Economic Crises and War – Historical and Theoretical Perspectives

World Economic Crisis: "First your money is gone – then you're ready for war"

The systemic link between hyperinflation, sovereign default, and war as a political-economic solution

The idea that states use political or military conflicts to resolve or distract from internal economic problems is well known in historical research, often under the term social imperialism. This suggests that wars can act as a "valve" to divert attention from domestic crises instead of solving them. Historical evidence indicates a close relationship between financial crises and military conflicts.

This paper presents selected examples (e.g., Germany after WWI and WWII, the USA during the Great Depression, Japan and Italy in the 1930s), analyzing whether wars have ever served as a “solution” for state debt, hyperinflation, or economic stagnation. Economic theories (Keynesianism, war financing, social imperialism) are considered to interpret the phenomenon. Key findings include: war financing via debt and money printing generally leads to inflation rather than wealth, and while military spending may temporarily boost employment, the long-term costs (destruction, reparations) are severe.

Historical Examples

Germany after World War I (1919–1923):

The massive state debt from the war was mainly financed through bonds and central bank loans. Between 1914 and 1918, the money supply increased fivefold, while industrial production stagnated. Even after the war, deficits and reparations continued, triggering inflation. The currency collapse peaked in 1923 (hyperinflation), as the government printed money to pay for the Ruhr occupation resistance and state salaries. The introduction of the Rentenmark in 1923 ended the inflation, and virtually all national debt was wiped out: about 154 billion Reichsmarks in war bonds became worthless.

Germany in the Great Depression and Nazi Rearmament (1929–1939):

The global depression hit Weimar Germany hard. When the Nazis came to power in 1933, they launched massive employment programs (e.g., autobahn construction) and rearmament. By 1937, unemployment had halved, and Nazi propaganda declared “full employment.” However, this success was based on heavy state spending and labor controls. By 1943, Goebbels called for “total war,” fully mobilizing society. Western democracies spent up to 80% of GDP on war efforts during WWII. In Germany, this boom led to total devastation after 1945.

USA during the Great Depression (1929–1945):

The Great Depression caused mass unemployment. The U.S. only recovered fully through WWII, with military production for the Allies driving growth and jobs. According to historian Robert Skidelsky, “Western democracies only recovered in and through the war.” Government spending surged dramatically, but this war economy led to postwar adjustment problems, including inflation and brief recession in 1946.

Japan and Italy in the 1930s:

Both countries faced severe economic stagnation in the 1930s. Japan’s 1931 invasion of Manchuria was partly driven by resource needs. Italy launched colonial wars (e.g., Ethiopia in 1935–36) to distract from internal crises. In both cases, militarization provided short-term economic stimulus but ended in collapse.

Country	Crisis	War/Military Action	Result
Germany (1919–23)	War debts, hyperinflation	— (no major wars post-WWI)	Rentenmark introduced; debts wiped via inflation
Nazi Germany	Depression, unemployment	WWII – aggressive expansion	Short-term job recovery; long-term destruction
USA	Great Depression	WWII – Allied war economy	Depression ended via war spending; later adjustments
Japan	Economic stagnation	1931–45: Expansion in Asia	Temporary boom; total defeat in 1945
Italy	Debt, economic crisis	Ethiopia war, WWII	Militarization failed; economy collapsed
Russia/USSR	1917 war crisis, 1998 debt crisis	WWI, WWII	1917 revolution; 1998 default, no war
China	Hyperinflation, civil war (1940s)	War with Japan (1937–45)	Collapse of Kuomintang; Communist takeover

Economic Analysis

Keynesian War Economics:

According to Keynesian theory, large-scale government spending (e.g., military buildup) can reduce unemployment and stimulate demand during economic downturns. Indeed, wartime production in the U.S., U.K., and Germany during WWII boosted industrial output and reduced joblessness. However, this "military Keynesianism" only temporarily masked structural issues. Civilian consumption shrank, and postwar inflation and conversion challenges returned.

War Financing and Inflation:

Wars are often financed through debt and central bank money creation. In WWI Germany, the government financed nearly all war expenses through loans and printing money, not taxes. This money supply explosion caused hyperinflation. In 1923, war bonds worth 154 billion marks were devalued to mere pennies. Similarly, WWII German war production relied on money printing, hidden behind price controls and rationing. In 1948, postwar inflation culminated in a currency reform that wiped out most private savings.

Social Imperialism and Diversion:

Social imperialism theories suggest that regimes may externalize domestic problems by launching wars. Hannah Arendt remarked that Europe's outdated systems could only be "solved" through two world wars. The Great Depression is linked to the rise of fascist expansionism in Germany, Japan, and Italy – all using war to distract from internal collapse.

Total Cost of War:

Economic studies show that war is extremely costly in the long term. Beyond direct military expenditures, the destruction of infrastructure, civilian casualties, and postwar reparations vastly outweigh any temporary benefits. A study by the Austrian government confirmed that wars are economically "unprofitable", creating lasting impoverishment.

Debt Cancellation via War:

While war can devalue or erase domestic debt through inflation or reforms, modern international financial systems make debt default via conquest ineffective. Most modern defaults are resolved through restructuring or inflation, not military conflict.

Conclusion

The historical and theoretical evidence suggests that wars do not solve underlying financial or economic crises, but only distract or postpone them. After WWI, Germany’s debt was wiped out through hyperinflation, not through war. WWII war economies in the U.S. and Germany created short-term recovery but at catastrophic human and economic cost. Postwar booms resulted from peace policies, such as currency reforms, the Marshall Plan, and integration—not war itself.

Modern economic theory is clear:

war as an “economic fix” is a myth.

While war spending can stimulate demand, it leads to inflation, debt, and destruction. Sustainable economic recovery depends on structural reforms, not military aggression.

War