# The Economics of World War I  ## Metadata - Author: [[Stephen Broadberry and Mark Harrison]] - Full Title: The Economics of World War I - Category: #books ## Highlights - During the twentieth century the world experienced two deadly global wars followed by a ‘cold war’ of unparalleled expense and danger. World War I opened this brutal epoch. To many who took part the experience was little less than apocalyptic; it seemed like an end, not a beginning. They saw it as putting a stop to history, progress, and civilisation. ([Location 267](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=267)) - Our book suggests that the outcome of global war was primarily a matter of the levels of economic development of each side and the scale of resources that they wielded; ([Location 274](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=274)) - Another theme of our book concerns the effects of war on long-run economic development. It is sometimes claimed that war, however dreadful, may have positive ‘spin-offs’ for the nations that take part, whether they win or lose. In practice these are not easy to find. War is, in general, a negative-sum activity. If war was followed by recovery and accelerated development, this was usually no more than a making good of wartime delays and losses. ([Location 280](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=280)) - The main lesson that has emerged from our study of the world wars of the twentieth century is that peace is better than war. The best that can be said for World War II is that a positive spin-off was a common understanding of this lesson. Because of this, the main participants in World War II cooperated after the war to promote recovery and trade. As a result, global economic growth in the half-century after World War II was much faster than in the half-century before it. In contrast, only some of the participants in World War I came away with this understanding. Others believed that the lesson of the war was to wage war again, only better. Hence World War II. ([Location 289](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=289)) - Globalisation has been under way for centuries. The modern wave of globalisation that dates from the early nineteenth century gave a significant boost to world trade, world capital flows, and worldwide migration, with great powers competing for colonial empires on a global scale. The Great War of 1914 to 1918 then interrupted and, for a time, set into reverse the process of globalisation. ([Location 302](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=302)) - Britain and France, the established powers of ‘old’ Europe, had established a condominium over most of Africa and much of Asia; Germany, the rising power of ‘new’ Europe, had no colonies to speak of, wanted some, and expected to get them at the expense of the French and the British. Behind this lay a perception that world power was a zero-sum game. ([Location 305](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=305)) - in the late nineteenth century liberalism was being challenged by a new nationalism that gave more weight to the control of territory and settlement than to trade and competition. When it came to territory, the supply was fixed and there was only so much to go round. Therefore, the new nationalists reasoned, it was worth Germany’s while to break up world trade for a while in order to grab territory from the older powers. ([Location 309](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=309)) - The increasing polarisation of the continental powers shifted attention away from Germany’s original aim, an adjustment of the boundaries of the British and French empires overseas, towards the balance of power in Europe itself. As a result, the war was largely fought on European soil for the control of Europe. ([Location 318](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=318)) - The German attack on France was motivated by a forward-looking calculation: once the coalitions on each side were fully engaged, Germany risked a war on two fronts, against Russia in the east and France in the west. Having identified the Russians as the less mobile enemy, the German plan was designed to avoid a war on two fronts at once by attacking France with a knock-out blow at the first sign of Russian mobilisation; thus, while the Russians completed their mobilisation the Germans would have time to defeat the French before turning their victorious armies to the east to defeat the Russians in their turn. Of course, this is not how things turned out.1 ([Location 323](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=323)) - the German war plan for 1914 anticipated victory in the west within six weeks. The war was intended to be won by military, not economic means, and was to be finished off long before economic factors could be brought into play. It was only after this plan had failed, as the leaders on each side contemplated the ensuing stalemate, that belts began to be tightened… ([Location 331](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=331)) - Once plans were redrawn for a longer haul, a war of attrition developed in the west where the opposing forces of Germany, France, and Britain, each backed by large, rich, and successful economies, ground each other down with rising force levels and rising losses. In battles that were intended to be won by the last man left standing, resources counted for almost everything. The greater Allied capacity for taking risks, absorbing the cost of mistakes,… ([Location 334](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=334)) - In the east, therefore, the immediate outcomes of battles were less determined by economic factors, at least in the short run. Over a period of years, however, the battles drained the weakest economy first… ([Location 341](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=341)) - The economic advantage of