Currencies In Times Of War

Posted by Allison on 6 April 2009, 15:22

War is hard on everyone who is involved in it – whether you are one of the ones on the front line or someone at home who is waiting for a loved one's return.

But wars affect us in many other more indirect ways as well.  The fact is that a war can have a profound affect on the currencies of the countries involved, as has been seen several times throughout history when wars have been mounted.

During times of war confidence and stability in a country – and therefore its currency as well – can be severely shaken.  This is why world trade markets can see a single currency fall considerably virtually overnight if that country becomes embroiled in wartime events with another country.  This can have a devastating effect on the country as a whole, because businesses and jobs can suffer more than you might think possible, even during a short time.

There are of course exceptions to this, and it is perhaps interesting to explore these first.  The most obvious one is gold.  Gold is a precious metal which always holds its value; that's why some countries peg their currencies to gold, as a way of keeping them buoyant.  It's also a naturally occurring metal which can't be reproduced by man, which means that there is a finite amount of it on the planet.  This fact alone keeps its value high at all times; while it does fluctuate, even in wartime, it never goes alarmingly low.

The other exception – proven by the way it has consistently performed over the years - is the US dollar, although this does not have the same protection as gold does, seeing as it isn't naturally occurring and therefore has a very real sense of fragility when compared to the precious metal.

But those are just two exceptions, and they don't provide a good general picture of what can happen to various currencies during wartime.  For starters inflation is always in danger of going up, since various goods and supplies generally become far more difficult to get hold of and their price is likely to rise as a result.  This is one of the reasons why rationing often comes into play during wartime, just as it did in Britain during World War II.

But wartime can affect currencies in much more sinister ways than by simply having an effect on inflation.  It might surprise you to learn that counterfeiters tend to be rather prevalent during wartime – and they are not always acting independently either.

There are lots of instances where governments have started counterfeiting massive amounts of money in order to try and cause severe problems for the country or countries they are fighting.  The Nazis succeeded in counterfeiting a large amount of money during the Second World War, and while they ended up not going through with their plan, they could have seriously devalued both the United States dollar and the British pound.  This is the main reason why counterfeiters come to the fore during wartime – their goal is to destabilise the currencies of the countries they are fighting against.

Why should this be the case though?  The reason is because fighting any kind of war costs a lot of money, and if a country should find that its currency becomes next to worthless during this testing time, it could have a serious effect on its ability to fight the war and protect its own currency.  It might seem strange to think that currencies have such a key role to play, but some wars have indeed been started over the issue of money in the first place, so perhaps we should not be so surprised.

With this in mind it makes perfect sense when we discover that some countries have even gone to the drastic measures of ditching their own currency altogether in favour of a completely new one – at least for the duration of the war itself.  This has been done to protect and support the country which they are on the side of, and Hawaii did just this during the Second World War, just in case the Japanese tried to invade Hawaii and take the money as a consequence.

In this kind of situation the total change in currency is normally a temporary one, and indeed Hawaii did regain its normal currency after the war ended and the danger had passed.

But the effect that war has on currencies isn't just restricted to modern times.  The effects of inflation that we see today were very much in effect in centuries gone by as well.  Inflation caused real problems in Rome, and although it was brought under control the eventual fall of Rome had a profound effect.

In fact it was so marked that Britain ended up doing away with its currency altogether for quite some time.  Such is the effect of war on money of all kinds.  It might seem strange to us now that a war could actually bring about the end of a currency, and indeed the chances that this could happen nowadays are pretty much zero.

One of the reasons why currencies are so affected by times of war is due to the greed of the human race.  War does away with law and order, and it's just a short step from there to do what you want with the currency in force in that country at that time.  If a country cannot keep adequate control of the rate of inflation of its currency at these times, then there is a real chance that a currency may even have to be altered drastically after the war has ended.  This has happened when a particular rate of exchange has had to be agreed on new terms.

It's quite frightening to think that the coins and notes we use every day can be so fragile in this sense.  It seems there is another reason to be thankful that major wars do not occur too often.