Bank Underground

How Britain paid for war: bond holders in the Great War 1914-32

Norma Cohen

This post contributes to our occasional series of guest posts by external researchers who have used the Bank of England’s archives for their work on subjects outside traditional central banking topics.

In August 1914, Britain was the world’s wealthiest country. Yet there was no guarantee that government would be able to harness that wealth for World War I. Effectively, Britain was forced into a ‘Battle for Capital’ simultaneous with its military efforts — with the efficacy of the latter dependent on the success of the former. Over 80% of the £7,280 million Britain borrowed from 1914 to 1919, was raised at home. New research shows that Britain’s desperate efforts to marshal its citizens’ capital for the purpose of war, while also struggling to direct wartime production, profits and labour, led to a sharp shift in the sources of its borrowings during the war and in the years after.

The shift in the sources of borrowed capital that was so critical to the outcome of the First World War mirror the profound changes inflicted by the conflict on the nation’s finances, its economy and society at large. New information about those changes comes from some of the hundreds of ledgers of War Loan investors who provided capital for war in the years 1914-1932. These ledgers have never been previously opened for research and thus offer, for the first time, a new insight into how modern Britain was shaped by that war. New research looks at a representative sample of investors 1914-32. These investors purchased two War Loan series, one launched in 1914 and the second in 1917. The sample includes investors purchasing the 1917 loan in secondary markets in the post-war years 1919-32. Representative samples of about 2000 investors from each wave have been analysed. 

Access to capital mattered to the outcome of the First World War because, ultimately it was a war of attrition with neither side able to defeat the other. The army able to outlast its enemy would dictate terms of surrender. That required the capital to buy not only arms and equipment but food for soldiers at the war front and civilians at home. Britain borrowed not only to finance its own efforts, it borrowed to support its allies. This included France, which had a large and deep, centuries-old capital market of its own. Of all purchases, historians conclude, food may have been most important. By autumn 1918, starvation undermined the will of German civilians to continue the war.

Britain’s first effort to raise war finance failed miserably; less than a third of the intended sum was raised, a fact kept hidden from the public for decades. That failure would hang over all other fund-raising efforts. While the slogan ‘Business as usual’ characterised Britain’s initial approach to war, the nation gradually abandoned successive long-embraced principles on free trade, taxation and laissez-faire capitalism. In autumn 1915, Britain sharply increased taxes, broadening the base for the lower middle classes and raising rates for the wealthier to draw in more capital. Increased taxation was also intended to act as a brake on private consumption that was driving inflation upwards.

By January 1917, Britain was so desperate for capital that the Chancellor, Andrew Bonar Law, in discussions with the nation’s financiers, threatened confiscation of bank and insurance company assets unless specified minimum amounts of capital were raised. For banks, the minimum was set at £620 million while for the insurers, the minimum was set at £100 million.

One challenge for Britain was maintaining the sterling/dollar exchange rate since so much of war purchases were in US dollars. To this end, Treasury offered generous terms to persuade British investors to surrender their dollar securities — intended to collateralise dollar-denominated borrowing in the US in exchange for new Exchequer bonds. Ultimately, this effort failed and in February 1917, the securities were ordered to be confiscated.

These efforts, which included offers of previously unthinkable tax breaks, led to debts that weighed on Britain for a generation after the war. Who benefited from this generosity? A sample of British investors in war loans underscore how wildly skewed the distribution of wealth was at the outbreak of war. More than 40% of the capital raised in the 3-1/2% War Loan 1925-28, issued in November 1914, came from financial institutions and businesses. By number of investors, these were only 3.1% of the sample.

The sources of investor’s capital can be identified from investor’s own self-described occupations given in the ledgers, and also from the 1911 Census where a match can be found. A significant minority of post-war purchases appear to have been ‘capital recycling’. That is, businesses which generated outsized profits in wartime could not do so in the peacetime deflation which followed. Wealthy owners of these businesses sold off in mass corporate restructuring following wartime. Sale proceeds were invested in safe ‘War Loan’. As War Loan rose in price, these already wealthy investors became wealthier still.

This can be seen in the proportion of men holding stakes of £1,000 or more during those years was roughly a third, up from less than a fifth in the first sample. To put it in perspective, £1,000 of liquid savings in 1919 is equivalent to £52,023 in today’s money — a sum equal to roughly twice the median household annual income in Britain in 2019.  Moreover, 87% of men’s War Loan in the sample, measured by value was held by those with a minimum stake of £1,000. These investors did well. The 5% War Loan 1929-47 War Loan was launched at a 5% discount to face value and traded at lower prices during and immediately after the war. But after the end of 1922, amid rising unemployment and deflation, it never traded below par.

