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What is the link between war finance and foreign trade? Compare the cases of Britain, Germany and the Habsburg Empire in the First World War? [The] period between 1914 and 1945 is distinctive from an economic viewpoint. In both world wars the main combatants were able to devote more than half of their national income to the war effort. This did not happen before 1914, or after 1945, and it seems unlikely that it will ever happen again. (Broadberry & Harrison 2005: 36) World War I 1 Simon Hinrichsen s.hinrichsen@lsle.ac.uk

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Agenda 2 Simon Hinrichsen s.hinrichsen@lsle.ac.uk A few essentials on World War I The economics of 1914-1918 Foreign trade and war finance Bankers of the war The U.S. is helping Money and prices The blockade Trade and war finance Germany Britain Habsburg Empire Conclusions (open for debate) Discuss Sources

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Great War, Total War 3 Simon Hinrichsen s.hinrichsen@lsle.ac.uk Allied countries in green (at any time), Central Powers in orange, grey is neutral.

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A few essentials on World War I 4 Simon Hinrichsen s.hinrichsen@lsle.ac.uk 1914: This is the most random war beginning ever Franz Ferdinand killed in Serbia Countries start alliances; declare war on each other; escalation Allied: France, Britain, Russia [until 1917], (the U.S. [from 1917], Italy, Japan) Central Powers: Austria-Hungary, Germany, (Ottoman Empire, Bulgaria) Russia assembles troops Germany attacks Belgium 1 and France Germany didnt want to fight a war on two fronts Germany thought they could win on the West Front in six weeks. Oops Next: Trench warfare for years; deaths (and lots of them); alliances 1917: Revolution in Russia tired of war, economy falling apart; U.S. enters 1918: Allied won as the Central Powers surrendered one by one 1 One has to feel bad for Belgium. They wanted to declare neutrality but were too slow. It ended up costing them 120,637 deaths over the next four years as a consequence.

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The economics of 1914-1918 5 Simon Hinrichsen s.hinrichsen@lsle.ac.uk

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The economics of 1914-1918 6 Simon Hinrichsen s.hinrichsen@lsle.ac.uk

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The economics of 1914-1918 7 Simon Hinrichsen s.hinrichsen@lsle.ac.uk The Allied would always win in the long run given their stronger economy Obviously, this is academia, so someone is going to disagree with that It cost double the amount to win ($147bn) compared to losing ($62bn) 1 In that sense, it is fair to ask: Why did it take so long to win? (Ferguson 2000) The gold standard was abandoned during the war Ironically, Austria-Hungary was probably the least war-ready country Based on defence spending per capita, total spending, etc. Austria-Hungary was subject to a pretty much uninterrupted contraction throughout the entire war Agriculture dramatically different supply and demand curves Germany, Russia: Paid less than before for food (decreased supply) Britain, U.S: Paid more thus increasing supply 1 Says Hardach (1977: 153) and Ferguson (2000). Not me [I think it leaves out productive uses of that, taking over and above pre-war norm is too crude.]

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Foreign trade and war finance 8 Simon Hinrichsen s.hinrichsen@lsle.ac.uk France and Russia borrowed money from Britain Britain borrowed from the U.S. Primary objective for the Allied was to keep the dollar-pound parity Britains currency was strong at the start of the war Important since all other Allied currencies were held up by Britain If Britains currency weakened they could buy less stuff from the U.S. Same would go for Allied vis--vis Britain

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Bankers of the war 9 Simon Hinrichsen s.hinrichsen@lsle.ac.uk The U.S. and Britain acted as bankers for the Allied. Burden for Britain (everyone wanted dollars), export financing for the U.S. Allied purchases of U.S. goods (until 1917) totalled $7bn and were financed: Exports to the U.S. ($1.6bn); sales of gold ($1.1bn); liquidation and repatriation of U.S. assets ($1.9bn); credits ($2.4bn) From 1917: European allies net imports mainly financed by U.S. govt loans

