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<META NAME="Description" CONTENT="World War I had a huge impact on the international financial system. The war nearly destroyed what had been the central element in the internationl finncial system--the gold standard. None of the belligerenant countries demonitized gold or refused to buy gold at fixed prices, none continued the the basic tenents of the pre-War gold standard. With the outbreak of War, both the belligerants and the United states adopted official and unofficial actions affecting fiscal policies and the gold standard. This was seen as temporary measures given the fact that most officials believed that the War would be a a short conflict, over in a few months. It almost was. No one forsaw abanding the gold standrd as a desorable permanent outcome. Wars have to be financed and the gold standard placed a brake on a vountry's financing. While military histories focus on battles, commanders, and weapons, financing the war is often a major factor in affecting the outcome. And this is especially the case in along, destructive war like World war I. Europe at the time of World War I was the center of world finance. European bankers were financing projects around the world. The three important financial powers of Europe were Britain, France, and Germany. Here Germany was in third place. While Germany was the largest of the three powers in both population and economic poyput, avavailable capital was primsrly invested in the doestic market. And the relative late entry of Germany in the colonization process meant that the colonies it did acquire were of relatively limited economic importance. Britain was the center of world finance. Estimates suggest that some 60 percent of world trade was financed through British banks and other financial institutions. [Hoen, p. 7.] Both Britin and France had very substantial overseas investments and thus resources upon which to draw. A fourth country had very important and growing financial resources, the neutral United States. The United States traded with all four countries, but its financial ties were primarily with Britain.    With photos and text. ">

<META NAME="KeyWords" CONTENT="World War I, First World War, aftermath, international system, countries, economy, economics, industry, insustrial sector, agriculture, food, rationing, finances, financing, gold system, kinternational financial system, ">

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<center><h1>World War I:  National Finances</h1></center>

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<i>Figure 1.--   </i>
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<p> World War I had a huge impact on the international financial system. The war nearly destroyed what had been the central element in the internationl finncial system--the gold standard. None of the belligerenant countries demonitized gold or refused to buy gold at fixed prices, none continued the the basic tenents of the pre-War gold standard. With the outbreak of war, both the belligerants and the United States adopted official and unofficial actions affecting fiscal policies and the gold standard. This was seen as temporary measures given the fact that most officials believed that the War would be a a short conflict, over in a few months. It almost was. No one forsaw abanding the gold standrd as a desorable permanent outcome. Wars have to be financed and the gold standard placed a brake on a vountry's financing.  While military histories focus on battles, commanders, and weapons, financing the war is often a major factor in affecting the outcome. And this is especially the case in along, destructive war like World War I.  Europe at the time of World War I was the center of world finance. European bankers were financing projects around the world.  The three important financial powers of Europe were Britain, France, and Germany. Here Germany was in third place.  While Germany was the largest of the three powers in both population and economic poyput, avavailable capital was primarly invested in the domestic market. And the relative late entry of Germany in the colonization process meant that the colonies it did acquire were of relatively limited economic importance. Britain was the center of world finance.  Estimates suggest that some 60 percent of world trade was financed through British banks and other financial institutions. [Hoen, p. 7.] Both Britain and France had very substantial overseas investments and thus resources upon which to draw. A fourth country had very important and growing financial resources, the neutral United States. The United States traded with all four countries, but its financial ties were primarily with Britain. 
<br>
<h2>Gold Standard</h2>
<p> The major industrial nations maintained a gold standard, meaning that their currencies were pegged to the price of gold and maintained large gold reserves. The centrl bankrs of the era were committed to the gold standard with a virtually religious devotion. [Ahamed]  World War I had a huge impact on the international financial system. The war nearly destroyed what had been the central element in the internationl finncial system--the gold standard. None of the belligerenant countries demonitized gold or refused to buy gold at fixed prices, none continued the the basic tenents of the pre-War gold standard. With the outbreak of war, both the belligerants and the United States adopted official and unofficial actions affecting fiscal policies and the gold standard. This was seen as temporary measures given the fact that most officials believed that the War would be a short conflict, over in a few months. It almost was. No one forsaw abanding the gold standrd as a desorable permanent outcome. Wars have to be financed and the gold standard placed a brake on a country's financing.  
<br>
<h2>Country Financing</h2>
<p> While military histories focus understandavly on battles, commanders, and weapons, financing the war is often a major factor in affecting the outcome. And this is especially the case in along, destructive war like World War I.  Europe at the time of World War I was the center of world finance. European bankers were financing projects around the world.  The three important financial powers of Europe were Britain, France, and Germany. Here Germany was in third place. While Germany was the largest of the three powers in both population and economic output, available capital was primarly invested in the domestic market. And the relative late entry of Germany in the colonization process meant that the colonies it did acquire were of relatively limited economic importance. Britain was the center of world finance.  Estimates suggest that some 60 percent of world trade was financed through British banks and other financial institutions. [Hoen, p. 7.] Both Britin and France had very substantial overseas investments and thus resources upon which to draw. A fourth country had very important and growing financial resources, the neutral United States. The United States traded with all four countries, but its financial ties were primarily with Britain. 
<br>
<h3>Austria-Hungary</h3>
<p> Austria-Hungary shared the belief with Germany a war could be won very quickly.  This was based on their belief that they could easily defeat Serbia and that the Germans had an army powerful enough to defeat Russia and France.  They were of course wrong on both accounts.  Thus they saw a short war which could be easily financed.    
Austria-Hungary were thus reluctant to adopt unpopular fiscal and raise additionl revenues after thy and German launched the War. [Eichengreen, p. 74.]


