What the UK can learn from 1914 war preparations

The UK and its European neighbours are not yet at war with Russia but the warning lights are flashing. Frequent violations by Russia of Nato’s airspace and sea passages point to rising risks of a full-blown European conflict. The message is clear: the UK and its allies must step up defence spending.

Sir Keir Starmer has pledged to raise defence spending from about 2.3 per cent of GDP to 2.6 per cent by 2027, and hopes to hit 3 per cent in the next parliament and 5 per cent within a decade. But the country’s finances are stretched: debt is at 95 per cent of GDP. Where will the money come from?

• David Smith: How much more tax will we pay to defend ourselves?

The need to raise defence spending in the face of fiscal constraints has echoes of August 1914 at the outbreak of the First World War. The UK was woefully unprepared then, just as it is now.

Sir Keir Starmer has vowed to increase defence spending

TEMILADE ADELAJA/AFP

How unprepared was it? Two slogans emerged in the opening weeks of war that testify to that condition. The first was “over by Christmas” — the expectation on all sides of a short war. The second was “business as usual” — the belief that the nation’s economy would power on. It was coined by an executive at WH Smith and later became a motto of British business. Both slogans proved tragically misplaced.

During the war of attrition that followed between 1914 and 1918, access to capital was key. The side that could outlast the other — not just on the battlefront but by cementing domestic political support — would be the victor. So it was by late 1918, when Germany and Austria-Hungary were not only running out of capital and arms but suffered starvation at home.

In the summer of 1914, London was the centre of the global capital market and had access to the deepest pool of private financial capital among the main combatants. But the UK could not easily tap those funds for war. Instead, the country launched a “battle for capital” throughout, as well as after wartime.

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This “battle” provides some lessons for today. The UK’s first move was to limit competition for capital, cutting German nationals off from the London market. Within days of declaring war, the government announced the seizure of the assets of the three largest German banks in the country. German holders of sterling-denominated stocks and bonds were not paid interest or dividends, nor could these be sold to UK citizens. Their securities had in effect become worthless.

A banner in Trafalgar Square in 1914. Soon ways were found to fund the war effort — methods that could have relevance now

TOPICAL PRESS AGENCY/GETTY IMAGES

This strategy was copied by the US, UK and EU within days of Russia’s invasion of Ukraine in February 2022, freezing about $300 billion in Russian central bank assets. That seizure, along with sanctions levied on buyers of Russian goods, has had some effect on Russia’s ability to finance war. But more must be done.

• Rishi Sunak: It’s our moral duty to seize Russian assets to help Ukraine

Another challenge for the government today echoes that of 1914-18: those with capital frequently prefer to invest it abroad. In 1914, more than a quarter of all British private financial capital was invested outside the country. To repatriate capital, the UK offered “Scheme A”, which paid a bonus to those bringing foreign securities back to the country. But this proved expensive.

As Britain’s desperation for financial capital increased in 1916, it launched “Scheme B”, levying fines on investors who failed to bring their assets home. And in early 1917, it ordered these to be confiscated.

Today, attracting British capital back from abroad is an even bigger challenge. A bulk of UK pension schemes, for example, are invested abroad. One strategy might be to offer some combination of schemes A and B, rewards accompanied by tax penalties.

Finally in 1916, Britain realised that it had to reach out to “small savers” — those with limited cash pots, a group often overlooked by aggressive money managers today. Ministers combined patriotic advertising with rewards mimicking those usually only earned by wealthy investors. Britain retained a successful advertising executive who came up with a plan. “We must give the investor something for nothing to make him lend his money to the country,” he urged. “In other words, why not make patriotism profitable?”

• Softening memories of the First World War

Post offices, savings banks, employers, civic groups and churches were all corralled into the national savings effort. The exercise proved so successful that by early 1917, as Britain faced its most urgent need for capital, the Treasury was able to launch its single largest war loan for £2.1 billion in capital — a sum equal to £1,096 trillion in today’s money. That loan was not paid off until 2015.

The strategy worked. The blueprint for raising capital for a completely unexpected war a century ago should be a lesson for today’s cash-strapped government.

Norma Cohen is honorary research fellow at Queen Mary University of London. “War Finance in Britain: Capital and the Allied Victory in the Great War 1914-32” will be published next year by Palgrave Macmillan