Notes on War, Institutions, and Central Banking

Democratic Advantage and War

• Domestic institutions enable international power by their ability to encourage investment and mobilize social resources in wartime.

Democratic Advantage

• States with democratic institutions almost always win wars, a regularity known as the "democratic advantage."
• Potential mechanism: rivalry among states pressures sovereigns to provide political foundations for secure markets to enlarge future military capabilities.

Central Banking as Commitment Technology

• War induces reforms that help governments credibly commit to promises to pay their debts.
• Focus here is on a single financial reform: the innova­tion of central banking.
• A central bank provides a commitment technology that improves the government's ability to borrow amid intense military competition.

Case: Bank of England (1689)

• Britain's superior financial, economic, and military performance after 1689 rested largely on the establishment of the Bank of England.

Institutions as Public Goods

• Institutions resolve collective action problems, but institutions themselves are public goods; their origins are subject to the same dilemmas they are meant to resolve.
• This raises the question of why self-interested and free-riding individuals contribute to the creation of such institutions.

Origin and Diffusion Puzzle

• What explains the incentives of self-interested and free-riding individuals to contribute to the creation and diffusion of credibility-enhancing institutions like central banks?

Focus of Inquiry

• Rather than studying the entire range of protections, the article concentrates on the financial element of reform—the central bank—as a credibility-enhancing institution.

Summary of the Puzzle

• War can spur domestic institutional changes that improve credible commitment to debt and borrowing, with central banking as a key mechanism; understanding why these institutions emerge and spread involves analyzing incentives within a public goods framework.