<!
What made Austrian and Hungarian state finances exceptional was how little of their ordinary revenues could cover war expenditures. Whereas the United Kingdom covered 28 percent, and the United States even a third of the war cost through tax revenues, other belligerents could hardly match such high proportions.[11] According to Teleszky, only 5,2 percent of Hungarian war expenditures were financed through ordinary budget revenues, while 94,8 percent were financed through government loans. 31,5 percent of the war cost was covered by loans from the Austro-Hungarian Bank, 53 percent by issuing war bonds, 5,2 percent by loans from the big Budapest banks, and only 5,1 percent by foreign loans. According to my estimate, 53 percent of the war expenditures in Austria were financed by issuing war loans, and 37,9 percent through the loans of the Central Bank to the government. The big Vienna banks loaned 3,9 percent of the war costs, and the remaining 5,2 percent were met through foreign loans.[12] In the case of Austria, the total government debt accumulated during the war amounted to 68.5 billion crowns which exceeded the total sum of war costs. It goes to show that tax and non-tax revenues of the Vienna government were not sufficient to cover even civilian expenditures.[13]

Until the end of 1915, the Austrian government held the opinion that the country’s population, already affected by the hardships of the war, would be unable to bear an additional financial burden.[14] The Treasury in Vienna only started reconsidering its revenue policy as the financial situation worsened. In April 1916, a war profits tax with progressive rates based on the German model was introduced. However, it did not yield much revenue, as the new law retained many loopholes for tax evasion.[15] From autumn 1916, measures were taken to cover a larger share of expenditures through tax and non-tax revenue. Surtaxes were levied on already existing direct taxes such as income tax, profit tax of joint stock companies and land tax. The prices of tobacco products were repeatedly increased, and consumption taxes on spirits and beer were raised. In spite of the drastic increase, consumption taxes did not generate much income due to diminishing domestic consumption. Gambling and playing the lottery were also taxed harder, and the taxation of match, flint and steel was introduced as a new type of state revenue. Tax rates were raised again in 1917 and 1918. In January 1918, taxes on wine and sugar consumption, general tax on earned income, land tax and surtaxes on direct taxes were increased. Following the German sample, coal tax was also introduced.[16] Still, all these efforts to increase the revenue did not prove effective. Austria’s financial situation worsened continuously, and by 1918, the government was accumulating dramatically growing debts. Revenues from the state monopolies tobacco, salt and saccharin proved equally insufficient in both Hungary and Austria.[17]

The Austro-Hungarian Monarchy started the war without adequate financial preparations.[18] The economic situation was not helped by the fact that no new budget estimates were introduced in either the Austrian or the Hungarian parliament until late 1917. Since the last ordinary estimates had been accepted in Austria in 1910, state finances had been regulated only through decrees (Budgetprovisorien) until 1916-1917, as the Reichsrat had been put off in March 1914 and was dissolved in July that same year. Paragraph 14 of the 1867 constitution empowered the government to regulate important questions requiring parliamentary approval when the Reichstag was not in session. The Vienna parliament reassembled in May 1917, when the first new budget since the outbreak of the war was introduced.

In Hungary, too, no ordinary estimates were accepted during the war years, but the validity of the act regulating state finances from 1914-1915 was repeatedly extended by bills of authorization. Paragraphs 16 and 17 of the Bill LXIII from 1912, which enacted the state of emergency in case of war, granted the government full power to take all measures necessary to cover war costs. Although the Budapest parliament was in session during the war, conflicts between political groups made it difficult to fund war expenditures with ordinary budget revenues. Proposals for tax increases or attempts aimed at the introduction of new taxes were met with strong opposition already before the war broke out.[19] The duration of the war, as well as the quickly growing military expenditures, compelled the Treasury to enlarge budget revenues. Income tax, which had existed in Austria since 1896, was introduced in January 1915, while a property tax and a war profits tax were accepted by the Hungarian parliament in 1916. However, none of the newly introduced taxes yielded adequate revenue, as the income tax rates, for example, were only modestly progressive and applied merely to exceptionally high incomes.[20] Inefficient administrative procedures and shortage in qualified personal contributed to delayed tax collection. Maintaining the social consensus combined with the need to continue their involvement in the war forced both governments to find other ways of financing the war.
4 Government Debts
↑

