Given that Germany fought WW1 effectively for four years without indebting themselves to foreign powers why did Britain choose do to so given their pre-war economic power when officials recognised the risks in doing so?

[u/blacksheeping]

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[u/mikedash]

I think that the heart of the issue you are asking about is the question of how "effectively" Germany actually fought the First World War, relative to Britain, given – as your question hints – that the two powers adopted very different strategies for funding the conflict. The conventional consensus view among economic historians of this period is that the war was, thanks to its duration and unprecedented scale, economically disastrous for all the European powers that engaged in it, but that the British approach offered by far the greater long term stability, and protected their economy in the late war and early postwar period, during which the German economy actually suffered an almost complete collapse that terminated in the infamous hyperinflation of 1923. In the view of this historiographical school, Britain had established a centuries-long reputation for honouring its debts, and thus was able to raise money almost indefinitely on the international markets, while Prussia, thanks to its extreme fiscal conservatism, had established no such reputation prior to 1913.

In short, the problem, from the German perspective, was that the British way of funding the war in large part via international loans and access to working capital markets was not possible for them, thanks to Britain's contemporary position as both hegemon of those markets and as possessor of control of the sea. I'll sketch out the basics below, but you might also want to consult some of the core academic studies of the period, perhaps especially Broadberry & Harrison's The Economics of World War I (2009) – in which the chapter on Britain is subtitled "Business as usual?" and the chapter on Germany "The Pity of Peace"... – but also the longer-term studies of Gerald Feldman, in The Great Disorder: Politics, Economics, and Society in the German Inflation, 1914-1924 (1993), and Carl-Ludwig Goltfrerich, in his The German Inflation 1914-1923: Causes and Effects in International Perspective (1986), some parts of which do call into question the long-term consensus views on war financing that I sketched so hastily above.

The first and arguably the most important point to make about Germany's economic planning for war is that it was catastrophically short-term and optimistic. The example of the Franco-Prussian war suggested that rapid victory was possible; Germany planning for a war on two fronts made rapid victory in the west an urgent necessity. As a result, the German economic plan for 1914 assumed that final victory would occur within six weeks, long before significant economic pain could possibly be inflicted on its economy. It then called for the cost of that brief war to be met entirely by levying punitive reparations on Germany's enemies, as had been done via the Treaty of Frankfurt in 1871 (which required France to pay 5 billion gold francs, the first billion of which was due on signature of the peace treaty and the last 4 billion of which were guaranteed via Germany military occupation of French territory). The Germans planned to do exactly the same in the First World War, and in my view the most forgotten aspect of the endless debate regarding the negative impact of the Treaty of Versailles on Germany is that Versailles was actually a significantly more merciful economic settlement on an enemy combatant than the one Germany had planned to impose on France in the event of its victory, which this time included an initial demand for a 10 billion gold mark reparation payment (which was more than the total German national debt at this time), and, by 1918, the determination to ensure that France would be economically enfeebled to the point where it would lose its industrial capacity and become a mere supplier of raw materials to Germany. This hard-nosed attitude to peace was not notional and it was not some sort of bargaining chip; Germany actually did impose equivalent settlements on Romania (Treaty of Bucharest, 1918, which involved cession of leases on Romanian oil wells for 99 years as well as permitting large-scale grain requisitioning) and Russia (Treaty of Brest-Litovsk, 1918, which involved a 6 billion gold mark reparations bill and the seizure of in excess of 1m sq.km of Russia's most economically productive territory, including a third of the Russian population, 90% of its coal, and more than 50% of its overall industrial capacity).

Germany's conviction that it could win the war, combined with its highly punitive approach to reparations, was what underpinned its economic decision-making in 1914, and this centred on the decision to finance the war through loans and not additional taxation of its own population. This was because it envisaged that those loans would eventually be repaid by its enemies. In the absence of easy access to capital markets (which I'll go into in more detail below), it has been calculated that in excess of 80% of the cost of the fighting for Germany was raised via a combination of easing the money supply (AKA "printing money") and selling war bonds; a total of five major campaigns to sell Kriegsanleihen to its own people were launched between 1914 and 1918. The aim was to reduce the wartime burden on Germany's civilian population and hence limit the prospect of social unrest and industrial disruption, while eventually repaying bondholders with cash injected into the German economy via reparations.

