"Military" Currencies
A very important issue whilst conducting a military campaign is the currency any military forces may use. It may seem a "world away" from the fighting of the frontline but it is vital to winning the peace. Consider, for example, the American led invasion of Iraq in 2003. The Iraqi Central Bank issued "Saddam Hussain" Dinars prior to the invasion and it would be unthinkable of the invasion forces to use the Saddam Hussain bank notes and coins. If the invaders had to use Saddam Hussain notes then they would have had to purchase the Iraqi notes in exchange for hard western currency and this could have benefited the Iraqi government.
"Military" currencies come in many different forms. There are those used for payment by the military, prisoner of war camp money, money used in concentration and internment camps.
The general public may not be overly concerned about currencies provided they can meet their commitments and that their savings are not eroded. However the banking industry, central banks and the military are all heavily exposed to re-denomination and default risk. The enemy's currency may no longer be accepted as a means of payment and the cash in hand can become worthless. Obviously both civilians, the banking industry and the military are all affected by the "currency" conflict.
From a strategic point of view military currencies can be considered as:
1) Printing and distributing currency for the purpose of demonstrating sovereignty
2) A means of payment (payment certificates) to the local population
3) Economic warfare such as counterfeiting and undermining the enemy's currency / economy
4) "Camp" money for Prisoners of War and other internees
1) Printing and distributing currency for the purpose of demonstrating sovereignty
Part of being a Sovereign nation is the ability for the domestic government to control the issue of currency, monetary policy and fiscal strategy. Some nations have joined common currency blocks such as the Euro and they have therefore devolved that right. However they do maintain the right of withdrawal from a common currency block but this would have dramatic consequences.
During a conflict the two (or more) combatants effectively have two currencies in conflict with each other. The government of the "winning" side normally introduces new currency to replace that of the indigenous government's. This can be illustrated by the bank notes of South Vietnam. The North Vietnamese won the military conflict and therefore these notes were only worth what you could exchange them into in either North Vietnamese or foreign (hard) currency which was probably very little at the time.
2) A means of payment (payment certificates) to the local population
One example of using a military currency is that of (Imperial) Japan. The Japanese Government issued "military" notes for military procurement activities and as a supplement to the local currencies of the occupied territories. In the Russo-Japanese War they were also used to pay the troops.
The usage of military currency can be very beneficial to the issuing government; as such it can pass some of the costs of military action to another government or the local population of the occupied area. If the notes are inconvertible into "specie" or other "hard" currency, or via restricting the amount in circulation or convertibility the issuing government can create large amounts of currency at limited cost to itself. This helps to avoid and off-load some of the costs of modern warfare.
The military strategist can use these techniques to help win wars. Often military currencies are designed to replace the indigenous currencies with the three objectives of (1) removing the Sovereign government's legitimacy for issuing the indigenous currency, (2) introducing a currency that represents the "invader" and (3) allowing the "invader" to profit from the conversion.
If "invasion" money cannot be exchanged for specie or hard currencies then some of the costs of warfare can be off-loaded to the population of the invaded nation. The "invading" government can also profit from the withdrawn currency to satisfy her own foreign exchange needs.
3) Economic warfare such as counterfeiting and undermining the enemy's currency / economy
One of the principal aims during a conflict is the undermining of the enemy's domestic economy. A method through which it can be undermined is by counterfeiting the enemy's currency. If the enemy's currency is undermined then it would find that there is rapid inflation in the target currency, it may be refused as a means of payment and that the imports into the enemy's country become more expensive in either domestic or foreign currency. All of these effects diminish the capability of the enemy to pay and equip its troops.
If there is wide spread counterfeiting (such as what has happened recently with certain Euro denominated notes) the enemy's government may have to consider re-issuing the currency. This is a major exercise and costly in itself. A result similar to this was achieved by the Germans in World War 2 when the British Government had major problems with certain bank notes.
The best known large scale military counterfeiting operation was Operation Bernhard (see International Bank Note Society Journal Volume 47 No 4, 2008 page 29). This was the biggest (military led) counterfeiting scheme ever devised and it was successful. Some of this operational features are still relevant to the modern day military but technology has moved on since the end of World War 2. One could argue that in the modern conflict that computerised banking systems would be an easier target to attack rather than printing forged bank notes!
4) Camp money for Prisoners of War and other internees
For the general public it may seem surprising that Prisoner of War, internment and concentration camps usually have their own internal monetary system. These camps have their own currencies which can be used as an alternative to the indigenous currency of the "host" nation.