Since common public revenues as a way to defray war expenditures were of limited significance in the Austro-Hungarian Monarchy, these costs had to be covered by loans. After the outbreak of the First World War, foreign credits ceased to serve their prior, long-term investment purposes for the governments, but instead covered current public expenditures. The line-up of creditors had substantially changed as well. Money holders such as the Central Bank and the population, which had not given the government credit before, became the most important lenders, replacing former foreign creditors for many years to come. European financial markets discontinued capital exports from summer 1914. From November and December of the same year, a further embargo prohibited all financial transactions between citizens of opposing belligerent nations thus restricting capital flows to countries of the same military alliance. As a consequence, neither Austria nor Hungary could borrow abroad following the summer of 1914. Instead, loans were to be obtained principally from domestic funds such as the big commercial banks, the Central Bank or the population, while only a smaller amount of capital was to be raised in Germany and in the neutral countries.
5 Central Bank Credits
↑

From summer 1914, the credits of the Austro-Hungarian Bank became the main source with which to cover the growing budget deficits. The first loan agreement was signed 14 August 1914, followed by many others. The governments shared the amount of loans in accordance with their respective agreed-upon quota to the joint affairs, which were at 63,6 percent for Austria, and at 36,4 percent for Hungary at the time. The legal background for central bank credits was created on 17 August 1914 by abolishing the Bank’s Statute, forbidding the Bank to supply governments with funds.[21] Elimination of the Statute repealed the Bank’s former relative autonomy and made her defenceless against the governments’ credit demands. The 40 percent cover ratio of bank notes was also suspended, along with the duty to maintain the value of the currency. In consequence, the monetary policy of the Central Bank turned out to be one of the major factors that caused the depreciation of the crown.

During the first year of the war, the Austro-Hungarian Bank supplied separate credits for the respective governments. From mid-1915, a regular credit scheme was accepted, in the scope of which loans of 1.5 billion crowns were given to the governments against debentures which could be obtained quickly and without previous negotiations. This agreement introduced the system of automatic deficit financing by the Central Bank.[22] Loans as high as 1.5 billion crowns were granted on twenty-one occasions from 1915-1918.[23] By 26 October 1918, Austria owed 25.1 billion crowns and Hungary 9.9 billion crown to the Central Bank. With the exception of Czechoslovakia, the consequence of the generous credit policy turned out to be devastating hyperinflation in the successor states of the Austro-Hungarian Monarchy in the early 1920s.
6 War Loans
↑

War loans were the most common alternative way of financing war expenditures. Bonds were issued on eight occasions during the war simultaneously in Austria and Hungary. The first bond was issued 16-24 November 1914. It was a huge success that exceeded all expectations and provided the Austrian Treasury with 2.2 billion crowns, and the Hungarian Treasury with 1.2 billion crowns. The unexpected success had many reasons. Both Treasuries wanted to increase the popularity of war bonds through favourable terms aimed directly at domestic investors. The bonds were duty and tax-free, and so as to attract smaller savings, bonds in smaller denominations were also issued.[24] The net yields of the bonds exceeded the rates of interest common before the war. The Austro-Hungarian Bank, the war loan offices set up in Vienna and Budapest, and many commercial banks and savings banks gave collateral credits to bond holders under favourable conditions in order to increase the amounts of subscriptions.[25] War loan propaganda organized and controlled by the Treasuries in Vienna and Budapest proved to be effective as well. The Austrian and the Hungarian government wanted to create a new investment form that would be attractive to small and big investors alike, even for those who had felt reluctant towards public bonds before the war. Journals and newspapers were important propaganda tools, but it was a collaborative effort carried by ecclesiastic and secular celebrities, leaders of the business federations and of civil organisations, politicians and actresses that popularized the bonds. While the very first subscriber had always been the Emperor, public servants and even soldiers on the front were also expected to subscribe. Further research is required on the social, as well as the national composition of the private bond holders, and on the structure of the institutional investors (banks, industrial and commercial enterprises, insurance companies, pension funds).

Bringing 18.6 billion crowns to Hungary and 35.1 billion crowns to Austria, the eight issues proved to be the most important source of revenue for both governments. As the war progressed, the enthusiasm for war loans was diminished with growing war exhaustion. The yields that had once seemed attractive turned to be worthless in the face of accelerating post-war inflation. Declining eagerness was reflected in the ever longer durations of subscription periods. While the first one took only eight days, the second, third and fourth had gone up to thirty days, and the last four lasted forty-six days on average. The subscribed amounts (in real values) declined as well (partly caused by accelerating inflation); in Austria, the last subscription yielded only a fourth of the first one in 1913 values. While the amounts fluctuated more in Hungary, the tendency was declining as well (see graph 1).