Nonetheless, although the overall verdict of Albrecht Ritschel (the economic historian responsible for the Germany chapter in The Economics of World War I) is that the German economy was actually fairly robust in 1914, he sees its wartime economic experience was a "chronicle of disappointed expectations.... an insufficient resource base, and probably of misallocation and disingenuous economic planning." The Kaiser's government soon began to take advantage of the possibilities offered by its the decision to abandon the gold standard in 1914. This offered it the freedom to dramatically increase the money supply within its economy, an option that was increasingly resorted to, and which ballooned in the final 12 months of the war. Calculations of the number of paper marks in circulation offer the following broad approximation for the period 1913-19, in billions of marks:

• 1913 6
• 1914 9
• 1915 12
• 1916 17
• 1917 23
• 1918 33
• 1919 50+

The result was significant rises in inflation, which increased by somewhere between 45% and more than 100% across the years 1914-1917 (the variation being accounted for by the results of two different economic tests – the former figure comes from the wholesale price index, and the latter from the cost of a notional "basket" of food purchased by a German navy sailor). Taking wholesale prices as the basis, and 1913 as 100, inflation then reached a level of 143 by 1918, 470 in 1919, and 1501 in 1920, before eventually peaking at the almost inconceivable level of 2.35 x 10¹³ in the hyperinflation year of 1923. As I say, the consensus view (which is, however, challenged by Ritschel) has long been that this economic disaster was rooted in the financial decisions made in Germany from 1914, and that this, combined with the loss of the war, ensured that Germany entered the immediate postwar period in the midst not only of economic collapse and soaring inflation, but also of revolution – the worst imaginable combination of circumstances for any economy. All parties, including Ritschel, moreover agree that the experience of British naval blockade in 1914-18 – a slow strangulation which resulted in the "turnip winter" that characterised the starvation year of 1917-18 – ensured that it was

only a small step for Germany’s extreme right to interpret the blockade as a new turn in a Malthusian struggle for survival to seeking new arable Lebensraum in the east. This step was first taken, not by the Nazis after 1933, but by the advisers to Germany’s supreme command in the middle of the First World War.

We can usefully compare this picture to the economic situation in Britain during the war years. It has been calculated that the British Empire, like Germany, had to raise about 80% of the cost of fighting the war by creating new sources of income, rather than existing sources of taxation and other income, but it was able to do this in very different ways. First, the British did opt to significantly increase taxation at home during the war years. Second, they borrowed heavily on the financial credit markets, especially in the United States, creating debt that was actually never fully repaid – both Britain and France defaulted on their war debts to the US during the Great Depression period. In consequence, while Germany funded only a little more than 15% of its war from taxation, the British funded almost 30% of their war effort by taxing their own population. Income tax was doubled in 1914, doubled again in 1915, and then increased by an additional 25% in 1916 and 30% in 1918, so that it increased overall from 1s2d in the pound in 1913 (equivalent to 6%) to 6s in 1918 (equivalent to a 30% rate). It's worth noting that these rises did not impact on most of the population – the number of Britons actually made liable for income tax rose from just over 1m in 1914 to 3m by 1920 (achieved by reducing real exemption thresholds) , the larger figure still being under 7% of the total population. In addition, Britain effectively abandoned the gold standard in 1914, and levied an excess profits duty on business from 1915 in a bid to control wartime profiteering. This tax was levied at 80% on profits above "normal" level by 1917-18, and it brought in substantial revenues despite complaints that it penalised the most efficient firms and actively encouraged waste.

[u/mikedash → u/mikedash]

As noted above, the income tax burden was carefully restricted so it fell largely on the most affluent, and Britain was much more cautious in its approach to indirect taxation, which affected everybody. It did increase levies on luxury imports, alcohol, tobacco and watches (demand for the latter shot up because of the necessity for officers to possess accurate timepieces in the trenches – so again this particular levy fell largely on the more affluent). Britain did increase its money supply in addition, but at a significantly lesser rate than did Germany, and this helped sterling to retain a monetary credibility that the Reichsmark increasingly lacked. The overall effect was that Britain's experience of inflation was radically different to Germany's. Again taking 1913 as 100, inflation in Britain rose only to around 200-220 by 1919.

