Is War Good For the Economy?

Given that different stock exchange markets around the world were originally established to fund wars, is war therefore a vital part of the economy?


By: Ringo Bones


For better or for worse it was primarily the constant search by various governments throughout history of various means to conduct wars – especially when it comes to raising funds – that engendered our contemporary economic systems. Though the financially disastrous “Moral Adventurism” of the Bush Administration’s invasion of Iraq back in March 2003 – which former World Bank president Paul Wolfowitz was the primary architect – would certainly serve as a bad example. No one can deny that throughout history, wars are the primarily effective economic stimulus packages.

Our various stock exchange markets can easily trace their origins in medieval times in many European countries. As governments became increasingly reliant on public loans for the capital need for conducting wars and other operations – though mostly in conducting wars – issues of stocks and bonds multiplied, thus making more and more elaborate financial machinery in the form of financial instruments necessary for the maintenance of a ready market in the various type of paper certificate issue. Out of this need, the stock exchange – as we know them today – was born.

The establishment of stock markets in London and New York during the second half of the 18th Century was primarily driven by war. Probably one of the oldest continuously run stock exchanges in the world was the one established in London. It started when several dealers in bills of exchange – that is, short-term credits – also dealt occasionally in government funds, started to look for buyers for those wishing to sell and vice versa.

As time went on, these dealers took to meeting regularly at a particular coffee house in London. Which at the time financial business of most kinds were often transacted in such establishments, by 1773, this place became known as the Stock Exchange Coffee House. By 1802 the amount of business conducted there, stimulated by the continuous raising of funds required to fight the Napoleonic Wars, had reached to such proportions that a new building – to be used exclusively for these business transactions was constructed. This building occupied part of the site of the present London Stock Exchange.

While the New York Stock Exchange - which now handles more business than any other stock exchange in the world - can trace its origins to the same point in time. Especially to the particular stimulus of the American Revolution in raising funds to defend the then fledgling country from continued British attacks, which the New York Stock Exchange has been in continuous operation since 1792. The American Revolution – like the Napoleonic Wars – made necessary the mobilization of considerable sums of money. Furthermore, the myriad securities issued by the separate states soon produced the need for market facilities.

The then fledgling New York market began with just 24 dealers who formed the habit of meeting for a short while each day under a large buttonwood tree quite close to the present site of Wall Street. These men dealt in securities issued by government banks, insurance companies, and canal builders. It wasn’t too long before business expanded to the point where a special building was required – together with a set of rules – by which the market was organized and controlled.

Even the first incident of short selling can be defined as a war time incident. It happened back in 1609 when Dutch trader Isaac Le Maire, a big shareholder of the Vereenige Oostindische Compagne or VOC. In 1602, Le Maire invested about 85,000 guilders in VOC. By 1609 the VOC still was not paying dividends and Le Maire’s ships on their Baltic routes were under constant threat of attack by the British Royal Navy. Primarily due to trading conflicts between the British and the VOC. Le Maire decided to sell his shares and sold even more than he had. The stock market notables at the time became outraged over this act and this particular incident led to the first real stock exchange regulations: a ban on short selling. The ban was eventually revoked a couple of years later.

Maybe it was the Keynesian dictum of crisis measures having a habit of lasting much longer than the crisis itself or the World War II-era Bretton Woods Conference that largely shaped our present financial system that most of us will note the inexplicable link between war and economic activity. Or is it that we in the Western Civilization had gotten war down to a science that we can easily profit from it provided that the rules that are in place that keep or dear Western Civilization from being destroyed are enforced. If this is the case, then maybe Wall Street insiders should brush up on their game theory knowledge to find out what they did wrong during the Bush Administration that created our present global economic crisis. Maybe there is something about that Sun Tsu’s Art of War being recommended by many as a required reading for aspiring business titans.