File:Graph War Finance Graph IMG.jpg‎‎

Graph 1: Results of war loan issues in Austria-Hungary, 1914-1918, million crowns[26]
7 Domestic and Foreign Credits
↑

Although the concept of war bonds turned out to be a success, their actual amount proved insufficient to cover growing war expenditures, and missing funds had to be supplied by the major Vienna and Budapest banks. From mid-1915, Austrian commercial banks provided numerous loans for the Austrian Treasury. According to Haider Shnawa, the sum total supplied by these banks was 2.6 billion crowns. In Hungary, too, the major Budapest banks had to help the Hungarian government sustain war efforts and loaned 1.7 billion crowns over the war years. [27]

While the Allies could access a sophisticated, flexible, domestic and foreign capital market, Austria-Hungary was incapable of attracting significant amounts of foreign capital from 1914-1918.[28] Foreign loans during these years were taken up to finance the most essential imports (mainly foodstuffs) and helped cover the growing deficit of the balance of trade. Foreign capital was also needed to protect the Austro-Hungarian crown's diminishing exchange rate on the European neutral states' financial markets.[29] The most important creditor was Germany. Both Austria and Hungary signed a contract with a syndicate made up of the Berlin banking houses Disconto Gesellschaft, S. Bleichröder and Mendelssohn & Co. on a Treasury bill loan which was extended many times during the war. Germany granted other smaller credits to Austria-Hungary to finance German imports.[30] Although these credits were given on favourable terms, they were not even sufficient to cover German imports surplus over the course of these years. Germany’s reluctance to give Austria and Hungary more loans was cause for some serious conflicts between the military allies.

On account of the increasing shortages in foreign exchange, the foreign exchange control had to be introduced. On 1 February 1916, the Devisenzentrale was set up simultaneously in Vienna and Budapest. However, it was not able to guarantee an adequate amount of foreign exchanges, wherefore the Austro-Hungarian Bank was forced to sacrifice her own gold and foreign exchange reserves and borrow abroad.[31] During the war, the states of the Dual Monarchy took up minor loans in the Netherlands, Switzerland and Denmark to cover the purchase of basic necessities such as foodstuffs and raw materials. In 1917, a credit granted by Sweden and Denmark was used to support Austrian and Hungarian prisoners of war in Russia by buying medicine and food and having it sent to them. Overall though, these loans were only of minor significance. Austria took up 3.39 billion crowns in foreign loans during the war, 93.5 percent of which was granted by Germany. Hungary’s share of the foreign credits amounted to a mere 1,66 billion crowns.[32]
8 Conclusion
↑

Although Austria-Hungary was unprepared to meet the enormous war costs and lacked adequate financial resources, monetary and fiscal authorities managed to find ways to cover growing expenditures to sustain long lasting war efforts. Ordinary public incomes proved to be of limited significance, as internal political conflicts made the increase of tax and non-tax revenues practically impossible. Neither Austria nor Hungary were able to borrow significant amounts of foreign capital over the years. From mid-1914, war loans and the credits of the joint Central Bank was the main source to cover the growing budget deficits. From July 1916, Vienna began accumulating bigger deficits and relied increasingly on the Central Bank’s loans than Budapest, putting Austrian state finances in a much worse position than its Hungarian equivalent. The article offers a new estimate of war costs for both countries of the Austro-Hungarian Monarchy and presents both Austrian and Hungarian war finances simultaneously for the first time.