the Allies over the Central Powers was substantial at the outbreak of war and rose steadily as the composition of… ([Location 344](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=344)) - What were the resources that were deployed on either side in the war? These are best measured by adding up the populations, territories, and gross domestic products of the territories at war. Populations limited the numbers of men and women available in each country for military service or war work. Territories limited the breadth and variety of natural resources available for agriculture and mining; the wider the territory, the more varied were the soil types and the minerals beneath the soil. GDPs limited the volume of weapons, machinery, fuel, and rations that could be made available to arm and feed the soldiers and sailors on the… ([Location 349](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=349)) - Thus, a relatively high level of economic development was essential if territory and population were to count in war. ([Location 361](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=361)) - By the end of this process governments representing 70 per cent of the world’s prewar population and 64 per cent of its prewar output had declared war on the Allied side. ([Location 369](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=369)) - the mere possession of low-income territories was of little value to a great power in the war. If India helped Britain in the war it was to enable British trade and commerce rather than because Britain could mobilise Indian resources in any meaningful sense. And the trade that really mattered to the British economy in the war was with rich America and Canada, not with poor India. ([Location 401](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=401)) - If Germany could not win the war for the Central Powers in the first six weeks, using surprise in the west and an army with superior military qualities, then the chances of victory could only diminish over a longer span of time in which economies would be mobilised on each side and the balance of resources would count for more and more. ([Location 436](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=436)) - in wartime the British and American economies expanded by over 10 per cent. The trend in Italy’s output is not really known, but the Italian economy certainly kept going and did not collapse (see the appendix to chapter 9). Russia, however, began to collapse in 1916 and France in 1917; this emphasises the importance of the American entry into the war on the Allied side. On the side of the Central Powers the dismal failure of wartime mobilisation was evident from the outset: for much of the war period the German and Austrian economies flatlined at 20 to 25 per cent below their prewar benchmarks for real output. In chapter 4 it is estimated that by 1918 the GDP of the Ottoman Empire had declined by 30 to 40 per cent. ([Location 451](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=451)) - At first the two sides were unequal in military and civilian organisation, motivation, and morale. Germany entered the war with first-rate military advantages associated with ‘the most formidable army in the world’ (Kennedy, 1988: 341), past victories, and the exploitation of initial shock and rapid movement. But the effects of looming defeat electrified Britain and France, transformed public opinion, and forced their armies and governments through intensive courses in the new rules of warfare and mobilisation. This proved to be the pattern throughout the war: each temporary setback was followed by strenuous efforts to refine strategy and strengthen morale and organisation, and these efforts generally succeeded within the limits permitted by the resources available to support them. In short, the ‘moral, political, technical, and organisational’ issues of the war on each side were not independently variable factors but proved to be endogenous to the progress of the war. Other things being held equal, a deficit of organisation or morale on one side tended to be overcome through a self-balancing process. The one thing that could not be overcome was a deficit of resources. ([Location 470](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=470)) - The evidence of the chapters that follow suggests that the comparative success of the various economies in mobilising their resources depended on three factors that varied independently: their level of economic development, their proximity to the front line, and the duration of their engagement. ([Location 492](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=492)) - In the mobilisation of young men we find a pattern that again rises with development and falls with distance. ([Location 519](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=519)) - The richer countries were not only able to mobilise more men. Regardless of distance, they also supplied them better. Capital-abundant economies were able to support capital-intensive warfare. ([Location 534](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=534)) - Countries like Russia and Austria-Hungary were large; why did it make such a difference that they were also poor? The reason lay in agriculture: these were countries that ran short of food long before they ran out of guns and shells ([Location 553](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=553)) - In practice the presence of a large peasantry proved to be a great disadvantage when it came to the mobilisation of resources for war. Peasant agriculture behaved very much like a neutral trading partner. Why should the Netherlands trade with Germany given the latter’s reduced ability to pay, except under threat of invasion and confiscation? Peasant farmers made the same calculation. Thus the Russian economy looked large, but if the observers of the time had first subtracted its peasant