She applied the “Page 99 Test” to her new book, How States Pay for Wars, and reported the following:
Fearing the worst-case scenario of a blank page, I did not think I would be so lucky that page 99 would represent the “quality of the whole.” Yet it does. Page 99 stresses the financial desperation and the war finance decision-making of the belligerent in my last case study: Russia during the Russo-Japanese War.Learn more about How States Pay for Wars at the Cornell University Press website.
At the onset of the Russo-Japanese War, the world bet (as reflected by the interest rates on belligerent sovereign bonds) on a Russian victory. Aside from a seemingly superior military, Russia was a seasoned veteran on the world’s credit markets. Whereas Russia was an experienced old-timer, Japan was a rookie. It was the first war in which Japan would incorporate taxation into its war finance strategy, as well as try its luck on international credit markets.
The world was wrong. Japan fought far more effectively than anticipated. More importantly, it was able to successfully extract taxes to pay for the war – due to the well-timed and well-executed bureaucratic consolidation of the Meiji Restoration – and establish its creditworthiness – due to a Chinese gold indemnity and aid from the New York Banking house Kuhn, Loeb, & Co.
Russia was now in a pickle. The war was longer and costlier than anticipated. Initially, the government attempted to pay for the war via taxation. A heavily regressive and weak tax structure, however, meant lower revenue than projected. The government then turned to domestic debt. Like taxation, this method of war finance proved short lived. The Russian government was zealously committed to maintaining their gold standard and domestic debt would violate the strict reserve ratio needed to maintain it. Hence, as discussed on page 99, the government would have to look outside its borders if it wanted to continue funding and, consequently, fighting the war.
Similar to the Russians on page 99, my book contains multiple instances of belligerents in a war finance quandary. Each war finance alternative – taxation, domestic debt, printing money, and external funding – has distinct political and economic costs and benefits. Thus, states face a series of tradeoffs when deciding how to finance their wars. How States Pay for Wars explores these tradeoffs and how states manage them.