Ágnes Pogány, Corvinus University of Budapest

Section Editors: Gunda Barth-Scalmani; Oswald Überegger
Notes

1    ↑ Schulze, Max-Stephan: Austria-Hungary’s Economy in World War I, in: Broadberry, Stephen and Harrison, Mark (eds.): The Economics of World War I. Cambridge 2005, p. 107; Broadberry, Stephen and Harrison, Mark: The Economics of World War I. An Overview, in: Broadberry, Stephen and Harrison, Mark (eds.): The Economics of World War I. Cambridge 2005, pp. 12, 14-15.
2   ↑ Bogart, Ernest Ludlow: Direct Costs of the Present War, New York 1918; Bogart, Ernest Ludlow: Direct and Indirect Costs of the Great World War, New York 1920; Bogart, Ernest Ludlow: War Costs and their Financing 1921.
3   ↑ Broadberry and Harrison: Economics World War I 2005, pp. 22-23; Schulze: Austria-Hungary’s Economy 2005, p. 104; Teleszky, János: A magyar állam pénzügyei a háború alatt [Hungarian State Finances during the War], Budapest 1927, p. 415.
4   ↑ Ibid.
5   ↑ Winkler, Wilhelm: Die Einkommensverschiebungen in Österreich während des Weltkrieges, Vienna 1930; Grebler, Leo and Winkler, Wilhelm: The Cost of the World War to Germany and to Austria-Hungary, New Haven 1940.
6   ↑ Schulze, Austria-Hungary’s Economy 2005, p. 105.
7   ↑ Calculated on the data of Winkler, Wilhelm: Die Einkommensverschiebungen in Österreich während des Weltkrieges, Vienna 1930, pp. 75, 231; Teleszky, János: A magyar állam pénzügyei a háború alatt [Hungarian State Finances during the War], Budapest 1927, p. 402; and Schulze, Max-Stephan: Austria-Hungary’s Economy in World War I, in: Broadberry, Stephen and Harrison, Mark (eds.): The Economics of World War I. Cambridge 2005, p. 83.
8   ↑ Teleszky, Ibid, p. 418; and Pogány, Ágnes: Kriegskosten und Kriegsfinanzierung, Die Finanzgebarung der österreichisch-ungarischen Monarchie während des Ersten Weltkriegs (1914-1918). in: Die Habsburgermonarchie und der Erste Weltkrieg, Die Habsburgermonarchie 1848-1918, volume XI, Vienna forthcoming in 2014.
9   ↑ Ibid.: pp. 104-105; Broadberry and Harrison: Economics World War I, 2005, p. 23.
10  ↑ Eichengreen, Barry: Golden Fetters. The Gold Standard and the Great Depression 1919-1939, New York 1992, pp. 74-75; Hardach, Gerd: The First World War 1914-1918, Harmondsworth 1987; Holtfrerich, Carl-Ludwig: The German Inflation 1914-1923. Causes and Effects in International Perspective, Berlin 1986, pp. 108-109.
11  ↑ Hardach, First World War 1987, p. 165. Eichengreen, Golden Fetters 1992, pp. 76-77.
12  ↑ Teleszky, A magyar állam pénzügyei a háború alatt [Hungarian State Finances during the War] 1927, pp. 401, 418; Kernbauer, Hans: Währungspolitik in der Zwischenkriegszeit. Geschichte der Österreichischen Nationalbank von 1923 bis 1938, Vienna 1991, p. 20; März, Eduard: Österreichische Bankpolitik in der Zeit der großen Wende 1913-1923. Am Beispiel der Creditanstalt für Handel und Gewerbe, Vienna 1981, p. 246.
13  ↑ Schulze, Austria-Hungary’s Economy 2005, p. 99; Matis, Herbert: Guidelines of Austrian Economic Policy 1848-1918, in: Matis, Herbert (ed.): The Economic Development of Austria since 1870. The Economic Development of Modern Europe since 1870, volume IX, Aldershot 1994, p. 39.
14  ↑ Von Müller, Stefan: Die finanzielle Mobilmachung Österreichs und ihr Ausbau bis 1918, Berlin 1918, p. 157; März, Österreichische Bankpolitik 1981, p. 148.
15  ↑ Jindra, Zdeněk: Der wirtschaftliche Zerfall Österreich-Ungarns, in: Teichova, Alice and Matis, Herbert (eds.): Österreich und die Tschechoslowakei. 1918-1938. Die wirtschaftliche Neuordnung in Zentraleuropa in der Zwischenkriegszeit, Vienna 1996, p. 28; März, Österreichische Bankpolitik 1981, pp. 200-202; von Müller, Finanzielle Mobilmachung 1918, p. 169; Perz, Helmuth: Aspekte der Kriegsfinanzierung. Die österreichischen Kriegsanleihen 1914-1918. Thesis, Universität Wien, Vienna 1989, pp. 14-15; Hardach, First World War 1987, pp. 157-159; Hefeker, Carsten: The Agony of Central Power. Fiscal Federalism in the German Reich, in: European Review of Economic History 5 (2001), pp. 119-142; Holtfrerich, German Inflation 1986, pp. 116-118.