population and farming resources they would have seen how small and weak Russia really was. Meyendorff (cited by Gatrell in chapter 8) described what happened in Russia as ‘the Russian peasant’s secession from the economic fabric of the nation’. And not only from Russia, for Italy, Austria-Hungary, the Ottoman Empire, and Germany all had large peasant populations, which proved extremely difficult to mobilise for much the same reason. ([Location 559](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=559)) - the motivation for farmers in the countryside to sell food was greatly reduced. These were subsistence farmers who grew food partly for their own consumption; what they sold, they took to the market primarily to buy the manufactured commodities, such as textiles and metal goods, that they needed for their families. But war dried up the supply of manufactures to the countryside. The small industrial sectors of the poorer countries were soon wholly concentrated on supplying the army with weapons and equipment, uniforms and rations. There was no capacity left to supply the countryside, which faced a steep decline in supplies. Consequently, peasant farmers retreated into subsistence activities. As the market supply of food dried up, in the towns food prices soared. ([Location 573](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=573)) - in richer countries the government paid more to the food producers, and this worked, but in poorer countries we will see that the government wanted to pay less and this had entirely predictable results. The willingness of farmers to participate in the market was still further undermined. ([Location 587](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=587)) - Some readers may be surprised to find Germany numbered among the countries that suffered a decline in agricultural output during the war. Although pre-1914 Germany has entered the economic history textbooks as a developed economic power, it should be noted that its modernisation was highly unbalanced. High levels of productivity in heavy industry co-existed with much lower productivity in light industry, and much of the service sector was also characterised by low productivity, despite Gerschenkron’s (1962) focus on the modernised railways and the universal banks (Broadberry, 1998). But perhaps the most obvious sign of Germany’s relative backwardness was the high share of the labour force engaged in low-productivity agriculture. Germany paid a high price during the two world wars for protecting its agriculture in peacetime (Olson, 1963). ([Location 615](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=615)) - to be poor when war broke out was to suffer the consequences of a peasant agriculture, which was essentially a dead weight on the mobilisation efforts of the country concerned. ([Location 622](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=622)) - Tangible physical capital is the conventional form of capital, consisting of buildings, equipment, and inventories. Intangible physical capital is cumulated expenditure on research and development, which is seen as improving the quality of the tangible physical capital. Tangible human capital is the spending required to produce an uneducated, untrained worker, i.e. basic rearing costs. Intangible human capital is mainly spending on education and training to improve the quality of the human capital, although it also includes other items such as spending on health and safety and mobility costs. ([Location 691](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=691)) - Tags: [[blue]] - Whilst holding to this generally sceptical view of the wider impact of the war, it is nevertheless possible to draw some valuable lessons from a consideration of several aspects of government. It is clearly true that the twentieth century has seen a substantial increase in welfare spending. However, it is equally clear that this welfare spending had its roots in the prewar period. ([Location 786](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=786)) - Tags: [[blue]] - the growing tendency towards combinations and scale in industry in North America and Europe was already under way well before World War I and can be seen as a result of technological developments associated with mass production rather than the outcome of wartime experience with state regulation and control ([Location 792](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=792)) - Tags: [[blue]] - Peacock and Wiseman argued that the war displaced norms concerning acceptable levels of government spending and taxation and appropriate levels of welfare spending and government intervention in the economy. As a result, they argued that there was a ratchet effect, with government spending increasing rapidly during the war through necessity, but falling back by less after the war. Although this appears to fit aggregate spending trends, it does not work once debt service payments are excluded. In other words, the only reason for the ratchet effect was the cost of debt service, with other types of expenditure merely growing in line with national income. ([Location 797](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=797)) - Tags: [[blue]] - There are four key aspects to the model. First, there is a temporary increase in government spending to fight a war. Although this displaces some private spending, the ‘direct crowding-out’ effect is less than proportional, since ‘guns’ are not a good substitute for ‘butter’ and people want to go on consuming butter. Hence the level of aggregate demand increases. Second, there is an increase in aggregate supply, as real wages increase to bring forth the required extra labour. In a way, a war acts a bit like a ‘gold rush’, creating a temporary boom. Third, if the increase in aggregate demand exceeds the increase in aggregate supply, there is excess demand, and this can be met by a deterioration