Supporting government borrowing, 1914-18
Fighting the First World War was phenomenally expensive.
Even before the war, Britain was engaged in an arms race, spending £74m, or 21% of total expenditure, on defence in 1913. This figure was to be utterly dwarfed in the next five years. In 1918, Britain's military expenditure reached £2.4bn. It was the exceptional challenge of funding such expenditure that David Lloyd George foresaw when he said, the day after Britain entered the war, 'In this tremendous struggle finance is going to play a great part. It will be one of the most formidable weapons in this exhausting war.'
Taxes were raised. Income tax rates more than doubled in the course of the war, and earnings inflation meant that more people reached the payment threshold. By 1920, 3 million people were eligible to pay income tax, compared to 1.1 million in 1914. Indirect taxes were also increased, and a new excess profits duty was introduced for companies. In all, the government's tax income rose from just under £300m in 1914 to over £1bn in 1919. Nevertheless, expenditure outstripped it three to one. The shortfall in 1916 alone was double the total national debt before the war. The government needed to borrow heavily, and to do as much of it as possible domestically. To achieve this, it sought extensive support from the British banks.
As before the war, treasury bills remained a key strand in government financing, and the banks remained significant holders of them. As the war went on, however, such short-term instruments proved insufficient. Three longer-term instruments came to the fore:
- Exchequer bonds remained the government's usual source of medium-term borrowing. As with the treasury bills, banks were a key buyer, and British government securities came to dominate the banks' balance sheets, representing 75% of their total securities by 1918, compared to 13% in 1913.
- A series of war loans, raised in 1914, 1915 and 1917. Learn more about the war loans and the banks’ role in supporting them (PDF 96KB).
- War savings certificates and national war bonds, introduced in 1916 and 1917 respectively, became a system of continuous medium-term borrowing. The mass-market nature of these investments led to the birth of the national savings movement. Learn more about savings certificates and war bonds and the banks’ role in supporting them (PDF 140KB).
Through these borrowing vehicles, combined with international borrowing, the government managed to keep funding the war. Nevertheless, the long-term cost was high. By 1920 the national debt was £7.9bn. Just paying the interest on that debt cost the country £375m in that year – more than the nation's entire expenditure had been in 1913.