The bank that won the war, and the bank that won't
The west has a financing challenge and an even bigger collective-action one.
Off of England’s southern coast, French cannonfire was dismasting ships, making swiss cheese out of hulls, and killing thousands of naval officers. The year was 1690. Outmaneuvered and grimly defeated, England needed to rebuild its navy. This required an enormous sum of money, which was hard to come by. English kings had a history of being fiscally irresponsible and conning their creditors. King William III begged goldsmiths. He asked parliament to loosen its close-fisted grip on the public coffers. But few forget that history has a habit of repeating itself.
A Scottish merchant named William Paterson had an idea that would change the tides of war. He proposed a bank that would be England’s bank. This “Bank of England” would do what other banks wouldn’t. It would fund the war against France, while restoring the country’s finances and, by extension, the Crown’s credibility. Charles Montagu, an influential politician at the time, liked the idea so much that he made it happen.
Founded in 1694, the Bank of England raised enough money to pay off outstanding war-time debt, allowing the Crown to credibly rack up more. The new debt bought new ships. It also repaired old ones. Supplies like food and beer were replenished. More men were recruited with wages worth the risk of life at sea. The new bank invigorated England’s fight with the French, but it also gave the English what they needed to conquer the rest of the world: a bank that would be there, through thick and thin.
Today, the whole of a western world finds itself like 17th-century England. It is under attack and financially constrained—and few have more conviction than Rob Murray that it is also in need of a bank.
The case for a war bank
Over his career, Murray has surely learned a thing or two about military operations and how they’re funded. He spent about a decade in uniform as a commander in the British army before getting what is probably by military standards a boring office job. He spent the next decade on NATO’s defence investment team, where he helped secure and direct investments of member nations.
The world may need an army-commander-turned-NATO-executive more than ever. Russia is at war with Ukraine at the European Union’s doorstep. While Russia threatens a “significant” response if the EU doesn’t stop militarizing, Russian drones have already been caught flying into Polish, Romanian, and Estonian airspace. Meanwhile, the United States is telling its European allies they’re on their own if they don’t start investing more in their own security.
Which is why Murray has been hard at work to establish a global bank, focused entirely on investing in defence.
His idea is straightforward, as far as financial schemes go. Founding countries put up a bunch of capital to start the bank, including the promise to bail it out if push comes to shove. The bank uses its government backing to issue bonds and raise money from investors. With multiple times the money it had at the outset, the bank can set up funds and underwriting schemes to raise even more money, which it can then lend out to governments and companies to bolster the alliance’s collective defence.
In banking, it doesn’t just take money to make money. It takes money to raise money to raise more money to make money.
In 2019, when Murray first floated the idea while still working at NATO, a global defence bank was ahead of its time. Many countries didn’t think it was necessary. Interest rates were low. A global defence bank that made it easier for countries to borrow money felt like a solution in search of a problem. Some countries were also worried about going into the banking business and sharing debt with their profligate neighbors.
Now the time is more propitious. Because of pandemic-era spending, countries are saddled with more debt. Meanwhile, interest rates are higher. This combines to make it harder for countries to meet their defence commitments in a world that is increasingly hostile and fragmented.
According to Murray’s proposal, this is where a global defence bank shines. Because several governments are backstopping it, it can get a good credit rating. This allows it to raise money on the best terms—for example, better terms than Poland’s government alone is able to negotiate. The end result is that Poland’s government can take out a cheaper loan and invest in defence without nose-diving off a fiscal cliff.
It’s an elegant solution for inelegant times. Though much of the western world has been reported to be interested in learning more about Murray’s defence bank—Canada is said to be in the running to headquarter the bank—no country has actually confirmed its participation. Only the United Kingdom has said anything definitive, and it was definitively negative: its finance ministry gave it the snub.
Money can’t buy everything
The irony of a global defence bank is that it is more multilateralism at a time of multilateral retreat. A populist disdain for technocratic and cosmopolitan institutions resulted in the United Kingdom separating from the EU about a decade ago. Animated by a similarly disdainful current of populism, the U.S. has been interfering with the World Trade Organization’s ability to function, while it runs afoul of trade law and agreements with countries around the world. Most recently, a U.S. plan to end the Russia-Ukraine war was effectively rejected by European leaders, one of whom warned that the G20 is “at risk” because there isn’t enough common ground between countries to solve big problems.
It’s the square that needs circling: if the west can’t cooperate to invest enough in collective security, then how will it cooperate to establish a global bank to make that same investment?
A global defense bank may make it easier to cooperate by relaxing the financial constraints, but the political constraints are getting stiffer. Governments don’t just want to buy the best military equipment at the lowest cost. They want to produce more military equipment within their borders, reducing their reliance on foreign companies, subject to the diktats of foreign governments, which can block access to war-time supplies. They also want to get some industry-policy bang for their defence-policy buck, creating high-paying jobs and making their own economies more innovative. Research shows that defence spending may boost economic growth more than other government expenditures, but only if put to certain uses. For example, U.S. spending on defence R&D has a bigger return on investment than paying janitors’ salaries at the local barracks.
Governments that agree to fund a global defence bank will disagree about how it should invest its money. For example, why should France approve of the bank’s limited capital going to Canada to fund a project to give unemployed autoworkers a second chance at factory work? Why should Germany want to see the money going to the United States, which already has a military industrial complex? Why should the United States release funds to any western country without conditions that advance some other U.S. interest?
That governments will suspend their local ambitions for the west’s good is fanciful. Decades of scholarship shows that global financial institutions, such as the International Monetary Fund and World Bank, serve the interests of their most powerful shareholders.
To work as advertised, the global defence bank needs to work like a carwash: the dirty self-interest of the founding countries needs to enter and come out the other end looking clean and selfless. This is easy to say and hard to do. Multilateral institutions will only be as multilateral as their governance is. As long as voting power is proportionate to things that are unequally distributed—the ability to pledge start-up capital, for example, or GDP—then multilateralism will be more unilateral than its name suggests.
Though populist critics of global institutions can sound kooky and lacking in erudition, underneath their raving is a justified paranoia. Either the few seize control to the detriment of the many or the many do the same to the detriment of the few. Either way, the result is a sort of tyranny. Which is the source of the irony of a global defence bank: the governance arrangement critical to its success is a surrender of sovereignty that will be rejected by the populism animating much of the western world.
When institutions aren’t enough
The Bank of England won wars and changed the course of history in the 17th century because English kings weren’t good with money. Kings created a financial problem that required a financial solution. Western leaders don’t just have a financial problem. They also have a political one, which Murray’s global defence bank cannot solve.
The global defence bank Murray is proposing works best when the west has a shared reality—when it shares the norms of noble and ignoble behaviour, the perception of a common enemy, and an aspiration that transcends its constituent polities. Member nations must also trust other member nations not to betray the group, which is where institutions can help by setting rules and predictably enforcing them. This shared reality is rare even in small communities, let alone across countries and continents.
Without that shared reality, such institutions will underperform. At worst, they won’t form at all. But Murray’s proposal may not disappear so much as shrink. His global defence bank may just become a regional one, smaller in scale and shaped by sheer necessity rather than grand design.