The History of War and Fiscal Policy

–excerpt from The Price of Liberty

In his first book, Robert Hormats examines with extraordinary clarity and vivid detail how America has financed its wars and arrives at the damning conclusion that the current war on terrorism “has replaced Vietnam as the poster child for how not to finance a war.”

For board directors, foreign affairs are not mere sport but an odds-maker’s guide to opportunity and risk. In order to properly counsel and help guide the globe-trotting efforts of companies, it is imperative that directors are in the know about the larger geopolitical scene. Hormats provides an expert view not only of the historical matter but comments trenchantly on how success and failure on the battlefield is indebted to political leadership, not dissimilar from the world of business. During the years following 9/11, Hormats, the vice chairman of Goldman Sachs, says his consideration for how the Bush Administration was funding the war grew into a personal curiosity about how previous wars were financed. He was further inspired when he found that a pivotal meeting more than 200 years ago occurred less than three blocks from his office in lower Manhattan. A modern office building now sits at 57 Maiden Lane, once the site of Thomas Jefferson’s New York home. It was there that Jefferson, Alexander Hamilton, and James Madison hammered out a compromise on how to repay the debt incurred by the states during the American Revolution. “It was a moment in America’s history—one like many that have followed over the centuries—that underscored how decisions on financing the country’s security have proven to be a catalyst for shaping its institutions and core values,” writes Hormats.

The war on terror is different in the most fundamental of ways. As with any military engagement, there are fresh images of horror and incalculable losses of lives and property. From a fiscal policy standpoint, however, Hormats argues that this war is unprecedented because it has been waged without a tax increase, without cuts in domestic spending, and with loans largely made, not to the American people in the form of bonds, but to foreigners in the form of securities. It has also been funded almost entirely through supplemental budget requests to Congress, passage of which becomes less assured as the public turns against both the war and its handlers.

Wartime financing, Hormats says, is about raising money and engaging the hearts and minds of the American people to support the war. “Enabling Americans to make a contribution when troops are fighting overseas is not just expected, it’s a moral obligation,” he said during a recent phone interview. This notion of “capitalizing patriotism” grew from bond drives during World War I. Following President Bush’s declaration of the war on terrorism, Americans were not told to buy bonds, to ration critical resources, or to support a tax increase, instead the American public was told to shop.

By comparison, Lincoln regarded borrowing during the Civil War “not only as a technique for raising large sums of money but also as a way to tie large numbers of Northerners to the Union’s cause,” Hormats writes. “For [Lincoln], the broader participation in war bond offerings, the greater the number of individuals and families with a stake in the Union’s success.”

The war on terrorism has been entirely funded by deficit spending and Treasury securities, more than half of which have been bought with foreign capital. Hormats warns that, like the Cold War, the war on terror poses unique fiscal challenges: “It is likely to last for decades and, consequently, will require a long-term financial strategy. Early Cold War presidents, Truman and Eisenhower, reached deep into America’s history, and followed George Washington’s imperative that policy should serve the needs not only of the current generation but also of future generations and Alexander Hamilton’s principle that sound national finances are a prerequisite for sustaining the country’s military strength and security, and thereby reduce its vulnerability to its enemies.”