When Armies Need Paying
War is expensive. Armies require food, weapons, ammunition, transport, pay, and medical care, all at scale, all on compressed timelines, all with no tolerance for supply disruptions. Modern estimates suggest the United States spent roughly $4.1 trillion on the wars in Iraq and Afghanistan between 2001 and 2021. The Union spent the equivalent of $80 billion in today's dollars fighting the Civil War. Britain's national debt roughly quadrupled during World War I.
Governments facing these demands have historically had three financing options: tax, borrow, or create money. Each has limits. Taxation raises revenue but takes time, faces political resistance, and slows economic activity during periods of maximum national stress. Borrowing works but carries interest costs and depends on the willingness of creditors to lend. Money creation, which expands the currency supply beyond what the economy's real output supports, is faster, politically quieter, and carries no explicit interest cost. It also has a reliable long-term consequence: inflation.
This is not a modern phenomenon or a product of central banking. The connection between war and monetary debasement runs through the entire history of organized conflict. Understanding it illuminates why wars so reliably damage the monetary system, and why that damage often outlasts the conflict by decades.
The Continental Dollar: America's First Monetary Crisis (1775 to 1781)
The American Revolution was financed partly through the first paper currency issued by the Continental Congress. Starting in 1775, Congress began issuing "Continentals," paper notes denominated in dollars but backed by no specific commodity and no reliable tax revenue. The states similarly issued their own paper currencies.
The problem was straightforward: the Continental Congress lacked the power to tax. It could request funds from state governments, but those requests were largely ignored. The alternative was to print. Between 1775 and 1779, Congress issued approximately $225 million in Continental notes. State governments issued another $210 million in their own currencies.
The results were predictable. By 1779, Continentals had lost roughly 98 percent of their face value against gold and silver coin. A paper dollar that had once been worth a silver dollar now bought less than two cents in specie. The phrase "not worth a Continental" entered the American vernacular as a synonym for worthlessness, a phrase that survived into the twentieth century, long after the currency that inspired it had ceased to exist.
George Washington wrote to a friend in 1779: "A wagon-load of money will scarcely purchase a wagon-load of provisions." Soldiers were paid in Continentals and found their wages purchasing almost nothing. Supply problems plagued the Continental Army partly because farmers refused to sell food for paper they knew was losing value.
The Continentals were eventually redeemed (at 1 cent on the dollar) when the new federal government gained the power to levy taxes under the Constitution of 1787 and Alexander Hamilton restructured the national debt in 1790. Those who had held Continental paper as savings lost approximately 99 percent of that value.
The Civil War Greenbacks (1861 to 1865)
By 1861, the United States government was operating on an annual budget of roughly $66 million. The Civil War, at its peak, was costing the Union more than a million dollars per day. The gap between revenue and expenditure was staggering and had to be closed rapidly.
Congress took three steps: issued bonds (which required buyers), raised tariffs (which took time), and passed the Legal Tender Act of February 1862. That act authorized the US Treasury to issue $150 million in paper notes (called "greenbacks" for the green ink used on their reverse) that were declared legal tender for all debts, public and private, but were not redeemable for gold or silver on demand.
Subsequent legislation expanded this authorization. By the war's end, approximately $450 million in greenbacks were in circulation. The inflation that resulted was significant but not catastrophic by historical standards: consumer prices roughly doubled in the North between 1861 and 1865. The Union's war effort also included substantial bond issuance and the first federal income tax in US history, so monetary creation was not the only financing mechanism.
The Confederacy's experience was far worse. The Confederate government had fewer sources of revenue, thinner credit markets, and a shrinking physical economy as Union forces advanced. Confederate paper currency ultimately experienced inflation estimated at more than 9,000 percent between 1861 and 1865. By the war's end, Confederate dollars were worthless, rendering the savings of Southern citizens in that currency entirely void.
"The Confederate dollar is dead. Our people took it for a while in hope that it would maintain a fixed value, but when it began to tumble, confidence was gone and prices rose in proportion." Confederate soldier's diary, 1865
After the war, a decade-long political debate ensued about whether to retire greenbacks or maintain them. Hard money advocates (creditors, banks, and those who believed in commodity-backed currency) argued for redemption and a return to gold. Soft money advocates (debtors, farmers, and those who had found cheap money useful) argued for maintaining or expanding the paper supply. The debate eventually resolved with the Resumption Act of 1875, which committed the Treasury to redeeming greenbacks in gold beginning in 1879. When that date arrived, confidence in the currency was high enough that relatively few people actually demanded gold. The credible commitment to redemption was sufficient to restore trust.