Table 1: The changing balance between institutional and private investors in war loans

IssuanceDate% of capital from retail investors (by value)retail investors as % of all investors (by number)% of capital from institutional investors (by value)institutional investors as % of all investors (by number)
3½% War Loan 1925-28191456.297.543.83.1
5% War Loan 1929-47191784.599.015.51.0
Secondary market trading1919-3273.597.926.52.0

But the investor base changed as war transformed society and the economy. A striking finding from the newly-opened ledger is the growing role of women during and after the war. Women were fewer than a third of retail investors at the outbreak of war and provided under a quarter of retail capital. By the years year 1932retail female investors outnumbered male retail investors, although these still provided a smaller percentage of retail capital by value. But perhaps the most striking finding is a stark geographic shift in the investor base. While London investors — including banks and insurers — accounted for just over half of all the capital in the first War Loan, these were only 8.1% in the afterwar years. Instead, investors based in the north east and north west of England along with Scotland accounted for roughly two-thirds of all capital in 1919-32.

Table 2: The geographic distribution of War Loan holdings

3½% War Loan issued in 1914 5% War Loan issued in 1917 Secondary market trading 1919-32
By number of investors By value of holdings By number of investors By value of holdings By number of investors By value of holdings
East 6.0% 2.6% 5.6% 4.1% 3.6% 1.5%
East Midlands 3.4% 2.0% 4.8% 4.5% 5.1% 3.0%
Ireland 2.1% 2.9% 1.9% 1.1% 1.4% 1.4%
London 29.7% 50.4% 23.0% 43.4% 9.2% 8.1%
North East 9.0% 5.6% 11.0% 5.1% 13.1% 25.2%
North West 10.7% 10.0% 13.0% 10.6% 16.7% 21.6%
Scotland 7.3% 7.5% 7.3% 3.8% 20.9% 18.1%
South East 16.0% 6.8% 15.1% 14.3% 8.2% 4.9%
South West 7.0% 2.9% 8.8% 5.2% 7.3% 3.7%
Wales 1.6% 1.6% 2.8% 1.7% 6.5% 3.8%
West Midlands 6.7% 7.5% 5.8% 5.7% 6.0% 7.7%

Two structural changes in the British economy appear to have contributed to the shift. The first was the lifting of restrictions on new capital raising in London leading to a surge in equities investment in newly emerging industries. Second, the areas providing capital in the third sample are home to what had been Britain’s core export industries which had done so well out of war, but which went into swift decline in the years after. These were coal, iron and steel, shipping and textiles. This geographic shift is in part a snapshot of how war permanently altered Britain’s economy and its place in global trade.

Despite the natural preponderance of wealthy investors in the ledgers, the research also offers a granular insight into one of the most significant shifts in Britain’s economy following the war; that is, the gradual decline in inequality in income and wealth which was so stark in 1914.

Some of those who gained were at the lower edges of the middle class and in the working class as well. That is because labour shortages in wartime forced government to make unprecedented interventions in wage negotiations in key industries, giving workers bargaining power they never had before. Indeed, the research shows how this played out in the rail industry, for example, where the state took control at the start of the war. In the years after, workers were taking two and a half times what was being paid out to investors as dividends. This might explain why the number of investors with rail-related employment rose from just two in the first sample to seven in the third sample. In addition, the collapse of Britain’s core export industries prompted a rush of mergers and amalgamations, boosting demand for workers with managerial training in fields such as accountancy. These professions did not draw those from the ranks of the landed gentry such as the fields of medicine and law did. Instead these came from the ranks of those benefitting from expanded educational opportunities which pre-dated war. When the occupation groups represented by educated professionals and skilled labour and craftsmen are added together, the number of investors account for over a fifth of male retail investors in total by the after-war years, up from just 10% in the first sample. It must be stressed that, contrary to much popular anti-tax commentary at the time, this research shows that most War Loan was not held by those on modest incomes. Instead it was held by the nation’s wealthiest investors, a significant minority of whom made money out of war. Nevertheless, the research shows how war itself transformed Britain’s finances, economy and social structure.

Norma Cohen is a PhD student at Queen Mary University of London.

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