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The U.S. is helping 10 Simon Hinrichsen s.hinrichsen@lsle.ac.uk When US replaced Russia in 1917, the Allied lost its weakest member, gain the strongest However, the U.S. had been on the Allied side for some time JP Morgan had arranged the Anglo-French loan in 1915; bridge-loans and credit lines; was buying agent for HM Treasury, Bank of England U.S. exports to U.K. and France more than doubled in 1916 In large parts thanks to loans and financing from the U.S. From 1915-1917 U.S. produced and delivered 24% of Allied munitions supplies U.S. saved Great Britain from insolvency in 1916 Says Glaser (2000); Ferguson (2000) says foreign borrowing relatively unimportant for Britain Disagreement (?): Domestic borrowing possible thanks to the U.S.

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Money and prices 11 Simon Hinrichsen s.hinrichsen@lsle.ac.uk Germany, Britain, Habsburg Empire: Broad money growth (1913-1918): Germany: 285% Britain: 110% Habsburg: Substantially larger Inflation (consumer prices, 1914-1918): Germany: 204% Britain: 110% Habsburg 1 : 1,062% The Central Powers, to a much larger extend than the Allied, used seniorage. This thanks to price controls turned out not to be that big a problem for Germany until after the war when inflation exploded 1. Habsburg number is for Austria only.

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The blockade 12 Simon Hinrichsen s.hinrichsen@lsle.ac.uk It has been said that World War I was: as much a war of competing blockades, the surface and the submarine, as of competing armies. Salter (1921: 1) Allied (meaning Britain, pretty much) blocked the sea routes of the Central Powers, so that sea trade would have be via neutral vessels (not happening) 1914-1915: The blockade was soft. From March 1915 it became unrestricted, leaving all Central Powers boats off the sea This was a response to German U-boats raiding; and the offense of 1915 Because of the blockade, the Central Powers ended up having a serious lack of food and other supplies as they could not import That helped spark domestic antipathy to the war (Ritschl 2005: 58) The blockade was extremely important. It limited the Central Powers ability to trade on sea this was maybe the most important economic weapon the Allied deployed

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Trade and war finance 13 Simon Hinrichsen s.hinrichsen@lsle.ac.uk Germany, Britain, Habsburg Empire: Germany (roughly) financed non-war expenditure with taxes, and borrowed the rest a lot like Britain on these metrics Exports were financed by war loans but not a lot of trade outside its allies Depression of prices lead to a black markets in food especially (with much higher prices) Germany was relatively successful in selling war bonds, despite not having the same reputation for repaying at par after wars as Britain Germanys trade actually fell from 1913 forward Imports was 40-60% below peace time levels; exports even further Decrease came in two phases: the second one in 1917 (Britain upped the blockade in 1916) Importantly: Blockade blocked trade. A lot

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Trade and war finance 14 Simon Hinrichsen s.hinrichsen@lsle.ac.uk Germany, Britain, Habsburg Empire: Britain raised funds in all three classic ways: taxes, borrow, print money Most of that was through borrowing, though Britain ended a net creditor. In 1921, its external debt was (primarily to the U.S.) totalled $5.4bn. It was owed $9.7bn from its allies. Net: $4.3bn Current account was positive due to huge invisible earnings Most importantly: Britain was able to finance its large increase in imports, and to keep financing its allies (through loans and subsidies)

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Trade and war finance 15 Simon Hinrichsen s.hinrichsen@lsle.ac.uk Germany, Britain, Habsburg Empire: Britains debt/GDP went from 26.2% in 1913/14 to 127.5% in 1918/19 Britains interest rate on war loans did rise from 3% to 5-6% The funds were mostly raised as domestic rather than foreign loans, thanks to well developed capital markets in London Less than 1/5 of the total national debt of 7,280 million in 1919 was foreign debt Advantage Britain: FX rate pegged at around $4.76, i.e. cheap imports 1915: import duties (ending free trade): to save foreign currency (on non-war related imports)