16  ↑ Von Müller, Finanzielle Mobilmachung 1918, pp. 160, 164.
17  ↑ Teleszky, A magyar állam pénzügyei a háború alatt [Hungarian State Finances during the War], 1927, pp. 194-202.
18  ↑ Popovics, Sándor: Das Geldwesen im Kriege, Vienna 1925, p. 18.
19  ↑ Sarlós, Béla: Az 1909. évi adóreform és a világháborús adótörvények [The Tax Reform of 1909 and the taxation bills of the World War],in: Történelmi Szemle [Journal of History] , 17/1-2 (1974), pp. 68-100.
20  ↑ Iványi, Magyar minisztertanácsi jegyzőkönyvek az I [Protocol of cabinet meeting of 29 May 1916] 1960, pp. 225-228; Teleszky, A magyar állam pénzügyei a háború alatt [Hungarian State Finances during the War], 1927, pp. 284-285, 289-290, 295-296; Pogány, Ágnes: Die Österreichisch-Ungarische Bank von 1914 bis zur Liquidation, in: Kövér and Pogány: Die binationale Bank einer multinationalen Monarchie 2002. pp. 135-136.
21  ↑ Pogány, Die Österreichisch-Ungarische Bank 2002, pp. 131-133; Bankhistorisches Archiv der Österreichischen Nationalbank (OENB BHA): protocol of the 609th meeting of the general council on 31 July 1914; protocol of the 610th meeting of the general council on 1 August 1914.
22  ↑ Popovics, Das Geldwesen im Kriege 1925, pp. 59-63. OeNB BHA, protocol of the 609th meeting of the general council on 31 July 1914, remark of Governor Popovics.
23  ↑ Teleszky, A magyar állam pénzügyei a háború alatt [Hungarian State Finances during the War] 1927, p. 250; Popovics, Das Geldwesen im Kriege 1925, pp. 61-63. OENB BHA protocol of the 624th Meeting of the general council on 15 July 1915; OENB BHA protocol of the 625th Meeting of the general council on 16 September 1915.
24  ↑ Teleszky, A magyar állam pénzügyei a háború alatt [Hungarian State Finances during the War] 1927, p. 258; März, Österreichische Bankpolitik 1981, pp. 245-246.
25  ↑ März, Österreichische Bankpolitik 1981, pp. 150-151; Popovics: Das Geldwesen im Kriege 1925, p. 56; Teleszky, A magyar állam pénzügyei a háború alatt [Hungarian State Finances during the War] 1927, pp. 255-256.
26  ↑ Teleszky, Ibid, pp. 264-265. Winkler, Ibid, pp. 40-41. Royal Hungarian Statistical Office: Magyar Statisztikai Évkönyv [Hungarian Statistical Yearbook], Budapest, volumes 1919-1924. Shnawa, Haider: Die österreichischen Kriegsanleihen und ihre Entwicklung nach dem I. Weltkrieg. Thesis, Wirtschaftsuniversität, Vienna 1999, pp. 10-12.
27  ↑ Shnawa, Haider: Die österreichischen Kriegsanleihen und ihre Entwicklung nach dem I. Weltkrieg. Thesis, Wirtschaftsuniversität, Vienna 1999, p. 4; Teleszky, A magyar állam pénzügyei a háború alatt [Hungarian State Finances during the War] 1927, p. 401.
28  ↑ Hardach, First World War 1987, pp. 146-148; Schulze, Austria-Hungary’s Economy 2005, pp. 98-99, 103.
29  ↑ Pogány, Die Österreichisch-Ungarische Bank 2002 , pp. 144-152.
30  ↑ Iványi, Magyar minisztertanácsi jegyzőkönyvek az I 1960, pp. 223-224, 241. OENB BHA protocol of the 624th meeting of the general council on 15 July 1915. MOL K 289 (Hungarian National Archive), Ministry of Finance, Documents of the Hague Delegation, IV/9. p. 2.
31  ↑ Pogány, Die Österreichisch-Ungarische Bank 2002, pp. 144-152. OENB BHA protocol of the 627th meeting of the general council on 18 November 1915.
32  ↑ Shnawa, Die österreichischen Kriegsanleihen 1999, p. 4; Teleszky, A magyar állam pénzügyei a háború alatt [Hungarian State Finances during the War] 1927, p. 401.