in the balance of trade deficit. Fourth, it makes no difference to the level of economic activity whether the increased government spending is financed by taxation or borrowing. Under this ‘Ricardian equivalence’ of taxation and bond finance, private spending decisions are unaffected by the form of finance of government spending, since bond finance represents a future tax liability, the present value of which is the same as the taxes which would otherwise have to be raised now. ([Location 819](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=819)) - Tags: [[blue]] - the issue of taxes versus bonds in a Ricardian framework becomes simply one of inter-generational transfers and tax smoothing, with a greater reliance on bond financing spreading the burden onto future generations of taxpayers. ([Location 829](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=829)) - Tags: [[blue]] - The consequences of this economic disintegration for the growth of per capita income in Europe and other parts of the world can be seen in table 1.11. The first point to note is that growth of per capita GDP for a weighted average of fifteen European countries was 1.8 per cent per annum between 1890 and 1994. However, whilst Europe grew at roughly this secular rate before 1914 and after 1973, there was a period of slower growth between 1913 and 1950, followed by a period of more rapid growth between 1950 and 1973. This slower growth during 1913–50 is interpreted by Feinstein et al. (1997: 8–9) as the destructive impact of World War I, followed by the economic disintegration of the interwar period and the further destruction of World War II. The argument is given added weight by the fact that the impact was much greater in Europe than in the United States, since the war was fought largely on European soil with unprecedented severity, and Europe’s economies were more dependent on international economic transactions before 1914. On this interpretation, the period 1950–73 is best seen as catching up in a more integrated world economy. ([Location 848](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=848)) - Tags: [[blue]] - Moving beyond the narrowly economic effects of nationalism, one of the most important developments, which cast a shadow over Europe for the next generation, was the switch in focus of German nationalism away from overseas territories and towards a ‘drive to the east’, as noted in Ritschl’s chapter on Germany. This development pointed the way to the horrors of World War II and the Holocaust, with the wrangling over the punitive reparations imposed by the Allies hastening the journey. ([Location 876](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=876)) - Tags: [[blue]] - World War I had some distinct features. One is that economics decided the outcome of the first war in a direct and straightforward sense, even more so than in the second. The military decision of World War I was expected on the western front, where the richest countries engaged most of their forces. Yet the military decision never came. It is true that there were victories and defeats, and that the front became considerably less stable during 1918. But the fact remains that the military struggle ended in ceasefire, not surrender, with the German army still standing on foreign soil. If Germany’s war effort had become unsustainable it was because of the failure of its economy, not its army. In Austria-Hungary, too, it was economic collapse that ended the military ambitions of the Habsburgs, just as urban famine and industrial collapse in Russia signed the death warrant of the Romanovs. In this limited sense World War II was different: it ended in the crushing military defeat of the Axis Powers. What remained the same is that the Allied victory of 1945, like that of 1918, was enabled by an overwhelming predominance of resources. ([Location 912](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=912)) - Tags: [[blue]] - In both world wars the main combatants were able to devote more than half of their national income to the war effort. ([Location 922](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=922)) - Tags: [[blue]] - What does a war shock do to economic behaviour? The war-related resource drain on national product operates very much like a major productivity shock, which exogenously reduces incomes and living standards. For consumers, this generates a strong incentive to smooth out the shock over time, be it through the depletion of stocks or through borrowing. In addition, the shock induces a real business cycle: faced with the very low returns from going to work, consumers value their free time more highly and decide to work less to ride out the shock. In a great war, when emotions run high, this effect becomes even more pronounced: volunteers on either side of the front leave their workplaces in droves to enlist in their armies. Volunteers to the combatant armies prefer spending their time in the trenches killing each other to going to the factory in the morning. This generates a bad real business cycle, from which the participating economies take time to recover. Yet this is not a complete characterisation of the wartime business cycle. As the war goes on, one often sees a remarkable upturn in output, labour input, and investment (Barro, 1981; Ahmed, 1986). If there is some probability of winning the war through economic means, this may be interpreted as a rational investment process. Faced with the choice between large welfare gains in case of victory and large losses in case of defeat, agents accept working overtime shifts, being rationed in their consumption, and investing substantial resources into the war industries. ([Location 1080](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1080)) - Tags: [[blue]] - If the news is not good, mobilising all the resources is hardly rational, as hardly any peace agreement is going to be so