Three Ways to Pay for a War
Every government that has ever fought a war has faced the same problem: war costs far more than peacetime revenues can cover, and it needs to be paid for immediately. Throughout history, states have had three tools available, and most wars combine all three.
Taxation is the most transparent mechanism — governments raise direct levies on income, property, or trade. It is politically difficult and practically limited: tax rates cannot be raised without bound before economic activity collapses or populations revolt. During WWI, income tax in the United States rose from 7% to 77% on top incomes. Even that was insufficient.
Borrowing shifts the cost to future taxpayers through bond sales. Governments promise to repay with interest, and creditors — domestic or foreign — provide funds upfront. This works as long as lenders believe the government will honour its debts. When creditworthiness collapses, this option disappears.
Monetary debasement — reducing the metal content of coins or printing paper money beyond what hard assets can support — is the oldest and most consistently used method. It is politically invisible in the short term: citizens only feel it when prices rise. The Roman Empire funded centuries of military expansion partly through progressive debasement of the denarius. Every major belligerent in WWI printed money after suspending gold convertibility. The pattern has repeated in virtually every large-scale conflict in recorded history.
The Sequencing of Desperation
States typically resort to these mechanisms in order. Taxation comes first because it is legitimate and direct. Borrowing comes second because it spreads the cost without immediate pain. Debasement comes last — and usually under duress — because it transfers wealth invisibly from savers and wage earners to the state, and from those who receive the new money last to those who receive it first.
The critical insight is that all three methods are ultimately taxes. Taxation is an explicit tax on current income. Debt is a deferred tax on future income. Debasement is an implicit tax on savings and money balances — the "inflation tax." Governments under wartime pressure almost always underestimate the second and third-order consequences of debasement.
Why Debasement Is Politically Irresistible
Debasement has a unique political advantage: the link between money creation and rising prices is delayed and diffuse. By the time prices rise visibly, the war may already be won or lost, and the connection to monetary policy is unclear to most citizens. This is not an accident. Keynes noted in 1919 that "not one man in a million" could diagnose inflation caused by currency debasement, while the same man would immediately notice a direct tax.
This asymmetry has made monetary debasement the go-to mechanism for financing wars that cannot be paid for through taxes alone — which is most of them.