War finance is a branch of defense economics. The power of a military depends on its economic base and without this financial support, soldiers will not be paid, weapons and equipment cannot be manufactured and food cannot be bought. Hence, victory in war involves not only success on the battlefield but also the economic power and economic stability of a state. War finance covers a wide variety of financial measures including fiscal and monetary initiatives used in order to fund the costly expenditure of a war.[1]
War finance measures can be broadly classified into three main categories:
Thus these measures may include levy of specific taxation, increase and enlarging the scope of existing taxation, raising of compulsory and voluntary loans from the public, arranging loans from foreign sovereign states or financial institutions, and also the creation of money by the government or the central banking authority.
Throughout the history of human civilization, from ancient times until the modern era, conflicts and wars have always involved the raising of resources and war finance has since remained, in some form or the other, a major part of any defense economy plan. For example, economics played a key role in the Roman Empire. The brutal wars between the Roman empire and the Carthage proved to be very costly so much that Rome even ran out of money altogether at one stage. The Roman economy during this period were a pre-industrial economy which meant the majority of workers up to 80% of them were involved in the area of agriculture. Virtually all the taxes that would be collected by the government were spent on the military operations which turned out to be about also 80% of the entire budget in c. 150. Due to the huge financial burden that the maintenance of the military operations would have on the economy, techniques were thought up to help solve the burden. One such technique was the process of debasing the coinage. This was used in many countries that used coins from precious metals and they would debase the coins. This however didn't last very long as inflation started to increase. Various governments in charge attempted to curb the high cost of inflation through new reforms but some of their attempts just got steadily worse with the increasing bureaucracy that the government had to maintain as well as the huge amounts spent on welfare payments to the growing population worse.[2]
Loot and plunder - or at least the prospect of such - may play a role in war economies.[3][4] This involves the taking of goods by force as part of a military or political victory and was used as a significant source of a revenue for the victorious state. During the first World War when the Germans occupied the Belgians, the Belgian factories were forced to produce goods for the German effort or dismantled their machinery and took it back to Germany – along with thousands and thousands of Belgian slave factory workers.
When belligerents do resort to plunder, it only comprises a small percent of their war finance strategy. Only two states have financed more than 25 percent of their war by plunder, Germany during the First Schleswig-Holstein War and Chile during the Pacific War.
In the post-cold war conflicts, the belligerents [...] aim not to resolve conflict, but rather to sustain it, to take advantage of economic opportunities afforded by looting, rent seeking, taxing or siphoning off humanitarian aid and remittances, and by illicit trade.