harsh as to reduce living standards below even wartime levels. This, in short, characterises the differences between the war economies of Germany and the western Allies during World War I. ([Location 1092](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1092)) - Tags: [[blue]] - The German economy appears to have mobilised about 40 per cent of its annual output and income into the war effort, with the exception of the year of 1917, where the ratio rises to about 60 per cent. This comes out remarkably lower than in the data for Britain, where 50–60 per cent of output was directed to the war effort. This poor performance of Germany’s economic mobilisation for war is consistent with the ‘really bad business cycle’ interpretation sketched above: given the bad news from the front, extreme economic mobilisation was not easy to sell to the Germans. Seen from a sectoral perspective, Germany’s incomplete war effort had its causes in the backwardness of Germany’s large agricultural sector. ([Location 1132](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1132)) - Tags: [[blue]] - Productivity per person employed seems to have fallen between 20 and 30 per cent, depending on the various different industry groups. ([Location 1172](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1172)) - Tags: [[blue]] - One possible reason why productivity suffered suggests itself from looking deeper into the industry structure of output, as in table 2.5. While output in war-related industries such as non-ferrous metals increased, it decreased sharply in everything not related to the war. We also find a remarkable stagnation and eventual collapse of output in iron and steel, despite its strategic importance. The enormous disproportions in sectoral output imply that capital utilisation rates must have been sub-optimal in most industries, driving down aggregate labour productivity. ([Location 1182](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1182)) - Tags: [[blue]] - the cumulative decline in output per capita of the German population is around 20 per cent even in Maddison’s optimistic estimate. Contrast this with Feinstein’s (1972) compromise estimate of British national product per capita (table 7.3): on the other side of the Channel, per capita product increased throughout the war without interruption, to peak in 1918, with a plus of 11 per cent over 1913. Evidently, the economy was not just a sideshow to World War I. ([Location 1201](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1201)) - Tags: [[blue]] - terms, German imports during the war remained at 40–60 per cent below their peacetime levels, while exports fell even further. ([Location 1224](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1224)) - Tags: [[blue]] - British import prices are reported to have increased by a cumulative 125 per cent over the war years (table 7.11), which would leave a real decline of no more than 16 per cent. If we apply the same 125 per cent increase to German import prices (i.e. a factor of 2.25 instead of 1.69), Germany’s imports in 1918 would be an estimated 3.16 instead of 4.2 billion marks. This would imply a cumulative decline of 71 per cent instead of the 61 per cent implicit in table 2.7. ([Location 1228](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1228)) - Tags: [[blue]] - the blockade managed to inflict far greater damage on the German war economy than the not-so-yellow submarines did to England. ([Location 1232](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1232)) - Tags: [[blue]] - wages were robust in the armaments industry and declined the most in civilian industries. ([Location 1282](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1282)) - Tags: [[blue]] - The data in table 2.12 show that, except for 1917, the number of workers on strike in Britain by far exceeded the number in Germany. This becomes even more pronounced when the duration of strikes is accounted for by the number of days lost. Here, Britain’s working class outperformed the Germans almost by orders of magnitude, at least in the early phase of the war. Ferguson’s point thus seems to be a valid one. He acknowledges that, in either country, strikes were mostly not just industrial disputes but more commonly political in nature. However, strikes in Britain and Germany meant two potentially very different things. The lack of political legitimacy of Germany’s government and the beginning of a schism in the Social Democratic Party combined to create a policy of Burgfrieden, a labour truce by which organised labour made big concessions in return for very little. The weakness of either side had the strange effect of preventing the government from regulating the labour market as drastically as Britain was doing at the same time (Kocka 1978: chapter 2). Indeed, the repeated attempts of the military to wield control over labour were defeated, when in late 1916 only a very diluted version of the programme was put into law (Feldman 1966, part V). The new upsurge in strikes in 1917 and again after the failed spring offensive of 1918 destabilised this shaky balance of power. The role of income distribution in this process is clearly minor, as table 2.10 shows. However, the fact that output and living standards had declined overall can hardly be ignored. ([Location 1327](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1327)) - Conventional wisdom has for a long time accepted almost unconditionally that German war finance was based far less on taxes than Britain’s and was, hence, less sound and more prone to inflation. Faced with an adverse productivity shock of major proportions, an individual consumer has a strong incentive to smooth out consumption, be it through the depletion of stocks or through borrowing. This incentive is especially strong in the presence of a distortionary tax system, in which the government’s attempt to cover the cost of war through