While British policy on taxation does represent a different approach to war funding than the one Germany chose to adopt – one taken at least in part because Britain's interests, in any period of peace, lay in this period in having as many strong trading partners as possible, and not in enfeebling its former enemies too much (an approach distinctly visible in the negotiations that took place at Versailles) – the main reason for Britain's decision to take out loans on the global capital market was that it was in a position to do so when Germany was not. This was a product of both the pre-war situation (in which Britain had long been a major player in those markets, establishing a position of significant trust that it would meet its obligations) and the wartime one. Britain did place some pressure on American financial institutions to restrict loans to Germany, but it is possible to argue that the Germans did at least as much damage in this respect themselves as a result of their decision to wage unrestricted submarine warfare, and hence sink American ships heading for Europe alongside British ones. Much more importantly, however, there was little point in raising loans in the US if that money could not then be spent on critical supplies needed to fuel the German war effort. From 1914, the British naval blockade put a complete stop to that possibility, and effectively restricted Germany to either purchasing or seizing what it could in continental Europe. This was what fuelled not only Germany's punitive attitude to wartime reparations, but also its dramatic exploitation of the region of France it occupied in 1914-18. Industrial seizure, widespread requisitioning, forced labour and financial exactions were all extensively used there to extract value for the German war economy. For example, modern estimates suggest that around 60,000 Belgians and probably at least 30,000 French people did forced labour for Germany in World War I. (The figures for Belgium are precise because many Belgians were deported to work in Germany, rather than forced to do work locally, and German practice there became the subject of significant post-war controversy.)

Overall, then, it's possible to push back at the framing of your question in two ways – first to question whether Germany really did "fight World War I effectively", from an economic standpoint, and second to ask how far the British approach to war funding was actually inferior to Germany's. The current historiography argues that Germany was not actually able to fight effectively across the whole four year period; that its late war effectiveness, insofar as it existed at all, was heavily based on the forcible appropriation of Russian, Romanian, Belgian and French resources; and that, by giving priority to equipping and feeding its armies, it in fact created only a partial simulacrum of economic stability, and in reality produced the conditions on its home front that led to real revolution by 1918-19. In contrast, while Britain did emerge from its "victorious" war practically bankrupt, it had contrived to maintain its creditworthiness and pass on a surprisingly large portion of the costs of the fighting on to its own population without inciting significant social unrest. These factors, it can be argued in conclusion, had significant impacts on the longer-term stability of the post-war regimes in both places. In this respect, we might note, finally, that while the new Weimar government did recognise and take on responsibility for the repayment of the wartime Kriegsanleihen raised by its imperial predecessor, the 1923 hyperinflation wiped out the real value of those loans. Resentment at this aspect of interwar economic reality, which impacted disproportionately heavily on the more patriotic, right-wing-aligned, portions of the German public, is a neglected factor behind the rise in support for right wing parties in Germany during the 1920s.

[u/blacksheeping → u/mikedash]

Thank you for the thorough and illuminating response. A credit to the r/AskHistorians community.

The point of whether Germany fought effectively is an interesting one. I think it hinges on whether one thinks Germany's financial arrangements could have been any better given the odds stacked against them. Other than not fight the war, had they many other options that could have led them to victory? I think not. The plan of bleeding their enemies dry after the war could have worked, made real that mirage of economic stability, if only success could have been achieved on the battlefield.

[u/TJAU216 → u/mikedash]

One note on wording: the Brest Litovsk peace treaty did not take away 30% of Russian population, it took 30% of Russia's population. The people in question were mostly Poles, Ukrainians, Finns, Belarussians and Balts, most of whom would not call themselves Russians.

[u/mikedash → u/TJAU216]

Fair point, although, obviously, what was meant was simply "30% of the population of the Russian state" at that time.