Did World War One nearly bankrupt Britain?

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1. The economic situation in 1914

Before World War One, Britain was the world’s economic superpower. With rapid growth and a vast empire, the country enjoyed significant levels of wealth and resources. However it wasn’t ready for the economic impact war would have.

In contrast, Germany’s 1912 budget had approved rising military expenditure until 1917 – effectively militarising their economy ahead of the conflict.

When war erupted in the summer of 1914, Britain faced market panic and a massive financial crisis. Not only did the government need to reassure the markets, it had to prepare itself for the huge economic demands of total war.

2. The cost of war

Infographic showing costs of Second Boer War as 255 million pounds and World War One as 3251 million pounds

War costs calculated from spending above level of year immediately preceding each war. Values shown are in constant 1900 prices. Unless stated otherwise, example costs are based on financial year ending 1918. The cost of bullets covers those fired in one 24 hour period in September 1918.

3. What the government did

Facing the financial strain of war, the government had to find ways of raising money. They had three main economic tools at their disposal:


Although indirect taxes raised some money, the government turned to direct taxes - on property and income - on a far greater scale. In 1913 income tax was only paid by 2% of the population. During the war, another 2.4 million people would end up being eligible so by 1918, 8% were paying income tax.


This took the form of big international loans but also borrowing from the public through the war bonds scheme. Big promotional campaigns were used to inspire the country to invest in the war effort.

Printing money

Freed from the Gold Standard by the Currency and Bank Notes Act of 1914, the Bank of England was able to increase availability of money by printing it, even though this risked contributing to inflation - rising prices.

But just how well did these plans actually work?

4. How well it worked

The fact that the country didn’t collapse before winning the war implies that the government was successful – but at what cost?

Hugh examines the impact of the government’s plans.

5. The economic legacy

Although Britain was ultimately victorious, the effects of war would be felt for many years to come. Foreign trade, a key part of the British economy, had been badly damaged by the war. Countries cut off from the supply of British goods had been forced to build up their own industries so were no longer reliant on Britain, instead directly competing with her. In 1920/21, Britain would experience the deepest recession in its history.

World War One was a significant moment in the decline of Britain as a world power. It would be gradual, but by the mid-20th century the United States would usurp Britain as the leading global economic power.

Today, nearly £2 billion worth of bonds are circulating in the market. War bonds originally paid an interest rate of 5% but in 1932, as the government battled against a budgetary crisis, the then Chancellor Neville Chamberlain changed the terms of those bonds. He appealed to holders to do their patriotic duty and voluntarily accept a cut in the interest rate to 3.5%. All but a small minority agreed the terms – and that wasn’t their only sacrifice.

War bond holders also agreed in effect to accept that they might never get their investment back. Whereas the original bonds had been due to be repaid in full in 1947, Chamberlain converted them to “perpetuals”, giving the government the right not to pay back the loans if they so wished, as long as they continued paying the 3.5% interest.

Surprise, surprise – no government since the 1930s has chosen to repay these bonds. There are believed to be about 125,000 holders – some of whom might have inherited them from parents or relatives who bought them during World War One.

The continued existence of the war bond debt is possibly the most graphic illustration of the lasting shadow cast by World War One.

6. Would war bonds work today?

Three experts give their view on whether the government could use a war bonds scheme to pay for a large-scale conflict today...

Money Saving Expert Martin Lewis

I believe if it came to defending the essence of everything we believe in, the people of Britain would stump up the cash. Britain’s biggest saving product is Premium Bonds - because people believe it’s safer as it’s government owned. Also in times of crisis people change their priorities. What’s the point of having savings if the nation is scuppered anyway? People trust the government because if it goes the entire economy goes.

Professor James Kimble, Seton Hall University

You would need a massive government campaign to really push and publicise it - it wouldn’t work if it was half-hearted. For instance in the U.S after 9/11 you could buy ‘patriot bonds’ where some of the money could be spent on fighting terrorism. We had those for 10 years but most people had never heard of them. We’re also more cynical - government propaganda on the homefront has been exposed and people are less willing to trust campaigns as a result. Back then you only saw one side whereas today you could see a dozen different perspectives than the government’s by going online. We’re less willing to believe what we’re told.

Danny Cox, Financial Planner, Hargreaves Lansdown

During a crisis we see a ‘flight to safety’. People buy products like National Savings bonds because they are backed by the government and are therefore 100% safe. That’s why customers are willing to accept a lower interest rate on them. It’s more important for people to get their money back than a big return on their money. If the government were to release a war bond today that was too attractive they could run in to trouble with banks and building societies – as it would be unfair competition. This could also cause a problem for the economy as banks pay a lot of tax and employ a lot of people.