War Debt, Moral Hazard, and the Financing of the Confederacy
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.
Volume (Year): 28 (1996)
Issue (Month): 2 (May)
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