World War I: The Suspension That Changed Everything (1914 to 1918)
When war was declared in August 1914, the major European powers faced an immediate practical problem: they had all subscribed to some version of the gold standard, under which their paper currencies were legally redeemable for gold at fixed rates. Maintaining that convertibility during wartime was impossible. Germany, France, Britain, and Austria-Hungary all suspended gold convertibility within days of the outbreak of war.
This suspension removed the primary constraint on money creation. Governments could now issue as much currency as needed to fund the war, subject only to the limits of industrial capacity and public confidence. All the major belligerents took full advantage.
Britain's money supply roughly doubled between 1914 and 1918. Prices rose by approximately 130 percent over the same period. The British national debt grew from £650 million in 1914 to £7.4 billion in 1918, more than a tenfold increase in four years. The burden of servicing that debt would constrain British fiscal policy for decades afterward.
Germany's experience was more extreme and had more catastrophic consequences. Germany financed the war almost entirely through borrowing rather than taxation, anticipating (incorrectly) that victory would allow reparations to cover the accumulated debt. When Germany lost the war, that debt was compounded by the reparations imposed by the Treaty of Versailles. The resulting fiscal crisis, combined with the political instability of the early Weimar Republic and the 1923 Ruhr occupation, produced the hyperinflation that erased the savings of the German middle class.
The monetary consequences of World War I did not end in 1918. The attempt to restore pre-war gold parities in the 1920s at exchange rates that no longer reflected underlying economic realities contributed directly to the deflationary pressure of the Great Depression. The monetary disorder of 1914 to 1918 echoed forward for thirty years.
World War II: Deferred Inflation (1939 to 1945)
The United States and Britain applied more sophisticated war finance techniques during World War II, having observed the monetary chaos the previous war had unleashed. War bonds absorbed civilian purchasing power, converting potential consumer spending into government loans that paid interest. Price controls and rationing suppressed inflationary pressure during the war years. These tools successfully managed the immediate inflation problem.
But they did not eliminate it. They deferred it.
The US money supply expanded by roughly 175 percent between 1940 and 1945. Civilian goods were simply unavailable during the war (production was redirected to military needs), so the monetary expansion did not immediately drive up prices. When price controls were lifted after 1945, the pent-up monetary demand combined with returning soldiers' spending produced a sharp postwar inflation: prices rose by approximately 35 percent between 1945 and 1948.
The broader monetary architecture of the postwar world, the Bretton Woods system established in 1944, represented an explicit attempt to prevent the monetary chaos of the interwar period from repeating. The dollar was pegged to gold at $35 per ounce; all other currencies were pegged to the dollar. This system worked reasonably well for roughly two decades. Then the fiscal demands of the next major American military engagement made it unsustainable.
Vietnam and the Breaking Point (1965 to 1971)
President Lyndon Johnson's administration faced a dilemma his predecessors had not. He wanted to pursue both an ambitious domestic agenda (the Great Society programs, including Medicare, Medicaid, and the War on Poverty) and fund an escalating war in Vietnam without raising taxes sufficiently to cover both. This combination of military and social spending, dubbed "guns and butter" by economists, required deficit financing on a scale that strained the Bretton Woods system to breaking.
Under Bretton Woods, the US was obligated to exchange dollars for gold at $35 per ounce whenever foreign governments requested it. As the US trade deficit expanded and dollar reserves accumulated abroad (particularly in France, where President de Gaulle was publicly skeptical of American monetary discipline), foreign governments increasingly demanded gold. US gold reserves fell from about 20,000 metric tons in 1958 to 8,100 metric tons by 1971.
By August 1971, the situation had become untenable. President Nixon, advised by Treasury Secretary John Connally, announced on August 15 that the United States would no longer exchange dollars for gold at any price. The Bretton Woods system was over. The Nixon Shock, as it came to be known, was the direct consequence of a decade of deficit spending driven substantially by the Vietnam War and Great Society programs.
