I. Introduction Many historians have argued that war, although destructive in nature, often causes surges in economic activity to provide for both the soldiers at the fronts and the citizens at home. Scholars such as Phyllis Deane argue that war tends to be both positive and detrimental on a nation’s economy. It is essential to keep in mind that these surges in economic activity do not necessarily outweigh the detrimental effects caused by war, especially in uniquely difficult and trying times of war. Specifically, Britain, the mid-eighteenth to early nineteenth centuries, experienced frequent and intense warfare which forced sectors of its economy to adapt to and mitigate the changes which normally affected a nation at war. The British economy dealt with wartime difficulties associated with rises in taxation, in foreign trade, and in financing wars themselves. Taxation, as a source of revenue to finance wars rose significantly, but the sums collected were often insufficient to alleviate growing debt. Foreign trade was often subject to embargoes, the politics of alliances, and privateering. Britain’s merchant class often faced the burdens associated with war. However, the case of the Continental System shows where Britain prospered despite the opposition it faced in commercial trade, making trade a practice where war did benefit Britain. In financing her wars, Britain borrowed heavily from the Bank of England, but after having been strained so much by multiple financial crises, the Bank could no longer supply the loans needed by the government. Eventually, the government had to borrow from the savings of the people in the form of issuing Consols and annuities. Generally each of taxation, trade, and war financing had more detrimental than positive effects upon Britain. II. War and its effects on demand
To understand the strains felt by an economy during war, one must observe the impact of war on the demand for goods and services. Generally it is agreed that war causes a higher demand for most products because a nation’s economy must provide the ships and weapons for soldiers as well as the ordinary domestic goods. In order to sustain the production of both types of goods during war, an economy must first divert resources from the ordinary industries into producing the necessary products for combat. Following the diversion of resources, the economy must then utilize the underemployed factors of production to sustain production levels in the industries where resources flowed into producing goods for fighting the war. The spike in demand brought on by war visibly increases production beyond the normal peacetime levels, and can attribute to growth during periods of war. However, in the absence of war, such increased demand does not necessarily occur.
When a war ends, the employment and production levels decrease back to peacetime levels. The effect can be potentially drastic because of the unpredictable nature of war. Without the knowledge of when a war would begin or end attributes to how sudden the subsequent increases in demand and production may occur. While stockpiling goods proved to be an effective way of offsetting the initial demand with the outbreak of a war, as a war came to a close the sudden shift in demand and supply was undoubtedly drastic for the economy. With the frequent occurrence of warfare from 1750-1815, it follows that the effects on demand and supply in a nation’s economy happen more often as well. The general effects of war on an economy require insights, specifically, into those of the economy that may have otherwise been unaffected without the outbreak of war. III. Trade
During periods of war, Britain’s international trade was subject to embargoes, the tensions created by alliances, and privateering. The dangerous state of the seas during war made trade routes more circuitous, and trade itself much riskier, leading to higher prices of exports and imports. However, as Britain increased its dominance of the sea in the eighteenth century, the risks for merchants trading diminished, yet threats still existed for ships and their crews. Often, a merchant would take out insurance policies on its shipments of goods during war times, but the added expense of insurance was relatively miniscule compared to difficulty in organizing a crew with the threat of impressments. Times of war often forced merchants to raise their wages for crew members as an incentive to accept the risk that the prospective crew member looking for work could find himself captured and placed under the rigorous strains of the press gangs of enemy privateers. With evidence in contract books during the Seven Years’ War, Ralph Davis supports the difficulty for a merchant to organize a committed crew with the fact that there are many entries marked ‘run’, meaning that desertion was common and that ships would often go through two or three crews before one could be organized for a voyage to even occur (Davis 325). Davis illustrates how dreadful the thought of impressment was for prospective crews, but it was possible for an individual to secure protection against impressments. With the given possibility of protection at a fee, it was common for these protective rights to be ignored altogether. Losses of merchant ships in warfare noted by Ralph Davis varied in different wars with insignificant losses during the Seven Years’ War and quite the opposite during the War of American Independence with losses totalling over three thousand vessels (Davis 318). The risks for merchants in participating in trade during war times were great economic obstacles because of the sacrifices made in time and safety, but the existence of alliances often disrupted trade levels more drastically. The increased risk of threats to the shipping industry was undoubtedly an effect created solely by war. Most notable of alliances impacting trade occurred during the War of American Independence and the Continental System during the Napoleonic Wars.
