The Economics of the First World War

As commemorations continue, there is a feature on the BBC website, where Economics Editor Hugh Pym looks at the impact of the Great War on the UK economy. It’s a short, accessible piece with some interesting video clips.

At the start of the war, the UK was the world’s leading economy, with a current account surplus. However, the war effort reduced trade between the UK and the rest of the world, with other countries having to build up their own industries to produce goods either no longer exported by the UK, or because of transport difficulties. This allowed some of our trading partners to become self sufficient, reducing the UK's strong trade performance.

The cost of biscuits for troops ran at £3.94m per year and bullets at £3.87m per day.

Financing the war involved raising taxes [only 2% of the population paid income tax in 1913…], taking loans from the US, printing money and issuing war bonds.

After the war, Neville Chamberlain reserved the right never to repay these bonds but promised to continue to pay interest at 3.5%, the bonds renamed as ‘perpetuals’. There remain 125 000 of them in existence today, still receiving interest!

The budget deficit in 1918 ran at a massive 47.9% of GDP, with a national debt of 127.5%.

This contrasts to the Second World War, where the National Debt rose above 240% of GDP in the late 1950s with the final repayment of loans made to us by the US made in 2006.

The wars in Iraq and Afghanistan cost the UK tax payer at least £30bn, £1000 per capita. As a comparison, the wars in Iraq, Afghanistan and Pakistan have cost the US $4.4 trillion and counting, according to the Cost of War unit at Brown University, Rhode Island- as much as $70 000 per head of the population. This site also has an interesting section on both the human and opportunity cost of war.