The Irrelevance of Money

French assault on German positions, Champagne.

National Archives

A lot of people make a mistake when they attribute alleged inability to meet certain public policy objectives to lack of money. This is a point I’ve been wanting to make for a long time, but in order to make it I needed to find an example of someone making a truly absurd version of the error. Fortunately, Liquat Ahmed’s Lords of Finance delivers quite early on. It’s conventional nowadays to mock pre-WWI European elites for believing that a general war between the great powers would be a short one, but few people realize that the “out of money” fallacy played a role in the mistake. But Ahmed reports that in September 1914, “at a dinner party in Paris given in honor of the British secretary of state for war, Field Marshal Lord Kitchener, the French finance minister confidently proclaimed that the fighting would be over by July 1915 because money would have run out.”

This was the finance minister, mind you, someone who should have known better. Similarly, “the Hungarian finance minister, Baron Janos Teleszky, when questioned in the cabinet about how long his country could pay for the war, replied three weeks.”

Generals, needless to say, being less knowledgable about economics would never make this mistake. A country can lose a war because it runs out of soldiers. You can lose a war because you run out of guns. You can lose a war becaue you run out of ammunition. You can lose a war because you run out of food. You can lose a war because you don’t have enough trained pilots. You can lose a war because you don’t have any working nuclear weapons. You can lose a war because your cities have been burned to the ground. You can also lose a war because the political authorities decide that reducing household consumption to direct production to the war effort is no longer worth it, all things considered. There are many reasons you might lose a war. But no country on earth has ever lost a war because it’s “out of money.” If you have the soldiers, and the soldiers have guns and ammunition, and you have the ability to grow food to feed the soldiers and the workers making the guns and the ammunition then as long as you prefer continued fighting to surrender you can keep waging the war.

That’s all pretty obvious if you think about it for ten minutes, and of course nobody surrendered in World War I because they ran out of money. They borrowed money, they printed money, they bartered, they did what they had to do. You fight with your real resources and money is one of several tools for mobilizing real resources. Everyone knows that. What people forget is that this is true in peacetime as well. No matter what you do with your monetary system, you can’t conjure up real resources that you don’t have. But by the same token, if you in fact have real resources available “lack of money” is never a good reason to fail to mobilize them. What’s true is that in a democracy that’s not at war, different political elites will typically disagree about the ends toward which it makes sense to mobilize real resources. Combine that fact with an American-style political system where disagreement leads to gridlock, and what you get is wasteful idling.