Alliances proved to be detrimental for British trade because of the lack of trade occurring between rival nations along with the blockades and trade embargoes enacted. The key example for demonstrating the detrimental aspect of alliances is the War of American Independence because Britain fought the war without allies. Tensions began with the colonists in 1765-1770 and resulted in trade embargoes with the British, hurting their export sector. The British ameliorated the situation by repealing some of the duties imposed by the Townshend Acts; all taxes save the tea tax were repealed. Unremedied tensions with the colonists eventually resulted in the War of American Independence, one that progressively became more difficult for Britain to fight. During the war Britain experienced declining levels of exports as their list of enemies grew, and in this period, Britain undoubtedly faced the greatest opposition from the outbreak of the war until peace was finally settled in 1783. With declining exports it was difficult for Britain to reasonably sustain its levels of trade. The domestic sectors of the economy must have felt the consequences in struggling exports because no allies were present to import goods from Britain and thus provide a source of financial remedy to the strained shipping industry. The difficulties faced by the shipping industry and the presence of alliances created problems for the British sustain trade levels that were typical during peace times. The problems encountered by the shipping industry during war are crucial to note regarding how both continuing and sustaining trade becomes more costly and straining on the British economy. The only anomalous circumstance to the general detrimental effects war has on trade is the Continental System imposed by Napoleon.
During the Napoleonic Wars, Britian faced the Continental system enacted by Napoleon which was a means of cutting Britain off from all trade in continental Europe; it was a period where Britain atypically benefitted from embargoes and non importation agreements. The Berlin Decree of 1806 brought all of the nations either neutral or under Napoleon’s rule together to end trend with Britain as a means of weakening the British economy. Interestingly enough, the Continental System actually weakened continental Europe more than Britain because of Napoleon’s tariff policies. Napoleon hurt trade among the nations within the Continental System by placing tariffs on all goods coming into France, but prevented other nations from imposing tariffs on French goods. Also, despite the fact the system was intended to hurt Britain, the GNP of Britain actually increased each year under the Continental System. Britain managed to prosper despite the Continental System because Napoleon clearly lacked consideration for the trading opportunities on the other side of the Atlantic. Without increasing the volume of trade to the United States, Britain would have no means of getting the goods it required. The impact of the Continental System is peculiar regarding its beneficial effects upon Britain, yet the fact that Britain could not trade with the continental European countries must strain certain British Industries. While evidence suggests that warfare does not always detrimentally impact trade, it is hard to ignore the difficulty for merchants with the presence of alliances, embargoes, and privateering in a period of war. The effect of war upon trade adequately shows the difficulties associated with the practice, but the rising trend in taxation in Britain shows the burden upon the people and their ability to consume. IV. Taxation
Britain saw an increasing trend in the rate of taxation as wars became more costly from 1750-1815, and while they were necessary to provide funds to mitigate the extensive borrowing to finance a war, their effects were burdensome upon the people. Taxes were essential as a flow of funds to aid in mitigating the growing debt, but as debt grew, so did the rate of taxation. J.F Wright notes that taxes mitigated growth of debt because the funds were used to pay off the accumulating interest. Taxes as a means of financing war were insufficient in the mid eighteenth century, and growth of debt was often not met by tax revenues. From the Seven Years’ War onward the extent of the increase of taxes foreshadowed what Britain’s frequent and expensive wars held for the nation. For example, revenues raised by the British government in the 1760s were twice the amount of total gross fixed capital formation, and half as high as total investment (Mathias 117). The data addresses an important point that as taxation increases, consumption decreases and in order to consume to satisfaction, an individual must give up savings or investment spending. As Peter Mathias writes that tax revenues grew consistently faster than the national income, he also notes that neither growth of national wealth in Britain nor population growth sufficiently mitigated the rising debt (Mathias 121). Data shows that from 1750-1821 the percentage growth of taxes often exceeded the percentage growth of national income supporting Britain’s need to tax as a means of mitigating the interest growth on debt. In conjunction with the growing trends occurring in other sectors of the British economy, there was an increasing demand upon the financial resources available. The growth in other sectors of the economy could be referred to as the spreading roots of the Industrial Revolution, but with rampant borrowing and increasing taxation in existence the sectors needing funds were deprived of the financial resources needed.