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Trade and war finance 16 Simon Hinrichsen s.hinrichsen@lsle.ac.uk Germany, Britain, Habsburg Empire: Habsburg Empires population more or less flat. This is a problem because: People are drafted (leave the economy), especially foodstuff sector People need food, i.e. this must be imported. The Allied had a blockade against the Central Power. Famine. Food riots Initial wartime deal of 1915 said the joint army should be supplied according to grain output, neglecting that the Austrian side was completely import dependent War was financed by borrowing. 1/5 of expenditures covered by revenues. Balance-of-payment constraint at a low level of net imports The borrowing was almost entirely war bonds, picked up domestically with limited German and neutral buying. No domestic capital market of size Up to 1915, inflation was controlled. From 1916, it ran amok due to money printing, central bank monetization, price controls

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Trade and war finance 17 Simon Hinrichsen s.hinrichsen@lsle.ac.uk Germany, Britain, Habsburg Empire: Just how bad was the economy? Well lets look at GDP of Hungary And note agriculture falls (a lot), and much of manufacturing went to warfare Lack of inputs (no imports available, fight over resources, shortages, etc.)

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Conclusions (open for debate) 18 Simon Hinrichsen s.hinrichsen@lsle.ac.uk Economics decided World War I The Central Power had two opportunities to win the war, both non-economic: If they had broken France in six weeks in 1914 (as was the intention), then economics would not have mattered. Instead: Trench warfare If Germany had broken through in the 1918 Offensive military victory Britain got to increase imports, and to finance 1 it via borrowing. The Central Powers couldnt. Therefore the Allied won. 1. Also! A well developed domestic capital market is quite useful.

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Discuss 19 Simon Hinrichsen s.hinrichsen@lsle.ac.uk The war [] was bound to be won by whichever coalition had Britain on its side. Discuss 1. Had Britain lost the Blockade fight, the Central Powers would have won. The United States ability to supply the Allied was more important than its soldiers. What mattered was how big a trade deficit countries were able to run by borrowing money. Germany and Habsburg fought WWI on the cheap, then didnt pay Cheap: Because they had less resources but were far more effective. Didnt pay: internal debt wiped out by inflation (1920-23); external debt by deflation (1928-31) also Britain and U.S. said ok. I say: Ok but inflation then deflation and unemployment set up for 1933. 1. Quote from Niall Ferguson (2000: 411).

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Sources 20 Simon Hinrichsen s.hinrichsen@lsle.ac.uk Broadberry, S. and M. Harrison (2005), The economics of World War I: an overview, in S. Broadberry and M. Harrison (eds.), The economics of World War I, Cambridge: CUP, pp. 3- 39; Broadberry, S. and P. Howlett (2005), The United Kingdom during World War I: business as usual?, in: Broadberry and Harrison, pp. 206-234. Glaser, E. (2000). Better Late than Never: The American Economic War Effort, 1917- 1918. In Great War, Total War, (Eds. Chickering, R. and Foerster, S.). Cambridge: Cambridge University Press, 389-407. N. Ferguson (2000), How (not) to pay for the war. Traditional finance and total war, in: Chickering & Foerster (eds.), Great War, total war. Cambridge: CUP, pp.409-434. Hardach, G. (1977), The First World War. Harmondsworth: Allan Lane, pp. 139-173. Ritschl, A. (2005). The pity of peace: Germanys economy at war, 1914-1918 and beyond, in: Broadberry and Harrison, pp. 41-76. Salter, J. A. (1921). Allied Shipping Control. An Experiment in International Administration. Oxford: Clarendon Press Schulze, M.S. (2005), Austria-Hungarys economy in World War I, in Broadberry and Harrison, pp.77-111. Strachan, H. (2005), 'The First World War', London: Penguin Books