Banking On War And Peace (2 min read)

US military

(excerpt from my upcoming book)

The retaliatory use of US and EU financial sanctions on Russian individuals show the importance of finance in geo-political relations. It shouldn’t necessarily come as a surprise as the largest increases in government debt tend to occur around wars. The financial system, then, is critical to raise these funds, and later find ways of paying it down.

Indeed, after the Second World War, most involved countries saw their government debt levels shoot higher. One way to pay the down down was to use financial repression, which is the most direct link between the state, war and the banking system.

Essentially, this involves forcing individuals to earn low interests when they deposit their money in banks. So in the US, from 1933 onwards the US imposed limits what banks could charge – this was called Regulation Q. Similar measures were taken by most countries in Europe as well. At the same time, after the Second World War, new rules were introduced to force banks to hold government bonds. In effect, the government was able to borrow from individuals at artificially low interest rates via banks.

History is replete with such examples. The Bank of England was established for just such a purpose in 1694. England was heavily defeated by France in various naval engagements in 1690. Consequently, England needed to build a powerful navy. It needed to borrow £1,200,000, but was unable to find lender, so it set up the Bank of England. The Bank would have limited liability and had the ability to issue bank notes. This allowed individuals to lend the required amount to the government through the Bank. This allowed England to build up its Navy. As a result, there has been a long-standing relationship between the state, war and banks.

Moreover, if we look at the largest organisation in the world, the US military, we can see why having a regular source of funding is so important. It has annual revenues of $850bn , which compares to $485bn for the next largest Wal-Mart . Since 2000, the cumulative excess military spend has come to $3 trillion – that is, above the amount the US would have spent had it kept its military spend the same as its share of GDP in 2000 as other countries like the UK and France have. So even before the 2008 financial crisis, US debt had gone up dramatically from $5.2 trillion in 2000 to $8.9 trillion, which could be accounted for by the extra military spend. As of 2015, one quarter of total US government spending could be attributed to military and surveillance expenditure

The bottom line is that the state and banks will always be closely tied to each other.