taxation would cause immense deadweight loss. Provided the government’s claim to honour its war bonds after a war is credible, agents will prefer smoothing out the tax burden over time to paying the bill instantly. This, in loose and abridged form, is the Barro view of war finance; see Bordo and White (1991) and Bordo and Kydland (1995) for applications of the Barro rule to war finance and the gold standard. Viewed from this perspective, the popular argument that German war finance was necessarily unsound is economic nonsense. To the extent that German war finance was more strongly debt-oriented than in Britain, the Barro view would either conclude that the Germans were more risk-averse than the British (that is to say, their period utility function had a stronger curvature), or it would hold that Germany’s tax system was more distortionary than its British counterpart. ([Location 1364](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1364)) - Bordo and White (1991) argue that, since the 1720s, Britain under the gold standard had accumulated a sound record of honouring war bonds at par after a war. It seems that Germany, on the contrary, did not have an established reputation in 1913: while Prussia’s fiscal policy had been extremely conservative throughout the nineteenth century, the same could not be said of the southern German states. Germany had embarked on the gold standard only in 1875, and the credibility of this commitment had not yet been put to test. The same is not true of France, which had paid for the 1871 war and her reparations to Germany through borrowing, and had honoured the debt in full gold value despite deflationary tendencies in the Great Depression of the 1880s. Yet Germany was remarkably successful in selling war bonds during most of World War I. ([Location 1374](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1374)) - it shows that German war finance was strictly of the Barro type: war expenditure and debt financing neatly match each other. ([Location 1398](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1398)) - prices already increased substantially during the war, as did the monetary base. Table 2.16 summarises the evidence. Up to 1918, wholesale prices (column I) had increased by 43 per cent, while prices of a constant food basket (of a sailor in the navy in 1914, column II) had more than doubled. During the same period, the monetary base grew by a factor of six, which testifies to the relative severity of price controls in the German war economy. As the data in table 2.16 bear out, hyperinflation was not a wartime phenomenon. Compared to the postwar years, prices were kept fairly well under control until 1918. The years of 1919 and 1920 witnessed the transition to open inflation, which had got entirely out of hand by 1922. However, a view at the monetary base shows a much steadier inflation process. Except for 1918, annual growth of the monetary base oscillated around 50 per cent per year, and shot up to generate astronomical price levels only in 1923. What made a difference for inflation after 1918 was apparently the ineffectiveness and disappearance of wartime price controls, not money growth itself. ([Location 1435](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1435)) - German war planners preparing for World War II constantly looked back and tried to infer what they considered to be the lessons from World War I. This started with war tactics, where the Germans tried to perfect the use of the one weapon that had contributed most to their own military defeat in 1918: the tank. But lessons did not stop there. Whether real or imagined, German planners interpreted the war as an inherently economic problem, and designed the aims for a war of revenge accordingly. Starting in 1915, public and internal debates on Germany’s war goals began to shift away from the classical ambitions of German overseas imperialism and towards building up a continental empire in eastern Europe. Internal memoranda in the army’s supreme command proposed the gradual Germanisation of Poland and the creation of a tight belt of German farm settlements in western Ukraine. In a classic treatment of German wartime imperialism, Fischer (1967) has claimed that these ambitions were indeed official policy. Nowadays, a consensus has emerged that this is probably exaggerated (e.g. Mommsen, 2001). However, there is no doubt that such ideas were seriously discussed in Germany’s military and political leadership. One such memorandum, elaborated by the Alldeutscher Verband (Pan-German Union), even proposed the ethnic cleansing of all annexed territories. Under the third military supreme command (Dritte Oberste Heeresleitung) of Hindenburg and Ludendorff, Germany indeed came close to putting such war aims into practice. The armistice concluded with Soviet Russia in Brest-Litovsk in December 1917 and a peace treaty imposed on Russia in March 1918 gave Germany almost unlimited freedom to pursue its territorial aspirations, both in the Baltic and in former Russian Poland. Germany occupied the Ukraine down to the Caucasus and even reached the oil fields of Baku on the Caspian Sea, something that Hitler failed to achieve in the Second World War. ([Location 1452](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1452)) - A contemporary observer, writing after the war, argued that Germany’s trade rivalry with Britain had unnecessarily provoked the war, and that Germany should have concentrated on establishing a continental empire instead. Given Britain’s unquestionable maritime superiority, the argument went, Germany’s attempts to break its food blockade had necessarily been futile. Given Germany’s food dilemma, a future war against Britain would only be feasible with the backing of Russia, just as war against Russia was only feasible with British neutrality. That writer was none other than Hitler himself (for details see Ritschl, 