Information provided by J.L. Anderson suggests differently, that “[...]the early practice of borrowing to pay for the war was of more benefit than is generally recognized, both in maintaining employment levels and in preserving the momentum of advance during a possibly critical period in British economic development”(Anderson 618). His support continues to state that the government did not parasitically drain the economy by taxation. While Anderson’s comments hold merit, they are reinforced by the trend for nations at war to make use of underemployed human and physical capital. The crucial discrepancy lies with the fact that once war ends, the underemployed resources used during war revert back to their idle state. Interestingly enough evidence in Anderson’s article support the idleness of both labour and capital following the Napoleonic Wars stating that, “In the postwar period both capital and labour were idle, a depression caused by inadequate aggregate demand, rather than by temporary frictions involved in the transfer of resources from martial to peaceful purposes”(Anderson 617). Yet, when war arrives, increased demand for goods comes with it, and after it leaves, the demand for such goods vanishes. The inadequate aggregate demand referred to by Anderson can be traced to war demand for goods, and thus makes war an event that can introduce a demand shock that can be devastating to an economy if there is no ability sustain demand following the war. From 1750 onward the wars intensified greatly from the Seven Years War to the Napoleonic Wars such that expenditure grew in relation to war’s rising intensity. After the War of American Independence, taxes followed a sharp trend upwards as Britain again plunged into war with France with the start of the Napoleonic Wars in 1793. The expenditures during the Napoleonic Wars were so great that national debt grew to the point where Britain did not overcome their debt, nor did taxes as a portion of national income fall below the levels of the 1790s until the 1830s.
T.S. Ashton reveals many crucial facts regarding the impact of taxes upon the state of the economy. Ashton also demonstrates the inelastic properties of some goods taxed. Beer for example saw an increased duty of 3s a barrel and led to a fall in consumption from 4.06 million barrels to 3.8 million barrels. The decline in consumption can also be connected with the fall in revenue from the increased tax. The detrimental effects of taxes and rising taxes among the general population show reduced consumer spending as well as revenues. The methods of raising duties did not always prove to work because if consumption decreased sufficiently, the increase in taxes would not justify the decrease in consumption. The circumstances presented where taxes result in decreased consumption and revenue show that tax policy may be ineffective in practice. V. War Financing and Bank Crises
The cost of a war lies solely on the nation itself and achieving victory may not justify the great expense to the nation. Britain saw an upward trend in expenditures in financing her wars, and with growing expenditures came growing debt. The primary funds for debt came from savings in the form of issuing annuities and Consols. The increasing percentage amounts of savings borrowed during each war show truly how dependent Britain was on its nation’s savings. In the years of The Napoleonic Wars, the amounts borrowed from savings were greater than total savings. J.F. Wright’s concluding point states that wars generally created a growth in demand for savings, and that such high demand for savings from the government makes it reasonable to assume that savings were often diverted from peacetime purposes into the funding of warfare. The cause for the heightened demand for savings can be seen as a result of the immense strain of war on the Bank of England and the subsequent financial crises endured by Britain.
The British banking system while lending funds to the British government encountered several crises, by-products of war that further strained the British economy. The first crisis followed the Seven Years War as a result of falling prices. London firms were faced with supplies of credit in unmarketable goods. While having little detrimental effect upon the British economy, this first credit crisis showed the vulnerability of the British banking system. The second major financial crisis brought on by war occurred in 1783. The War of American Independence was coming to a close, and Britain’s military expenditures led to an export of gold. Reserves of the Bank of England fell from 4.2 million pounds to 2 million pounds from August 1780 to August 1782 (Feavearyear 176). Peace was reached in January 1783 and with it came a surge in trade, increasing the amount of country bills requiring discount in London. The amount of London bills that also required discounting increased, but the Bank of England did not increase the quantity of notes in circulation, in fact it decreased. Measures were taken by the British government to alleviate the growing crisis by providing a loan to the Bank of England. However, the loan only had the effect of increasing note circulation and causing stocks of coinage to decrease. The period of this crisis drained the reserves of the Bank of England because of the volume of raw materials being imported from abroad. Another crisis occurring in 1793 was brought on by the threat of war with France and created fear amongst holders of country bank notes. The initial spark for this crisis occurred from April 1792 onward because a desire in Britain for action against France instigated caution among country bank note holders. Sir Albert Feavearyear points out the crucial difference between the crises of 1783 and 1793 with the former brought on by an external drain caused by expanding credit and the latter crisis caused internally by shrinking credit (Feavearyear 178). Feavearyear continues to point out that the directors of the Bank of England noticed the significance of the difference between the two crises, and the directors knew that restricting discounts could only add to the current feelings of nervousness (Feavearyear 178). After France declared war on Britain, fears were realized as Country bank’s credit collapsed. The collapse of credit created widespread panic throughout Britain. In efforts to remedy the situation, the Bank did not have the resources to give relief. Government aid in the form of Exchequer bills and the issuing of loans provided relief to those most adversely affected by the credit crunch.
