We, the UK, are expected to suffer austerity yet again to fund a war. Researchers have put together an understanding of the desperate measures taken to fund their part in the Great War, which began in 1914.
Here is an extract from the piece:
This post contributes to our occasional series of guest posts by external researchers who have used the Bank of England’s archives for their work on subjects outside traditional central banking topics.
In August 1914, Britain was the world’s wealthiest country. Yet there was no guarantee that government would be able to harness that wealth for World War I. Effectively, Britain was forced into a ‘Battle for Capital’ simultaneous with its military efforts — with the efficacy of the latter dependent on the success of the former. Over 80% of the £7,280 million Britain borrowed from 1914 to 1919, was raised at home. New research shows that Britain’s desperate efforts to marshal its citizens’ capital for the purpose of war, while also struggling to direct wartime production, profits and labour, led to a sharp shift in the sources of its borrowings during the war and in the years after.
The shift in the sources of borrowed capital that was so critical to the outcome of the First World War mirror the profound changes inflicted by the conflict on the nation’s finances, its economy and society at large. New information about those changes comes from some of the hundreds of ledgers of War Loan investors who provided capital for war in the years 1914-1932. These ledgers have never been previously opened for research and thus offer, for the first time, a new insight into how modern Britain was shaped by that war. New research looks at a representative sample of investors 1914-32. These investors purchased two War Loan series, one launched in 1914 and the second in 1917. The sample includes investors purchasing the 1917 loan in secondary markets in the post-war years 1919-32. Representative samples of about 2000 investors from each wave have been analysed.
Access to capital mattered to the outcome of the First World War because, ultimately it was a war of attrition with neither side able to defeat the other. The army able to outlast its enemy would dictate terms of surrender. That required the capital to buy not only arms and equipment but food for soldiers at the war front and civilians at home. Britain borrowed not only to finance its own efforts, it borrowed to support its allies. This included France, which had a large and deep, centuries-old capital market of its own. Of all purchases, historians conclude, food may have been most important. By autumn 1918, starvation undermined the will of German civilians to continue the war.
Britain’s first effort to raise war finance failed miserably; less than a third of the intended sum was raised, a fact kept hidden from the public for decades. That failure would hang over all other fund-raising efforts. While the slogan ‘Business as usual’ characterised Britain’s initial approach to war, the nation gradually abandoned successive long-embraced principles on free trade, taxation and laissez-faire capitalism. In autumn 1915, Britain sharply increased taxes, broadening the base for the lower middle classes and raising rates for the wealthier to draw in more capital. Increased taxation was also intended to act as a brake on private consumption that was driving inflation upwards.
By January 1917, Britain was so desperate for capital that the Chancellor, Andrew Bonar Law, in discussions with the nation’s financiers, threatened confiscation of bank and insurance company assets unless specified minimum amounts of capital were raised. For banks, the minimum was set at £620 million while for the insurers, the minimum was set at £100 million.
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