The 1970s inflation that followed, peaking at over 13 percent annually in 1979, was in large part the deferred consequence of Vietnam-era monetary expansion, amplified by two oil shocks and the loss of the dollar's formal anchor to gold. The Federal Reserve under Paul Volcker ultimately broke the inflation cycle in 1980 to 1982 by raising interest rates to nearly 20 percent, producing the sharpest recession since the Great Depression. The cure was as painful as the disease.
The Consistent Pattern
Looking across these episodes (the Continental dollar, Civil War greenbacks, World War I, World War II, and Vietnam), several features emerge with remarkable consistency.
War makes normal fiscal constraints politically unacceptable. A government cannot tell its citizens that it lacks the money to defend them. The political cost of losing a war is higher than the political cost of inflation, particularly because inflation is diffuse, spread across the entire population, often with a lag, while a military defeat is immediate and concentrated.
The printing press is always the easiest option. Taxation requires legislation, economic disruption, and visible sacrifice demanded of specific people. Borrowing requires willing creditors and carries explicit interest costs. Money creation can happen quickly and its costs are invisible at first. The political logic points reliably toward monetary expansion.
The costs are paid by savers. Those who hold wealth in the domestic currency lose purchasing power proportional to the monetary expansion. Those who hold real assets such as property, commodities, foreign currency, or gold are relatively insulated. This transfer of purchasing power from savers to debtors (including the government itself) is the consistent mechanism across every episode.
The damage outlasts the war. World War I's monetary disorder contributed to the Great Depression. Vietnam's monetary expansion contributed to the 1970s stagflation and the collapse of Bretton Woods. The debt accumulated through wartime spending constrains fiscal policy for decades afterward. The monetary system can absorb war's shocks, but not without cost, and the bill is paid slowly, through years of purchasing power erosion.
A Note on War Bonds
War bonds deserve mention as the most conscientious approach to war finance. By selling bonds to citizens, governments borrow existing purchasing power rather than creating new money. Citizens who buy war bonds voluntarily defer consumption, lending the government real resources that already exist rather than manufactured claims on resources that don't yet exist.
The US Series E war bonds sold during World War II represented genuine fiscal discipline: they were sold at a discount and redeemed at face value, providing a modest real return and ensuring the government was actually borrowing rather than inflating. They also served a psychological purpose: involving the civilian population directly in war finance and giving citizens a tangible stake in the outcome.
The limitation of war bonds is that they depend on public willingness to lend, which constrains the government's spending to what the public will support. When a government wants to spend beyond what the bond market will bear at acceptable interest rates, monetary expansion becomes tempting regardless.
Sound Money as a Constraint
The recurring connection between war and monetary debasement was a primary motivation for advocates of the gold standard. Gold could not be created at will; a government that pegged its currency to gold could not easily inflate to finance military adventures without losing gold reserves. This constraint was meant to be automatic and credible.
The limitations of the gold standard as a wartime constraint were, however, evident from the outset: every major belligerent suspended convertibility immediately upon the outbreak of World War I, suggesting the constraint was always conditional on political will. When national survival was at stake, no gold standard survived. The constraint that worked in peacetime dissolved at the moment it was most needed.
Bitcoin advocates note that this conditionality is precisely the weakness a cryptographically enforced supply limit addresses. No government authority can amend Bitcoin's monetary policy by executive order or emergency legislation. The 21 million coin limit is enforced by the consensus of a distributed network, not by the self-restraint of institutions that face existential pressure to abandon restraint.
Whether Bitcoin can fulfill the role of a genuinely war-resistant monetary standard at a civilizational scale remains unproven. What is clear from history is that governments facing existential military threats will consistently choose monetary expansion over other financing options, and that populations holding the resulting currency bear the cost in eroded purchasing power, sometimes gradually, sometimes catastrophically, but always eventually.
Understanding this pattern is not cause for despair about human institutions. It is, rather, an accurate map of the incentives that have shaped monetary history, a map that allows individuals and institutions to make more informed decisions about how to preserve wealth across time and across the recurring disruptions that war visits upon every monetary system it touches.
This article is for educational purposes only and does not constitute financial advice. Historical events are described for informational and educational context.