The two major crises of 1783 and 1793 present interesting cases for examining the effects of war on the financial system of Britain. Generally, the sensitivity of the financial system to the outbreak of war and the resulting effects on the credit of Britain highlights concerns regarding how Britain managed to finance the Napoleonic Wars. In 1794 with the Napoleonic Wars underway, the government began making requests for loans from the Bank. After experiencing strain on its reserves from the crisis of 1793 the Bank opposed the requests for loans, but despite their protests their reserves plummeted. Reserves were drained by the loans and a renewed confidence in the French assignat that caused gold to flow out of Britain into France. From 1794-1796 reserves fell from about 6 or 7 million pounds to 2.5 million pounds, showing the intensity of the drain upon the bank (Feavearyear 179). Another crisis in 1797 was caused by the threat of invasion by Napoleon, and again resulted in panic among the people creating demand for withdrawals as well as note redemptions that together drained the reserves of the Bank. With the Bank under such great strain, the government was forced to seek loans from the public. The diminishing reserves and strain upon the Bank were major factors inducing the government to increase their borrowings out of savings by issuing annuities and Consols.
Annuities and Consols issued by the government were a significant source of funding for war expenditure. Within table four lie more intriguing numbers, such as those under the row labelled, nominal debt increase. The amounts listed there represent the increase in the unredeemed debt raised in Britain during the war periods. Because the annuities were to be paid off later makes it reasonable to assume that the economy did not see the proper stimulation for industry as it should have. With vast sums of pound sterling waiting to be paid back to the owners of annuities, the funds were there to finance industrial growth, they were simply locked up until maturity. Simplified, it would be reasonable to state that the savings utilized in purchasing Consols and annuities postponed investment for the industrial revolution. Table five gives the total amounts raised by the issuance of annuities and Consols during each period of war and gives an idea of how much money was being funded into war. Taking into consideration that the purchase of annuities and Consols from savings funds were necessary for the government to finance the Napoleonic Wars, investment funds to stimulate industrial growth were difficult to procure. VI. Conclusion
Following the periods of war after 1815 Britain’s economic well being felt the straining effects of taxation and war expenditure. Mathias provides support for the strained state of Britain by saying: “[...] while the financial impact of the wars between 1793 and 1815, being on an unprecedented scale both in terms of current levels of taxation and the extent of borrowing, cast a long shadow over the peace-time generation after Waterloo” (Mathias 121). By foreshadowing the detrimental effects of taxation and borrowing, Mathias shows the culmination of the constant strain Britain faced. Continuing to show the added effects of taxation, borrowing, and stressed trade, Mathias notes:
“Not until the 1830s did peace, continued economic expansion and demographic growth bring the share of taxation in the national income once again below the levels of the 1790s and finally overcome the cumulative financial burden which eighteenth-century wars has placed upon the British economy” (Mathias 121-122).
Here Mathias shows the scope of the difficulty faced by Britain in overcoming the economic burdens brought by war. From the amount of time it took to mend the damages from war, it is evident that the losses occurring during war and the problems following war accumulate creating more damage than what could have been immediately perceived. With each individual aspect of taxation, borrowing, and stressed trade examined to reveal their detrimental effects, the combined effect following a long period of war is quite drastic and shows the extent of the economic damages of war.

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[ 1 ]. Deane states that, “...war involves physical destruction of real capital, diversion of scarce labour, capital and raw material resources from productive to unproductive uses, and an increase in the risks and uncertainties of mercantile or manufacturing enterprise...”, which attribute to being detrimental for economic growth. The demands of war and their effects cannot be ignored because they present evidence against the detrimental effects of war. Deane notes that the demands of war make use of underemployed factors, expands certain industries creating falling costs, and establishes organization of financial systems to promote innovation. Each of these points made by Deane shows the importance of war stimulating demand in an economy. Dean, Phyllis, ‘War and Industrialisation’, pp. 91 J. M. Winter, ed., War and Economic Development: Essays in Memory of David Joslin (Cambridge, 1975).
[ 2 ]. Warfare generally creates a stimulus for the economy by making use of underemployed resources. While the stimulus increases output and demand in most industries, the sustainability of demand and supply increases must be addressed. For example an unsustainable demand shock created by a war could likely cause a depression.
[ 3 ]. The unique case of the Continental System is crucial to note because of the fact that it did not harm Britain as Napoleon intended.
[ 4 ]. Given the unpredictable starts and stops of wars, it follows that the shocks in demand and supply were just as unpredictable.
