As the death toll and economic costs of the coronavirus outbreak make themselves felt, a swath of commentators — elected officials among them — have compared the crisis to wartime. Public pronouncements are littered with references to the Blitz and the Dunkirk spirit invoking a plucky Britain at a dark historical moment.
The analogy between wartime and the pandemic crisis is driven by the reality that they both are about nothing less than national survival. States will throw every penny of national treasure at them to ensure their continued existence.
However, comparisons to 1940s Britain may be looking at the wrong war. The current circumstances are probably closer to those faced in August 1914 at the outbreak of the first world war.
Economic signals from governments on both sides of the Atlantic are pointing to the sharpest contraction since the Great Depression as efforts to stem the pandemic choke off businesses and workers from their livelihoods. It was the first world war that upended industrialised economies, paving the way for that depression.
Mark Harrison, professor of economic history at Warwick University who has studied war finance, argues there are good reasons to compare the current pandemic to wartime. The pandemic, like war, is an enemy that is striking at national supply chains: “It attacks economic co-operation and the division of labour.”
The question is whether Britain — or indeed any other industrialised economy — is any more prepared for the disruption the pandemic will cause in capital markets than was the case in 1914.
As with the outbreak of the pandemic outside China early in 2020, the first ripples of disruption then made themselves felt in financial markets shortly after the assassination in Serbia of Archduke Franz Ferdinand in June 1914. The London Stock Exchange closed, along with the one of Paris and eventually New York, and remained officially closed until January 1915. The Bank of England in the following months, stepped in to provide liquidity — albeit much more modestly in 1914 than in 2020 — to stabilise the banking system.
Unlike in 1940, Britain was unprepared for a war that would prove as enduring and cataclysmic — and expensive — as the years 1914-18 would become. Indeed, then chancellor David Lloyd George pronounced the official British stance towards war as “business as usual”, predating Boris Johnson’s herd immunity approach to allowing the pandemic to spread.
In his November 1914 budget, Lloyd George conceded that more capital would be needed, announcing the largest ever borrowing with a double-dated maturity, the £350m 3.5 per cent War Loan 1925-28. But that coupon, although higher than the ones on any other UK government borrowing, was too little to attract the needed capital. The loan was a flop, forcing the Bank of England to step in to buy up the securities, a fact kept hidden from the public for decades. Over time, the amount of capital Britain would be forced to raise for war, and the price it had to pay for it, grew exponentially.
Indeed, chancellor Rishi Sunak’s initial announcement of £350bn in aid to prop up the nation’s economy — equal to roughly 15 per cent of GDP — has already been augmented with a further $60bn and looks inadequate seen in the context of war finance. A single issue, the 5 per cent War Loan 1929-47, launched in early 1917, raised £2.1bn alone, a sum equal to more than 40 per cent of GDP prevailing at its first maturity date.
By 1915, as in 2020, it became quickly apparent how woefully unprepared Britain was for such a crisis. Not until the fall of the Asquith government in December 1916 did Britain take steps to control the costs of labour, materials and profits. Product shortages occurred early in the war just as tests and protective equipment for health service workers fell short at the start of the Covid-19 outbreak.
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A shortage of jute, the fibre used to make sandbags to protect soldiers in the trenches, emerged early in 1915 as an early example. The War Office requisitioned the output of the Dundee jute mills allowing it to obtain supplies and fix prices, but it was reluctant to use its powers more broadly.
A key difference is that capital now is sufficiently plentiful — aided by a variety of central bank programmes — to be raised at far lower interest rates than it was in 1914-18, as UK government borrowing edged towards 6 per cent. However, as states compete for capital, the price tag is likely to rise. The question is whether Britain emerges from the pandemic in any better shape than it did from war.
Norma Cohen is the FT’s former demography correspondent and author of a PhD thesis, How Britain Paid for War: Bond Holders and the Financing of the Great War 1914-32