CHAPTER VIII
THE COSTS OF WAR
8.1 – Introduction
Wars are expensive and must be paid for. Latin American governments dedicated a very high percentage of their total expenditures to the military. We saw how unstable Uruguay was; what effects did instability have on public finances? Buzzetti (1969:96) tells us that, in 1837, of a total public expenditure of $1,013:000, military expenditures reached $570:000, or 56.3%. Add to this the repayment and servicing of the foreign debt and the payment of civil servants and it becomes clear that there was very little, if any, left for development, economic or otherwise.
Mexico, after Independence, was politically dominated by the Armed Forces and military expenditures regularly absorbed over half of all public expenditures (Halperin Donghi, 1972: 22). This generated chronic budgetary deficits. Lopez Rosado states this clearly:
“Ordinary budget revenues were never sufficient to cover expenditures during this period. This situation was due to the /military expenditures/…which by themselves absorbed the largest share of the revenues. There were instances, such as in 1822; 1825; 1832-33; 1840; 1841 and 1846 in which they represented between 70% and 90% of all expenditures. This was well known to the country’s leaders, but not one could free the country from such a heavy burden as coups and rebellions were endemic to the nation…”(1963:291).
Although there was variance among the proportions of the central governments’ budgets taken up by military expenditures, they were very high by today’s standards. In several countries, such as Mexico, the figure was almost always above 50%, were there rebellions or not.
Major civil wars and international wars, of course, made things much worse. Rafael Nunez, Secretary of the Treasure in Colombia during Presidente Mallarino’s administration described his country’s situation:
“It is difficult to ascertain how much the country invested in military expenditures due to the disorganization of public accounts during many years and because it is impossible to estimate, even approximately, the gigantic sums wasted during these internal conturbations….when the present administration started /Colombia/ had missed eleven yearly payments of its foreign debt; the disastrous revolution of 1854 had just finished and it absorbed in seven months more than the country /normally/ spends in seven years of peace.” (Nunez, 1945).
Military expenditures fluctuated with political stability, both internal and external: in Brazil, the first imperial budget (1823) dedicated $3.064:086, or 65% of the total, to military expenditures. The Empire had just been started and there were many royalists who opposed the Empire and provoked conflicts even against the King of Portugal’s will and some of them even considered appointing a different king; also, there were republicans under the influence of the American and French revolutions. During the following two years, 1824 and 1825, military expenditures were reduced to less than 40%, but from 1826 to 1829 expenditures went above 50% due to the war with Argentina. After the war, these unproductive expenditures were drastically reduced. But in 1835 the Farroupilha Revolution began; and military expenditures, once more, increased substantially: the absolute expenditure level doubled from 1836/37 to 1837/38 and increased again in 1839/40, when it absorbed 56% of all expenditures (Lima Jr. and Gomes Klein, 1970:62-68). The war against Rosas, the Argentinian caudillo, brought about a new hike in military expenditures: they were less than 10 thousand “contos de reis” in 1845/46, but had to be increased to 14 thousand during the first year of war and then again to 20 thousand; after the war, they were reduced to 12 thousand. The war against Paraguay brought about a major increase in war expenditures: from 20,151 “contos” in 1863/64, to 37,830 in 1864/65; to 68,963 in 1865/66, reaching 87,445 in 1867/68. When it became clear who would be the winner, military expenditures decreased to $37,354:000 in 1870/71 and continued to decline thereafter (Castro Carreira, 1889).
Thus, military expenditures increase during times of war and civil strife, both in absolute terms and as a percentage of the budget. The financial and economic drama caused by armed conflict, however, does not end there: how is this paid for? The newly formed Latin American countries had to face enormous military expenditures with meager resources. How did they do it? Two solutions were common: deficit financing and borrowing. Special attention will be paid to budget disequilibria and to the foreign debt. This was due largely to the fact that the internal economy did not provide an adequate tax basis: very large proportions of the population lived outside the monetary economy and the widespread poverty did not provide a sound taxable basis. Those few who could pay higher taxes were the least likely to be forced to do it, as they had a strong voice in government. Even foreign trade, which traditionally provided the taxable basis in new countries of past centuries, had been dismantled and for decades did not provide a substantial taxable basis. Simply, there was nowhere to pump money from.
8.2 – Budget Deficits
Many Latin American countries enacted harsh policies and managed to balance their budgets for varying periods of time, just to see large deficits reappear in a few years as a result of sharp increases in military spending.