1990). ([Location 1467](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1467)) - Mommsen (2001: 153) has referred to the First World War as ‘the incubation phase of a new, aggressively völkisch nationalism and of radical anti-semitism, which spread at a rapid speed and gradually cast its spell over larger and larger parts of the population’. Such was the mindset of large parts of Germany’s political class and its military towards the end of World War I. ([Location 1483](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1483)) - Given the state of mind of Germany’s public, it can be argued that President Wilson’s Fourteen Points and the Treaty of Versailles offered a peace arrangement that was too lax and too strict at the same time. It was too lax because it left the task of uprooting the elites supporting the Kaiser and his armies undone. It was too harsh because it attempted an economic ersatz warfare against Germany instead. The underlying problem of the peace arrangement was that the outcome of the war in 1918 was not as clear as it should have been. Germany’s economy was exhausted but not in ruins. Wartime food rations had been minimal but not obviously below subsistence. The army was technically defeated, but Germany had not yet been invaded. Strikes in the metal industry and mutinies in the navy – which was about to be sent off on a final suicide mission – accelerated the political implosion of Germany. But still, whatever the moves on the military chessboard of Germany’s western front, the defeat was not visible to the man in the streets of Germany. Soon, ‘stab-in-the-back’ myths spread, and asserted that the army had been knocked out, not by enemy action in the battlefield but by faltering morale on the home front. Such urban legends may have helped the uninformed average German to overcome the cognitive dissonance between propaganda and reality. However, they undermined the legitimacy of the new republic from the first day, and laid the ground for future revenge. ([Location 1487](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1487)) - To understand the implications of the incomplete end of World War I in 1918, assume a counterfactual which projects the end of the Franco-Prussian war of 1871 onto World War I with signs reversed. Imagine that Allied troops had stormed the Kaiser’s headquarters in Spa in late 1918, rather than allowing him to slip away into exile in the Netherlands. Suppose, furthermore, that war had continued, with irregular units forming on the German side, as actually happened after 1918. The spring of 1919 would doubtlessly have seen the invasion of Germany by Allied troops. In a further analogy to 1871, one might imagine the Allies encircling the cities of Berlin in the east and Munich in the south, while communist insurgents and the right-wing irredenta kept fighting each other in the besieged city centres. To complete the counterfactual, imagine the proclamation of a new French monarchy in the hall of mirrors in Potsdam’s Sans Souci castle in 1919. Evidently, the analogy is not complete: Berlin does not easily compare with Paris, and Sans Souci can by no means rival Versailles. However, what matters is the significance of these places in the political symbolism of either country, not the size of their respective halls of mirrors. It took another war and the rise of the Soviet Union for the Allies to finally make it to Potsdam and sign an agreement there in 1945. America’s insistence on an early armistice and its swift withdrawal from the European war theatre had to a certain extent spoiled the military victory over the armies of the Kaiser. The harsh clauses of the Treaty of Versailles can be interpreted as a desperate attempt to achieve an ersatz victory by economic means. ([Location 1510](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1510)) - during the international deflation after 1921, price levels quickly fell again. This subsequent deflation (to about 130 per cent of the 1913 price level in the US in 1922 (e.g. Dornbusch, 1987) thus operated as a debt deflation on German reparations, raising their real value again. ([Location 1532](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1532)) - What did cause a problem, though, were the intended additions to the net indemnity. A first item was the so-called B bonds, considered by some to be an indirect compensation for the future inter-Allied debt owed by the European Allies to the US (panel I of table 2.17). At gold parity, these amounted to another 80 per cent of Germany’s GNP of 1913 (panel III of table 2.17). Taking these two parts of Germany’s reparations debt together, Germany thus owed almost her entire peacetime GNP abroad in reparations. To this was added what could be termed the unrealistic part of Germany’s reparations, another 160 per cent of her GNP of 1913. This sum was added to the reparations bill mainly to pacify right-wing backbenchers in the parliaments of London and Paris. Payment on this item was arguably never seriously expected ([Location 1561](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1561)) - Under the influence of Keynes’ (1919) polemic against the peace treaty, contemporaries were worried about Germany’s ‘capacity to pay’, envisaging macroeconomic transfer problems should reparations really be paid. However, as a sovereign debtor, Germany was evidently not easy to force into payment, and default would seem like an obvious prediction. The modern theory of sovereign debt since Eaton, Gersovitz, and Stiglitz (1986) and Bulow and Rogoff (1989) has emphasised the dominance of willingness-to-pay constraints over capacity-to-pay constraints in sovereign country debt. ([Location 1584](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1584)) - It is the pity of the peace of 1919 that the Allies lacked the necessary resolve to turn military advantage into political victory. There is no way of knowing