How do you pay for a war?

Answers vary. If you arre fighting a war of agression, and if you win, you pay for the war with plunder. You take the enemy's resources for yourself and use them in place of other, more expensive resources. Another way to profit from the wara is to corner the market and sell the appropriated resources to others at inflated prices. If you loose, you pay for the war with your own resources and labor to your disadvantage or perhaps to your complete ruin. If you do not win, and are not conquered, as in a stalemate or the late discovery that the rewards are not worth the sacrifice, then you have to find a way to reduce the war debt without selling off your own resources. The tried and true way of reducing real war debt is to reduce the value of the currency which has been promised to pay back the holders of the war debt.

The result of this action, in common language, is inflation. The way that you do it is to start printing, and spending, more money than can be backed by real wealth. In a free or lightly regulated economy this will reduce the value of the money, or even make it worthless as happened with Confederate money during and after the Civil War. Since the actual debt is locked in at the previous value of the money you get a real after the fact discount. In other words if you promised to pay for a bullet in dollars which were worth an ounce of gold but which are now worth only a half ounce of gold, you get the bullet for half price. Who loses? The holders of the debt. Who wins? The buyer of the bullet.

Ok, so who holds the debt and who bought the bullet? Well, in a global economy, the overall economy of the aggressor is used as collateral for the debt. The aggressor economy is seen globally as being a good investment and other nations put their money into it in hopes of getting a good return on their investment. Often this is seen as priming the pump; the loaning country will put money into the aggressors economy so that the aggressor will buy goods, perhaps arms, perhaps consumer goods, from the country making the loan. They do this by buying the currency of the aggressor country and thus making the currency seem to have more value or by selling goods to the aggressor at a discounted value, which has the same effect. The increased value of the aggressors currency allows the aggressor to have the funds to launch the war. The loaning country is gambling that the aggressor will win and that the aggressor will pay them back with money that is more valueable than when loaned.

There is another holder of the debt and that is the citizenry of the aggressor country. These citizens have invested in the economy of the aggressor nation, either by buying equity in the war machine or by being obligated to pay future taxes towards the war debt. There is also a middle operation in the finance of the war that makes a nice profit off of all the transactions regardless of whether the war is won. These people are generally smart enough to trade in currencies and commodities which will not loose value.

So, you fought the war but muddled it and did not get the plunder and cheap labor you thought you were going to get. Your war debt is pegged to a specific value of currency that is not tied to a specific commodity like gold or silver. How do you reduce the debt? You reduce its value relative to real commodities like gold. You do that by printing and spending more than you can borrow or tie to a real commodity. The result is that the currency loses value and you can pay back the debt with worthless money.

Sound familiar?