Colombia, marked by instability during the nineteenth century, is one case in point: its deficit was very high in 1866, nearly doubled by 1877 and reached catastrophic proportions by 1885.
TABLE VIII.1
COLOMBIA: NATIONAL TREASURY DEFICIT, SELECTED YEARS
YEARS Expenditures
1866 1,213,916 pesos
1877 2,259,983 pesos
1885 53,349,449 pesos
No country can cope with an increase in the budget deficit by a factor upwards of twenty in eight years! Colombia’s finances were a shambles and the state did not function as an instrument of development, social, economic or otherwise. Every administration’s most pressing concern was to pay the public debt, particularly the foreign one.
Brazil, in spite of a certain stability, also felt the pinch of budget deficits. The war with Paraguay, which Brazil won, left a strong imprint: the Imperial budget had been reasonably balanced for some years and its deficit was only 3% in 1863, an outstanding achievement even by today’s standards! But the war changed all: military expenditures more than tripled from 1863 to 1865, from twenty thousand contos to almost seventy. By 1867, military expenditures had almost quadrupled and stayed at a high level until 1870 when the fate of the war was clearly decided and expenditures went down to 37 thousand contos.
The relationship between absolute military expenditures and relative budget deficit is clear and is translatable in a correlation coefficient of +.91; the interpolation based on the regression predicts a 67% deficit with a 100 thousand contos expenditure. Logarithmic transformations offer a still better fit, with a correlation of +.93.
TABLE VIII.2 – BRAZIL
MILITARY EXPENDITURES, BUDGET DEFICITS AND THE WAR WITH PARAGUAY. (Data in contos de reis)
YEAR Military Expenditures Deficits
1863 20,151 3.0%
1864 WAR BEGINS
1865 68,963 51.9%
1866 66,010 46.4%
1867 87,445 57.1%
1868 76,018 41.9%
1869 73,664 33.0%
WAR DECIDED FAVORABLY
1870 37,534 2.3%
Linear correlation coefficient: +,91
Coefficient of determination: ,83
Regression constant: -19,43
Regression coefficient: ,000865
Standard error of estimate: 10,007
Logarithmic results: correlation coefficient: +0,93
This deficit was partly financed through printing money: the rate of increase was 3.6% and 3.3% in 1861/2 and 1862/3, respectively, but suffered a sharp increase until it reached the disastrous figure of 48.1% in 1868/9 (Lobo, 1973). This led Brazil to a steep inflation which was difficult to control. War, therefore, brought heavy budgetary deficits to Brazil and flooded the country with money, thus generating inflation. Elsewhere in Latin America, the same phenomenon took place. But unbalanced budgets and money printing were not the only negative financial consequences of war: public debt perhaps was a more serious one.
8.3 – The Debt
Latin American governments used another measure to face war expenditures: they resorted to heavy borrowing, both internal and external. Public debts soared and for decades plagued governments and ministers of finances. Uruguay was one of the many Latin American countries which experienced a chronic instability for decades, beginning almost immediately after Independence; this instability was reflected in the country’s public debt: from $151 thousand pesos in 1829, it kept climbing steeply to $1:195 thousand ink 1835; $25 million in 1852 and over $110 million in 1857!
TABLE VIII.3
URUGUAY: THE PUBLIC DEBT, 1829-1857
(data from Buzzetti, 1969:117).
YEARS Debt in pesos
1829 $151,000.00
1835 $1,195,000.00
1840 $4,108,000.00
1852 $25,074,000.00
1857 $110,334,000.00
The impossibility of paying this debt in the short run is obvious; the servicing of the debt alone was very heavy and some countries could not afford them. Loans were made on a very unrealistic basis or speculatively. Take Venezuela: it had to pay yearly 12 million bolivars in London (about 472 thousand pounds of the time); in a country in which only 0.5% of the national territory was occupied (about 387 thousand acres), and worked by only 650 thousand persons. This was an extremely heavy burden and could not be covered by the regular budget:
“The ordinary revenue was not enough to pay for the administration expenditures, not even the payroll. It was even less sufficient to make mortgage payments on the debt, and was insufficient even to pay the interests” (Picon-Salas, 1962:360).
