Oh! What a Lovely War

In 2014, countries are still paying off debt from World War One

It has been 100 years since the start of the First World War, which was fought for four years and claimed the lives of more than 6000 soldiers a day. Countries in Europe began marking the centenary earlier this year and the Tower of London, pictured above, is awash in poppies in beautiful tribute to the men who died.

The scale of World War One was unprecedented in several ways, including the cost to finance it. In fact, several of the countries involved are still facing related debts.

Britain

Earlier this week, the UK announced it will repay £218 million ($349 million) from the £2 billion of debt that it incurred during the war. National War Bonds were issued to the public in 1917 to support the effort, funded by widespread patriotic publicity campaigns and an attractive interest rate (both then and now) of 5%. (About 3 million Britons bought the debt and this is how the Spectator covered the creation of National War Bonds.)

Ten years later, the bonds were refinanced by Winston Churchill into 4% Consolidated Loans. Facing the huge financial strains of the Great Depression, chancellor Neville Chamberlain used patriotism again to convert some of the “4% Consuls” into perpetual bonds, which give the debtor the right to never pay the principal as long as the interest is paid—which he cut to 3.5%. The government has been paying about £136 million a year to holders of the perpetuals and war loans. The government estimates it has paid £1.26 billion in total interest since 1927. Still, the Great War is estimated to have cost the UK around £3.25 billion.

Britain can now refinance the 4% Consuls at more favorable terms to the taxpayer, and so it will pay off a tiny amount of its total debt in February—for the first time in 67 years. There are 11,200 registered holders of theses bonds, with 92% holding less than £10,000 worth.

Incredibly, because the 4% Consuls were used to refinance even older debt, some of the debt being repaid in early 2015 goes as far back as the 18th century. “In 1853, then-chancellor Gladstone consolidated, among other things, the capital stock of the South Sea Company originating in 1711, which had collapsed in the infamous South Sea Bubble financial crisis of 1720,” the UK Treasury said. And Chancellor George Goschen converted bonds first issued in 1752 and subsequently used them to finance the Napoleonic and Crimean Wars, as well as the Slavery Abolition Act of 1835.

All of this bodes quite well for repayment of the debt the UK took on to finance the invasion of Iraq in 2003.

Germany

On Oct. 3, 2010, Germany finally paid off all its debt from World War One. The total? About 269 billion marks, or around 96,000 tons of gold.

The reparations were part of many humiliating clauses imposed by the Treaty of Versailles following Germany’s defeat in 1918, mainly by France, which suffered so much during the war and was also fearful that without the weight of such repayments, Germany would rise again quickly as a military power and attack it.

The UK sent a certain economist, John Maynard Keynes, as the principal representative of the British Treasury to the Paris Peace Conference. He resigned in June 1919 in protest at the size of reparations. “Germany will not be able to formulate correct policy if it cannot finance itself,” Keynes said. All very prescient, as Adolf Hitler and his Nazi Party seized on popular hatred of the Versailles treaty to take power. Following the Great Depression in 1929, Germany’s debt was cut to 112 billion marks, payable over a period of 59 years. Not that it mattered—Hitler suspended reparation repayments in 1933.

In 1953, following the end of the Second World War, West Germany agreed at a conference in London to pay off its debts from before World War II, and in return was allowed to wait until reunification before paying €125 million in outstanding interest owed from 1945-1952. In 1990, the Berlin wall fell and Germany started paying off that interest—the very last of which was paid in October 2010 on the 20th anniversary of reunification.

One of the lessons of World War Two was the consequences of lumbering a losing nation with huge debts. “After WWII, they decided to hang the leaders but not to punish the nation,” Mark Harrison, an economics professor at University of Warwick, told the BBC. “But in WWI, it was the other way around.”

US

As Quartz’s Matt Phillips has noted, the US was virtually debt-free before World War One—with debt just 2.7% of the economy in 1916. The surge in debt associated with World War One was financed largely by selling bonds to the US public and, in the aftermath, the US hit a new record high debt-to-GDP of about 33%, with more than $25 billion in debt.

The US only entered the war in 1917, but much of the finances afterward revolved around the emerging global superpower. In the aftermath of the war in the 1920s, Weimar Germany faced hyperinflation and was on the verge of collapse under the weight of its Versailles debt payments. The war left a curious issue, in that the UK and France borrowed huge amounts from the US but could not pay them back, as they were owed huge amounts by Germany, which was broke.

So the solution to this was brokered by the future US vice-president Charles Dawes, who in 1924 proposed that the US lend money to Germany to fund its reparation payments to France and the UK, who in turn would use the money to repay their war debts. The solution was so good that Dawes won the Nobel Peace Prize the next year in recognition. And the plan worked.

“With a combination of budget surpluses, expenditures aimed explicitly at paying off debt early, and payments from the losers of war, the US made significant progress in whittling the debt down,” Phillips said. “It fell by more than $9 billion by 1930, a reduction of more than a third.”

The 25-year US loans to Germany envisioned by Dawes paid interest at 7%. American investors were thirsty to get involved—until Hitler defaulted on the loans.

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