Forced Savings and Political Malinvestment

Steven Horwitz's book, Micro-foundations and Macroeconomics has been at the center of the post-crisis revival of Austrian business cycle theory. Much of the work that has been done on this topic has either extended or refined Horwitz's framework. This paper's aim is more modest. In it, I apply Horwitz's framework to the Confederate monetary experience during the U.S. Civil War. While there was an excess supply of money, I do not find any evidence that it generated a credit boom - quite the contrary. That said, there is evidence of forced savings, which the state and Confederate governments used to fund large-scale investment projects, among other things. While this is not malinvestment in the traditional sense, I argue that allocating credit in response to political incentives is unlikely to result in a sustainable capital structure. This finding points to the need to incorporate the notions of forced savings and malinvestment into a broader political-economy perspective.