how the Weimar Republic would have fared had the war ended with results as obvious and indisputable as those of 1871. Germany’s war on France was clearly orchestrated by the Prussian hegemon, and Prussia’s determination to carry it to the extreme indirectly helped to stabilise France’s new republic. World War I against Germany was much more of a classical coalition war. Its premature end both revealed the fissures within that coalition and foreshadowed its later break-up. And it offered little help for political transition in central Europe. Germany escaped from the horrors of World War I with its economy weakened but its determination to pursue its nationalist goals largely unscathed. The premature end of the war and America’s sudden withdrawal from the scene, so bitterly criticised by Keynes (1919), opened a security void in Europe that America’s weakened allies could not easily fill. In this situation, the Treaty of Versailles was at best a poor substitute. It sought economic safeguards in the absence of a credible security arrangement. It prolonged the agony of Germany’s economy for several more years. It strengthened the elements aimed at revenge instead of promoting change and modernisation. And when its feeble controls ultimately collapsed, nothing was left to prevent Germany from rearming for World War II. ([Location 1605](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1605)) - The pity of war lay in providing German imperialism with a new geographical aim, and the pity of peace lay in providing it with the necessary breathing space to get there. This chapter has sketched a counterfactual borrowed from the Franco-Prussian war of 1871 to examine the possible effects of a more clear-cut end to World War I. Failure to fight the war to the end in 1919 and the hasty withdrawal of American troops generated a security void in Europe that the economic clauses of the Treaty of Versailles could not fill. Had a clear regime change in Germany been sought and supported by a credible security arrangement, the modernisation of Germany and its economic recovery would have been secured against a fallback into its old vices. Lacking that, the peace treaty substituted military credibility with economic pressure, and the nascent Weimar Republic bore the double burden of unreasonable economic demands from without and unreasonable charges of collaboration with the enemy from within. ([Location 1644](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1644)) - than 1 million of the 8 million men mobilised in the Austro-Hungarian armed forces had died in action or as prisoners of war. More than 1.8 million had been wounded, 3.5 million had become ill and hospitalised, while between 1.5 and 1.7 million soldiers of the Habsburg armies were taken prisoner ([Location 1736](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1736)) - While the Habsburg authorities may have gambled on a short military conflict that could be fought on the basis of material stocks, from an economic perspective the empire was ill prepared for the long, resource-intensive industrial war that was to start in August 1914. Some basic observations underline the point. Judged by its commitment to spending on armaments, Austria-Hungary was, perhaps ironically, the least militaristic of the six major European combatant nations. While participating in the prewar European armaments race (Stevenson, 1996), it did so with less vigour than any of the other major belligerents. A measure available to contemporaries such as per capita defence expenditure would suggest that there was only a very small difference in defence commitment between Austria-Hungary, Italy, and Russia (table 3.1), all of whom spent far less on defence per inhabitant than the richer economies of Britain, France, and Germany. ([Location 1745](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1745)) - the scope for expanding the female labour force was severely limited by the extent to which, prior to the war, women were engaged in low-productivity agriculture. According to the 1910 census, nearly 45 per cent of Austria’s female population participated in the labour force and most of those (67 per cent) were in agriculture, largely as so-called ‘family helpers’.4 The female participation rate in agriculture stood at 58 per cent and Winkler (1930: 31–2) argues that there was little room for going much, if at all, beyond that level. Any significant increase in the size of the female labour force was, therefore, largely confined to the urban, non-agricultural population.5 There, initial prewar female participation was about half of that within the agricultural population, permitting a pronounced increase during 1914–18. ([Location 1841](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1841)) - The agricultural sector provides a poignant illustration of the first problem. In both halves of the empire, its absolute and relative size in terms of output shrank dramatically during the war as labour, seeds, fertilisers and transportation were lacking, leading to widespread and progressively more serious food shortages (see pp. 91–7). Austria-Hungary’s experience thus offers a stark reminder that a country’s peacetime (near) self-sufficiency in foodstuffs may well be irrelevant to its war economy (Hardach, 1987: 111–12, 121–3). Before the war, male agricultural workers accounted for half the total male labour force in Austria; in Hungary theproportion was even higher at 67 per cent (Austria – census 1910; Hungary – census 1910). Drafting these men (or a significant proportion of them) from low-productivity agriculture into the armed forces was bound to have a large adverse effect on the total output of foodstuffs. Yet the blockade against the Central Powers succeeded in making compensating imports of foodstuffs unavailable. ([Location 1922](https://readwise.io/to_kindle?action=open&asin=B00E3UREA2&location=1922))