (1989, pp. 63–64).
91. Reid (2012).
92. Feis (1930, chs. 5 and 6).
93. Grant (2007, p. 7).
94. Centeno (2002); Feis (1930); Marichal (1989); Suzuki (1994); Thies (2005).
95. Cappella Zielinski (2016).
96. Countries in the sample are Argentina, Brazil, Chile, China, Denmark, France, Greece, Italy, Japan, Mexico, Morocco, Paraguay, Peru, Russia, Spain, Turkey, the UK, and the US.
97. Flandreau and Flores (2012b).
98. Wynne (1951, pp. 300–302).
99. Mauro, Sussman, and Yafeh (2006).
100. Stone (1992).
101. The panel is balanced and includes the following countries: Argentina, Australia, Austria, Brazil, Canada, Chile, China, Cuba, Egypt, France, Germany, Greece, India, Italy, Japan, Mexico, New Zealand, Peru, Rhodesia (now Zimbabwe), Russia, South Africa, Spain, Turkey, Uruguay, and the US.
102. Wimmer and Min (2009). Further details on the war data appear earlier in this chapter.
103. Wimmer and Min’s 2009 coding of secessionist war depends on intentions, not outcome.
104. Reinhart and Trebesch (2016, p. 12).
105. War costs drawn from Davis and Huttenback (1986) and Ranger (1969).
106. Davis and Huttenback (1986).
107. Frankema and van Waijenburg (2014); Gardner (2012).
108. This problem was sizable with self-governing colonies. As early as 1862, the British Parliament issued the 1862 Colonial Military Expenditure Report, which accepted British responsibility for military expenses arising from “imperial” policy. The same report made internal order the “main responsibility” of colonies (Gordon, 1965, p. 22).
109. Davis and Huttenback (1986, p. 149).
110. The total cost of the war was £23.5 million. India paid £18.5 million and Great Britain £5 million (Benians, 1960, pp. 187–188).
111. Gardner (2017, pp. 247–248).
112. Black (2009).
113. Davis and Huttenback (1986, table 5.2).
114. Davis and Huttenback (1986, p. 159).
115. Davis and Huttenback (1986, p. 145).
116. Vignon (1893, p. 286) quoted in White (1933, p. 83, fn. 1). For reference, the franc-pound conversion rate in 1880 was 1 franc = 0.04 pound sterling.
117. White (1933, p. 81).
118. Coquery-Vidrovitch (1969, p. 176).
119. López Jerez (2020, pp. 112–117).
120. Cogneau, Dupraz, and Mesplé-Somps (2021, p. 448).
121. Refer to chapter 3 for details.
122. Ferguson and Schularick (2006, p. 296).
123. Gwaindepi and Siebrits (2020, p. 283).
124. Van-Helten (1978, p. 388).
125. Krüger (1969, pp. 343–344).
126. Pakenham (2000, p. 258).
127. Krüger (1969, p. 346).
128. Judd and Surridge (2002).
129. Krüger (1969, p. 342).
130. De Kock (1924, p. 412).
131. De Kock (1924, p. 424).
132. Pakenham (2000, p. 258).
133. De Kock (1924, pp. 423–424).
134. De Kock (1924, p. 411).
135. Gwaindepi and Siebrits (2020, fn. 18).
136. Headlam (1936, p. 538).
137. Davis and Huttenback (1986, pp. 150–151).
138. De Kock (1924, p. 394).
139. British Parliament (1908, p. 295).
140. Lieberman (2003, pp. 111–112).
141. Quoted in Davis and Huttenback (1986, p. 119).