Joshua N. Feinman, Peter M. Garber, and Michelle R. Garfinkel
To the extent that it has received academic attention, financial warfare has usually been relegated to a back chapter in primers on economic warfare. 1 Existing analyses aim chiefly at listing policies to prevent enemy countries from gaining resources abroad from exports of foreign financial securities. 2 The literature generally ignores the potential of financial warfare to disrupt internal taxation by an enemy government and, more generally, the credit allocation mechanism in an enemy country. 3 Apparently, the benefits from engaging in financial warfare are so obvious that economists have spent little effort to analyze how financial warfare contributes to a country's war aims. While application of financial weapons may hinder an enemy's acquisition of resources, it may also harm the country employing them, especially in the presence of retaliation by the enemy. To make the case that a country advances its war objectives by engaging in financial warfare requires a demonstration that financial warfare emerges as an equilibrium outcome in the gaming situation faced by the warring countries.
In this chapter we will develop a model to address whether countries behaving optimally in a war will employ financial warfare. We will pose financial warfare as an attack on an enemy's internal credit mechanism, resulting in inadequate funding of otherwise profitable investment projects and a decline in resources available for the war effort. We study financial warfare in the context of an unregulated, free-market financial and banking system.
To summarize our results, we find that financial warfare emerges as a Nash equilibrium prior to the major battles of the war. Since equilibrium levels of