Finance

In war, the financial system does not just creak; it seizes. Output, credit, and investment all fall far more than GDP, and even solvent banks and businesses suddenly cannot roll over short-term funding or turn assets into usable money. Research from the Centre for Economic Policy Research shows that during conflicts, real domestic credit drops by around 20%, governments pivot sharply from long-term bonds into short-term debt worth roughly 1.2% of GDP, and inflation is financed by rapid money creation that pushes consumer prices up about 62% over a decade while nominal money supply grows about 67%. The result is a “flight to liquidity”: households and firms cling to cash despite high inflation because alternative stores of value and funding channels have broken, making immediate purchasing power and short-term safety more important than long-run returns. Historical work from the Riksbank on Sweden’s 20th‑century war episodes shows the same pattern in miniature—credit booms, shortages of key inputs, price–wage spirals, and ultimately a wholesale redesign of monetary and fiscal frameworks once the old regime of fiscal dominance and currency defence collapses under the strain of war.