Sunday, November 11, 2018
How we won the Great War but lost the economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

This is a moment of history. The Great War itself went slowly, painfully so, but the period since we were marking 100 years from its start, four years ago, to today’s centenary of the Armistice seems to have flashed by. Those four years, of course, have included events that will also change the course of history.

You might think there is not much new left to say about the 1914-18 war. We rightly commemorate the sacrifices made in the world’s first industrial war, as we have done for many years. That is what todays’s 100th anniversary is all about.

But historians, including economic historians, are always delving, and discovering. A new Centre for Economic Policy Research (CEPR) collection, The Great War: A Centennial Perspective, edited by Stephen Broadberry and Mark Harrison, available as a free eBook on the website, taught me things I did not know.

Calling it the Great War, for example, was commonplace until the 1940s, until the bigger 1939-45 saw it downgraded to merely the first of two 20th century world wars. By the 1960s the Great War description was much more rarely used but I will stick with it today.

Harrison, professor of economics at Warwick University, points out that the war was no accidental conflict brought on by a chance assassination in Sarajevo; it was fully intended. It was not undertaken for commercial advantage, being opposed by business interests in all countries. It was less “needless slaughter”, though French and British losses occurred at a faster rate than those for German troops and there was a terrible waste of life, than a calculated war of attrition.

He also challenges the view that Germany was starved into submission by the cutting off of food imports, a myth later fostered by Hitler. German war mobilisation did more to damage food production and create hunger on the home front, which in the end undermined its war effort.

Economic firepower was key to the victory of the allies. They began the war with bigger economies, measured by real gross domestic product, than Germany and the other central powers, and used it to their advantage. During the Great War the allies produced four times as many tanks, three times as many aircraft and twice the number of machine guns as the German side. As Harrison notes: “The Allies produced far more munitions, including the offensive weaponry that finally broke the stalemate on the Western front.”

There was another paper in the collection that also sparked my interest, from Nick Crafts, also of Warwick University, where he is professor of economic and economic history. That Britain lost her position as the world’s leading economy in the first half of the 20th century is well known. Fighting two world wars was central to that. In the aftermath of the Great War, and for years afterwards, the British economy could be described as “walking wounded”, he writes.

Crafts sets out clearly the extent of the loss of economic advantage incurred by Britain as a result of the Great War. It is customary to focus on the costs of the war itself, which as he notes, were considerable: “Britain incurred 715,000 military deaths (with more than twice that number wounded) and the destruction of 3.6% of its human capital, 10% of its domestic and 24% of its overseas assets, and spent well over 25% of its GDP on the war effort between 1915 and 1918.”

But, as he points out, this was only part of the effect, as “economic damage continued to accrue throughout the 1920s and beyond”. The Great War ushered in a period of high unemployment and high government debt, with the last of the latter not paid off until three years ago under George Osborne’s chancellorship. Government debt rose above 100% of GDP in 1916 and did not come back down below that level (having hit 259% of GDP in the immediate aftermath of WW2) until 1963.

This sharp deterioration in the public finances required Britain to run what Crafts describes as “eye-watering primary surpluses [budget surpluses] to preserve fiscal sustainability”.

As much as this, the Great War destroyed Britain’s highly successful economic model. At the outbreak of war Britain was the poster-boy of the first period of globalisation, the liberal world economic order established in the second half of the 19th century. Britain accounted for 27% of global manufacturing exports and was the world’s leading capital exporter, with net property income from abroad 9% of GDP. Trade accounted for 54% of UK GDP, much more than Germany, 40%, and America, just 10%.

This model was destroyed, not just because of the protectionism that took hold during the interwar years – a lesson for today – but also because other countries, notably America and Japan, stepped in to claim Britain’s international markets when this country’s attentions were devoted to the war effort. By the mid-1920s, Britain’s exports were only 75% of their 1913 level and the damage done to staple industries such as textiles and shipbuilding was never recovered.

By the time international markets were opened up again, which took many decades, it was too late.

Prolonged high unemployment, particularly affecting what Crafts describes as “outer Britain” including a jobless rate of 30.5% in shipbuilding and 25.5% in iron and steel was the result in the second half of the 1920s. Policy, notably the return to the gold standard announced by Winston Churchill in April 1925, not his finest hour, made a bad situation worse.

In recent years we have been used to talking about the hangover from the financial crisis. It is clear that, for Britain, the economic hangover from the Great War was proportionately much bigger.

Crafts suggests that the losses to Britain during the 1920s, broken down into a higher “natural” rate of unemployment, a loss of trade and the consequences of dealing with much higher levels of government debt mean an annual loss of roughly 11% of GDP each year through the 1920s, adding up to “a total not very different from the amount spent on fighting the war”, much more than previously thought.

Time has passed but one thing is clear. “To the victor belong the spoils” could hardly be less appropriate. Victory in the Great War was achieved at enormous human cost. It also resulted in considerable damage to the British economy, from which, in certain respects, we have never recovered.