Raising money for war

Tweet

 

As the warmongering rhetoric of the UK’s traditional parties (Tory, Lib Dems and Labour), along with newcomer Reform Ltd, ramps up, suggestions have been floated that the UK should start issuing war bonds, a method of borrowing from the public which was used to fund both World Wars. One of those floating the idea is Lib Dem leader, Ed Davey, and the call is also being supported by an alliance of defence industry bosses. The keenness of the armaments industry for the government to raise more money to divert into their pockets is understandable – arms manufacturers are the only consistent winners from warfare. Surprise, surprise – arms manufacturers support a plan to transfer other people’s money to themselves!

Even if we assume, for the purposes of argument, that spending more on armaments is a good thing, there is a big question over whether the government actually needs to borrow money to achieve that aim. The constraint isn’t about money – the government can always create money to fund whatever it wishes – it is about real resources in the economy. Are the raw materials, labour, energy etc to produce more armaments actually available, or do they need to be redirected from other economic uses? The way in which they are financed is a separate question entirely. On the scale on which our politicians apparently wish to manufacture armaments, it is likely that diversion of resources from other activities will be required – and which economic activities are selected to suffer the effects of that diversion is a far more important question, even if not one that any of them are in any great rush to answer.

Those advocating war bonds as a means of raising finance seem to think of it as an opportunity for ordinary people to come together and loan their pennies to the government in a great patriotic outpouring, as happened in the two world wars. Except it didn’t happen; it’s a false memory of events seen through biased lenses. And that little dampener eliminates the need to even consider whether the UK’s population would suddenly be overcome by the jingoistic fervour which the proposal presupposes.

In both world wars, the bonds were overwhelmingly sold not to ordinary individuals in the street but to a small number of wealthy individuals and to companies and institutions, unsurprisingly concentrated in London and south east England. The scheme launched in the first world war was actually a spectacular failure, with the Bank of England being forced to buy many of the bonds itself (an early example of what would probably be called quantitative easing today), hide the assets in its accounts, and then lie about having done so. As the government increased the interest rate in an increasingly vain attempt to attract more money, many of the new bonds were purchased by holders of the existing bonds converting them into the new higher interest bonds instead. As might be expected by any rational observer, the motivation of capitalists was more about making money than saving the country.

That highlights one of the issues with governments issuing bonds – they benefit mostly the wealthiest in society. By treating tax and ‘borrowing’ as alternatives, the rich end up keeping their capital and earning interest on it rather than paying tax. It’s also a double whammy – when the government spends the money into the economy, it overwhelmingly flows upwards into the hands of the wealthiest, through profits and dividends. To the extent that even a small number of ordinary people respond to the call, they end up reducing their own spending power as the flow of capital increases social inequality. It's not quite the wizard wheeze as which its advocates seem to see it. Unless you're an arms manufacturer.