Wednesday, May 28, 2025

A flawed financial system inevitably creates wars

The assertion that a flawed financial system inevitably creates wars is not fully supported by historical evidence or economic analysis, though there are connections between financial systems, economic conditions, and conflict. Financial systems can contribute to the conditions that lead to war, but they are not the sole or inevitable cause. Below, I explore this relationship using historical and contemporary perspectives.

Financial Crises and War: Historical Linkages

Financial systems under stress can exacerbate tensions that may lead to conflict, but they do not directly cause wars. For instance, the Great Financial Crisis of 1914, triggered by the assassination of Archduke Franz Ferdinand and escalating diplomatic tensions, demonstrated how a breakdown in financial markets—such as the closure of the London Stock Exchange and runs on banks—can coincide with the onset of war. However, the crisis was a reaction to geopolitical events rather than a cause of World War I. Markets initially underestimated the risk of war, but once Austria issued a belligerent ultimatum to Serbia, fear replaced greed, leading to a scramble for liquidity and market crashes4. This suggests that financial systems can amplify existing geopolitical tensions rather than originate them.

Similarly, economic interdependence through financial systems has often been thought to prevent conflict, as argued by economist Norman Angell in 1910, who believed that the interconnectedness of modern finance made war irrational. Yet, history disproved this notion, as Europe descended into war in 1914 despite deep financial ties, and more recently, Russia's invasion of Ukraine in 2022 occurred despite economic links like the Nord Stream 2 pipeline5. This indicates that a flawed or fragmented financial system does not inevitably lead to war, nor does a robust one guarantee peace.

Economic Conditions and Conflict Financing

Economic inequalities and failures within financial systems can create fertile ground for conflict, particularly in developing countries. Research highlights that poverty, economic stagnation, and inequalities between groups often underlie violent conflicts. These conditions can motivate groups to fight for redress when political solutions are unavailable, or provide private incentives for individuals to engage in war through looting, illicit trade, or profiteering3. Moreover, in war economies, conflict financing—where armed groups control resources like drugs, diamonds, or timber—can sustain and escalate violence. Insurgents and incumbents alike target economic infrastructure to deny opponents revenue, further destabilizing formal economies and increasing reliance on informal ones1. While flawed financial systems may enable such predatory financing by failing to regulate illicit flows, they are not the root cause of the conflicts themselves.

Modern Economic Shocks and War

Contemporary examples, such as Russia's invasion of Ukraine, illustrate how war can compound existing economic challenges rather than being caused by them. The conflict has exacerbated global inflation, food insecurity, and poverty, particularly through disruptions to wheat and fossil fuel supplies from Russia and Ukraine. However, these economic shocks are consequences of the war, not its origin. Preexisting inflationary pressures and supply chain issues were already present due to post-COVID-19 recovery policies, and the war simply worsened an already difficult situation2. This suggests that while financial and economic systems can be strained by conflict, they do not inevitably provoke it.

Conclusion

A flawed financial system can contribute to the conditions that make war more likely—through economic inequality, failure to regulate conflict financing, or amplifying geopolitical crises—but it does not inevitably create wars. Wars often stem from a complex interplay of political, cultural, and economic factors, with financial systems playing a supporting rather than a determinative role135. Historical and modern cases show that even interconnected or robust financial systems cannot prevent conflict when geopolitical tensions override economic rationality45. Thus, while flaws in financial systems can exacerbate risks, they are neither a sufficient nor necessary cause of war.

Citations:

  1. https://www.files.ethz.ch/isn/164674/738e4d8dd99cc71b53297ad29b01bae1.pdf
  2. https://www.imf.org/en/Publications/fandd/issues/2022/03/the-long-lasting-economic-shock-of-war
  3. https://pmc.ncbi.nlm.nih.gov/articles/PMC1122271/
  4. https://www.lbma.org.uk/alchemist/issue-73/the-great-financial-crisis-of-1914
  5. https://www.economist.com/special-report/2024/05/03/how-the-financial-system-would-respond-to-a-superpower-war
  6. https://ideas.repec.org/h/elg/eechap/18828_8.html
  7. https://watson.brown.edu/costsofwar/costs/economic
  8. https://www.bis.org/speeches/sp011213.htm
  9. https://www.youtube.com/watch?v=3bdhiA0CiFQ
  10. https://academic.oup.com/cje/article/33/4/563/1730705

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