Selected Bibliography

    Bachinger, Karl / Lacina, Vlastislav: Wirtschaftliche Ausgangsbedingungen, in: Teichova, Alice / Matis, Herbert (eds.): Österreich und die Tschechoslowakei 1918-1938. Die wirtschaftliche Neuordnung in Zentraleuropa in der Zwischenkriegszeit, Vienna 1996: Böhlau, pp. 51-112.
    Bogart, Ernest Ludlow: Direct and indirect costs of the Great World War, New York 1919: Oxford University Press.
    Bogart, Ernest Ludlow: War costs and their financing. A study of the financing of the war and the after-war problems of debt and taxation, New York; London 1921: D. Appleton and Company.
    Broadberry, Stephen N. / Harrison, Mark (eds.): The economics of World War I, Cambridge; New York 2005: Cambridge University Press.
    Grátz, Gusztáv / Schüller, Richard: Der wirtschaftliche Zusammenbruch Österreich-Ungarns. Die Tragödie der Erschöpfung, Vienna 1930: Hölder-Pichler-Tempsky.
    Grebler, Leo / Winkler, Wilhelm: The cost of the world war to Germany and to Austria-Hungary, Carnegie Endowment for International Peace. Division of economics and history. Economic and social history of the world war. Supplementary volumes, New Haven; London 1940: Yale University Press; Milford Oxford University Press.
    Hardach, Gerd: The First World War, 1914-1918, Harmondsworth 1987: Penguin Books.
    Iványi, Emma (ed.): Magyar minisztertanácsi jegyzőkönyvek az első világháború korából 1914 - 1918, Budapest 1960.
    Jindra, Zdeněk: Der wirtschaftliche Zerfall Österreich-Ungarns, in: Teichova, Alice / Matis, Herbert (eds.): Österreich und die Tschechoslowakei 1918-1938. Die wirtschaftliche Neuordnung in Zentraleuropa in der Zwischenkriegszeit, Vienna 1996: Böhlau, pp. 17-50.
    Kernbauer, Hans: Währungspolitik in der Zwischenkriegszeit. Geschichte der Österreichischen Nationalbank von 1923 bis 1938, Vienna 1991: Österreichische Nationalbank.
    Komjáthy, Miklós (ed.): Protokolle des Gemeinsamen Ministerrates der Österreichisch-Ungarischen Monarchie (1914-1918), Budapest 1966: Akadémiai Kiadó.
    Kövér, György / Pogány, Ágnes: Die binationale Bank einer multinationalen Monarchie. Die Österreichisch-Ungarische Bank 1878-1922, Stuttgart 2002: F. Steiner.
    März, Eduard: Österreichische Bankpolitik in der Zeit der großen Wende 1913-1923. Am Beispiel der Creditanstalt für Handel und Gewerbe, Munich; Vienna 1981: Oldenbourg : Verlag für Geschichte und Politik.
    Müller, Stefan von: Die finanzielle Mobilmachung Österreichs und ihr Ausbau bis 1918, Berlin 1918: Leopold Weiss.
    Perz, Helmuth: Aspekte der Kriegsfinanzierung. Die österreichischen Kriegsanleihen 1914-1918 (thesis), Vienna 1989: Universität Wien.
    Pogány, Ágnes: Az Osztrák-Magyar Bank az I. Világháború és a forradalmak idején 1914 - 1919, in: Bácskai, Tamás (ed.): A Magyar Nemzeti Bank története, volume 1, Budapest 1993: Közgazdasági és Jogi Könyvkiadó, pp. 341-411.
    Pogány, Ágnes: Kriegskosten und Kriegsfinanzierung, Die Finanzgebarung der österreichisch-ungarischen Monarchie während des Ersten Weltkriegs (1914-1918), in: Rumpler, Helmut / Schmied-Kowarzik, Anatol (eds.): Die Habsburgermonarchie und der Erste Weltkrieg, volume 2, Vienna 2014: VÖAW.
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    Shnawa, Haider: Die österreichischen Kriegsanleihen und ihre Entwicklung nach dem I. Weltkrieg (thesis), Vienna 1999: Wirtschaftsuniversität Wien.
    Teleszky, János: A magyar állam pénzügyei a háború alatt (Hungarian State Finances during the War), Budapest 1927: A Magyar tudományos akadémia kiadása.
    Winkler, Wilhelm: Die Einkommensverschiebungen in Österreich während des Weltkrieges, Carnegie Stiftung für internationalen Frieden. Abteilung Volkswirtschaft und Geschichte. Wirtschafts- und Sozialgeschichte des Weltkriegs. Österreichische und ungarische Serie, Vienna; New Haven 1930: Hölder-Pichler-Tempsky; Yale University Press.

Citation

Pogány, Ágnes: War Finance (Austria-Hungary) , in: 1914-1918-online. International Encyclopedia of the First World War, ed. by Ute Daniel, Peter Gatrell, Oliver Janz, Heather Jones, Jennifer Keene, Alan Kramer, and Bill Nasson, issued by Freie Universität Berlin, Berlin 2014-10-08. DOI: 10.15463/ie1418.10161.
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This text is licensed under: CC by-NC-ND 3.0 Germany - Attribution, Non-commercial, No Derivative Works.
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>