[ 5 ]. Utilization of convoys for securing the transport of goods attributed to the cost of trade. Cruisers necessary to protect merchant vessels were inadequate in number, yet did have notable effect in protecting merchants transporting their goods. The convoy was disadvantageous to trade because it slowed the transport of goods because the assembly of the convoy was quite time consuming.
[ 6 ]. Britain’s dominance of the seas cannot be ignored in discussing trade, and while their power remained supreme throughout the wars from 1750-1815, the continual strain upon the merchant marine was costly to the nation. Notably the cost can be seen in Britain’s need to place more resources into the production of naval ships, and to get the necessary resources Britain had to shift resources from one sector to another.
[ 7 ]. Such rights were difficult to acquire and the general disregard of the protective rights against impressments was a result of the need for a navy to have supplies of men to crew their vessels.
[ 8 ]. The two separate wars are crucial to examine because each shows how trade embargoes are circumstantial, and thus affect Britain’s trade differently.
[ 9 ]. The year 1765 marked the beginning of a dullness of trade from many sectors with relatively low exports from 1766-1780, and the stagnation of trade was attributable to the Colonists’ refusal to accept the Townshend Acts. Ashton, T.S., Economic Fluctuations in England, 1700-1800 (Oxford, 1959), chapter 3,‘War, Trade, and Finance’, pp. 61.
[ 10 ]. While fighting the American War of Independence without allies, no loans or subsidies were made by Britain to foreign powers to sustain the export industries. Ashton, T.S., Economic Fluctuations in England, 1700-1800 (Oxford, 1959), chapter 3,
‘War, Trade, and Finance’, pp. 62.
[ 11 ]. Britain saw their list of enemies grow as France joined in 1778 with Spain following in 1779. The Irish felt a need to oppose the British and did so by creating non-importation agreements. In the Baltic, the powers in the north combined efforts to create the Armed Neutrality, restricting access to the Baltic. War also broke out in India with the Mahrattas and Haidar Ali. The decline in exports can largely be attributed to the lack of loans and subsidies to allies to sustain export industries. The lethargic pace of the peacemakers may explain why following the war there was a lack of a sudden boom in exports, but a progressive improvement from 1782-1784. Ashton, T.S., Economic Fluctuations in England, 1700-1800 (Oxford, 1959), chapter 3,
‘War, Trade, and Finance’, pp. 62.
[ 12 ]. Heckscher, E.F., The Continental System: An Economic Interpretation (Oxford, 1922).
[ 13 ]. As tax rates increased it would almost always follow that consumption on the good taxed would fall, and the revenue from that tax would fall also. Tax policy was often subject to elasticities of goods taxed, and because the reaction to an increase in tax was often difficult to measure made the entire process often counterproductive if the resulting effect of increased taxes did not result in increased tax revenues.
[ 14 ]. Refer to Table 1.
[ 15 ]. Demand shocks caused by war are largely caused by the need for a nation to make use of the under employed resources of a country. With employment and demand increasing during war, the growth occurring in industry cannot be maintained following the war unless the demand can be sustained. The depression following the Napoleonic Wars may be largely due to the fact that greater use of unemployed resources was not maintained, which is why capital and labour were idle as Anderson suggests.
[ 16 ]. Refer to table 1.
[ 17 ]. Ashton, T.S., Economic Fluctuations in England, 1700-1800 (Oxford, 1959), chapter 3,‘War, Trade, and Finance’. pg 65.
[ 18 ]. Table 4. The percentage of debt funded by savings increases from 80% in the Seven Years’ War to being well over 100% of savings in periods of the War of American Independence and the Napoleonic Wars. The trend of increasing reliance on savings for financing war expenditure shows the amount of strain the Bank of England was under that made it necessary for Britain to borrow from savings.
[ 19 ]. Wright, J.F., ‘British Government Borrowing in Wartime, 1750 - 1815’, The Economic History Review, 2nd ser., 52:2 (May1999). Pg 360.
[ 20 ]. The extensive drain on the Bank by the many crises eventually led to payments being halted, and a loss in confidence of the country banks. The Bank reacted by introducing a paper money that was not redeemable for precious metals. The impact the introduction of this currency had on the Bank was significant, it helped the reserves recover and renewed confidence in the country banks. The need to move away from the gold standard coinage to paper was largely due to the strain on reserves brought on by war in the form of massive note redemptions and government loans. Feavearyear, Sir Albert, The Pound Sterling: A History of English Money (2nd ed., rev. By E.V. Morgan, 1963), pp. 181-182.