Public debts, when they were paid, usually took the lion’s share of the public expenditures. In Nueva Granada, 1855, 48.7% were due to the public debt, to which we should add 8% of civil servants’ salaries and another 8% of in military wages and salaries which had not been paid in 1840, fifteen years earlier! Customs revenues, by far the most relevant ones, were mortgaged; in some cases foreign governments or enterprises directly administered customs. Although foreign debts started before Independence and kept increasing ever since, they did not increase as a linear function of time; sometimes they decreased, but soared in times of major civil strife or of war. Once more, the war with Paraguay provides a good example of the impact of war on finances: for 40 years, the Brazilian foreign debt was kept under control, around five million pounds; in 1850, it was reduced to about 4.5 million and in 1855 it was further reduced, to 3.5 million. The advent of the war with Paraguay, however, dismantled this relatively favorable situation: in 1865 the foreign debt had climbed above 14 million pounds sterling. Thus, war was disastrous for Brazilian public finances and yet Brazil won the war. Think now of what war did to Paraguay: the country was destroyed politically and economically; its debt, enormous, its population massacred. One estimates places the pre-war Paraguayan population at about 525 thousand inhabitants, reduced to 221 thousand after the war, of which only 29 thousand were adult males!
These debts lingered on: Colombia had the known Jaime Mackintosh debt. Mackintosh, a British citizen, who theoretically loaned the Colombian government to be a certain sum for the purpose of purchasing war hardware, a task which he also took upon himself. When the shipment arrived in Cartagena, it was seen that it was made of scrap materials, rusted, with ammunition’s caliber different from the guns’. The shipment was returned; nevertheless, Mackintosh floated this loan in Britain and many citizens purchased shares, formed interest groups and pressured the British government to protect their interests. That, it did. Colombia was forced to pay and, several decades later, in 1855, these payments accounted for 10% of all disbursements of the Colombian government.
By the turn of the century, some debts dating back almost one century were still immobilizing the budgets of some Latin American countries. In Central America, three fourths of a century after the dissolution of the Central America Confederation, governments were still burdened by payments of debts dating back that far, many of which they did not recognize as legitimate. Approximately one-fourth of public expenditures were taken up with these payments, from around 10% in the case of Honduras and Nicaragua, to 30.9% and 33.2% in Costa Rica and El Salvador, respectively. Observe that these are, approximately, the same figures that these governments spent with public works AND education together in the same year (1913).
Latin American countries were born in debt; the financial consequences of the chronic instability of the first few decades extended much longer; loans to pay for military expenditures were replaced with loans to pay loans; by turn of the century, only a few countries borrowed in a more realistic fashion and used loans to finance developmental projects. But these phenomena created a pattern, that of an important and sometimes choking relationship between Latin Ameriocan governments and foreign creditors backed by their respective governments. Given this pattern, the price of Independence still is being paid.
8.4 – Benefits from War
Granting that wars are almost always destructive and that the overall balance is negative for all concerned, some countries have derived benefits from war. Chile, the winner of the War of the Pacific (1879) gained territory and a source of income that became crucial for the country’s economic life. There is little doubt that the war was an imperial war and that it was backed by British interests.
The Chilean economy, which had grown fast as an export economy experienced a serious crisis in 1875, culminating in 1878 when Chile was forced to adopt “an inconvertible paper” strategy that allowed for an expansion of the internal means of payment, in spite of a deficit in the balance of payments. The nitrate mines just north of the border were the solution. The war paid off in spite of a slight decline in the prices of nitrate (5% less between 1874 and 1894 than in 1850), Chilean revenues from nitrate exports in 1914 were twelvefold what they had been in 1880!(DeCew, 1969:11). Nitrate exports became crucial and soon took the lead among Chilean exports.
TABLE VIII.4
SHARE OF DIFFERENT EXPORT ITEMS
IN THE TOTAL VALUE OF CHILEAN EXPORTS, 1880-1914
(DeCew, 1969:12).
Year silver copper agricultural nitrate total
1880 13% 40% 17% 30% 100%
1890 12% 19% 5% 64% 100%
1900 — 18% 3% 79% 100%
1910 — 9% 5% 86% 100%
Nitrate quickly became the main source of export earnings: four decades after the war, nitrate accounted for 86% of all earnings from the major export items. The costs of war, therefore, must be weighted against the benefits derived from the conquest of new territory (although Peru recovered part of the lost territory later on, as a consequence of diplomatic pressure from the United States) and of new resources, which became a major source of export earnings. It is clear that in the military minds, this calculus was present and humanitarian considerations probably absent. This, however, may have been one of the very few cases in which a Latin American country derived substantial benefits from a war so that one may even risk the question (humanitarian and ethical considerations aside): was it worth it? In the vast majority of conflicts, it was not.
