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War Debt, Moral Hazard, and the Financing of the Confederacy

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  • Grossman, Herschel I
  • Han, Taejoon

Abstract

This paper develops a formal model of war spending and external borrowing and quantifies this model for the case of the American Confederacy. Our proximate objective is to determine why the Confederacy undertook little external borrowing. We find that the moral hazard associated with war debt seems to have had little effect on the amount of external borrowing that the Confederacy undertook. Rather, because the Confederacy began the war with large mobilizable resources relative to its expected postwar resource endowment, it required little external borrowing to accomplish the optimal amount of consumption smoothing. But, our results also suggest that unimportance of the moral hazard associated with war debt is not a generic property of war finance. Copyright 1996 by Ohio State University Press.

Suggested Citation

  • Grossman, Herschel I & Han, Taejoon, 1996. "War Debt, Moral Hazard, and the Financing of the Confederacy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 200-215, May.
    • Handle: RePEc:mcb:jmoncb:v:28:y:1996:i:2:p:200-215
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    Cited by:

    1. Marc Weidenmier, 2004. "Gunboats, Reputation, and Sovereign Repayment: Lessons from the Southern Confederacy," NBER Working Papers 10960, National Bureau of Economic Research, Inc.
    2. Cutsinger, Bryan P. & Ingber, Joshua S., 2019. "Seigniorage in the Civil War South," Explorations in Economic History, Elsevier, vol. 72(C), pages 74-92.
    3. Gary Pecquet & George Davis & Bryce Kanago, 2004. "The Emancipation Proclamation, Confederate Expectations, and the Price of Southern Bank Notes," Southern Economic Journal, John Wiley & Sons, vol. 70(3), pages 616-630, January.
    4. Viswanath, P. V., 2000. "Risk sharing, diversification and moral hazard in Roman Palestine evidence from agricultural contract law," International Review of Law and Economics, Elsevier, vol. 20(3), pages 353-369, September.
    5. Weidenmier, Marc D., 2005. "Gunboats, reputation, and sovereign repayment: lessons from the Southern Confederacy," Journal of International Economics, Elsevier, vol. 66(2), pages 407-422, July.
    6. Vincent Medina & Cyr-Denis Nidier, 2003. "Pricing war within a real option framework," Defence and Peace Economics, Taylor & Francis Journals, vol. 14(6), pages 425-435.
    7. Pecquet, Gary M. & Thies, Clifford F., 2007. "Texas treasury notes and market manipulation, 1837-1842," Explorations in Economic History, Elsevier, vol. 44(1), pages 81-99, January.

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