<br>
<h3>Britain</h3>
<p> World War I was not, as widely expected in Britain, over by Christmas 1914. Some like Lord Grey, British Foreign Secretary, had a more realistic idea as to what was happening. He told a friend, "The lamps are going out all over Europe, we shall not see them lit again in our life-time."  Too often finance and economics are poorly covered in war histories. With men dying in huge numbers on the battlefield, finance seem a distasteful subjet, but it is in fact highly impotant.  Finances are often not important in short wars.  Germany like Prussia before it was acustomed to short wars.  In such circumstances, powerful standing armies are important.  Long wars like World War I are very different matters. And in finnce, Britain had a huge advantage over Germans, but an advatage that only came into play when the French held at the Marne (September 1914), meaing that it would not be a short war. Britain in 1914 was what be described as a global enterprise. Germany had a massive industrial base and the world's strongest army. Brutain on the other hand had a small armyb but a large navy. Its industrial base ws potent, but had fallen behind the Germans. But Britain had unrvaled diplomatic and financial resources. This made Britian politically the most powerful country in the world. And Britain ws the unquestioned world finacial center. The British pound stirling was the major global reserve curency. It was backed by the enormous gold reserves held by the Bank of England. The pond stirling was valued all over the world. At the onset of theWar, the combatant countries suspended the conversion of their currencies into gold. The various governments believed with some valiity that they need to hoard their gold and pay for the War by printing money, in part bcause it became difficult to borrow money in international markes. This is why the various countries launched national bind sales. Only the British declined to follow this path. They maintained convertability to gold. As a result the British managed to maintain their credit standing. And thus theBritish coulkd birrow money to finance the ar effort. Economist John Maynard Keynes recommened this policy. And the princiapal source of capital o which Britain turned as America. There the House of Mogan played a najor role. Jack Morgan, son of the legendary J.P. Morgan, organized massive loans from New York banks to support the British war effort.  Surprisingly there were at first net gold outflows from America to Britain. British investors sold stocks, bond, and land in America to obtain gold in times of financial uncertainty. The gold was shipped to London and added to the gold stock piles of the Bank of England. The Houe of Morgan helped to ensure that the whole process wa orderly.  There were only so many British assets in America. Soon the gold flow reversed. This occurred only a few months after the War began (November 1914). Morgan helped float some $0.5 million in loans.  The British needed all kinds of supplies thatAmerica could provide, including food, wool, cotton, oil, munitiins, and much more. And to purchase these materials, the British had to pay in gold or pound stirling that was convertibe into gold. The gold thus flowed back from London into the Federal Reseve Bank of New York and its associated private member banks. It was at this point that the U.S. dollar emerged as a reserve currency that began to rival the pound sterling. The United States and earlier emerged as the greatest industrail power on earth, surpassing both Britain and Germany. It was, however, only at this point that the dollar began to rival the British pound stirling in international money markets. The pound would be severely weakened by the Wwar, but it strength throughout War would be a significant assett to the war effort.  Once the United states entered the War, the United States Government helped to finance the Brirish war effort, some $4 billion from the U.S. Treaury (1917-18)--an enormous sum at the time. 
<br>
<h3>France</h3>
<p> The French Third Republic after the outbreak of the War decidded to finance it in two ways.  First it instated the country's first income tax.  Second it began borrowing money.  The primry foreign credior was the United sttes.  Britain also helped ith finances.  
<br>
<h3>Germany</h3>
<p> Europe at the time of World War I was the center of world finance. European bankers were financing projects around the world. The three important financial powers of Europe were Britain, France, and Germany. Here Germany was in third place. While Germany was the largest of the three powers in both population and economic poyput, avavailable capital was primsrly invested in the doestic market.  And the relative late entry of Germany in the colonization process meant that the colonies it did acquire were of relatively limited economic importance.  Britain was the center of world finance.  Estimates suggest that some 60 percent of world trade was financed through British banks and other financial institutions.  Both Britin and France had very substantial overseas investments.  This inbalance was something that German diplomatic officals were concerned about before the War.  They had only limited success in promoting Gernan bankers to invest abroad.  Even the strategically important Berlin-Bagdad Railway project required French participation.  Britain matched German investment in China. The French were able to affect German financial markets during the Second Moroccan Crisis (1911). [Horn, p.7.]  French industry had fallen behind the German, but not the French finamcial system.  The Imperial German Government because the German Army was so powerful expected a short, decisive war as had been the case with the Austro-Prussian War (1866) and the Franco Prussian War (1870-71)
The Germans thus made no attempt to meet the huge costs of the War by increasing taxes.  Rather it began borrowing money.  Imperial officials were sure of victory and believed that they could pay for the War by exacting taxes from the defeated countries in the form of reparations. This was what they had done with France after the Franco-Prussian War (1870-71). It seemed the easiest way to pay for this War without asking the German people to make any sacrifices.  The German Government was so sure of winning the war that they did not want to risk the political repercussions.  (After the War, ironically the Germans were outraged that reparations were assessed on them.)  The Germans from the beginning of the War dimissed the United States as a force to be reconned with.  There were various reasons for thius, including America's lack of a substantial standing army and its mixed ethnic composition. But as in other areas, Imperial German officials failed to understand the importance of American financial markets.  Total War spending by the Imperial Government has been estimated at 170 billion marks.  Taxes accounted for only about 8 percent of that total.  More than 90 percent was borrowed and almost entirely from German banks and private citizens.  The Reichstag passed a series of war credit bills.  The Government sponsored nine national war loan drives (Kriegsanleihe) drives asking for the financial support of the citizenry.  Most of the German bonds had a cupon rate of 5 percent, redeemable over a 10-year period, in semi-annual payments.  These loans raised only 10 billion marks. [Chickering, p. 105.]  We have, however, seen different figures.  The German Government found it almost impossible to borrow money from foreign banks.  The major potental lender was the United States, but American ties with Britain and German actions like invading neutral Belgium and the sinister image of U-boats made American loans impossible.  The German Government attempted and failed to float a major war loan on Wall Street (1914). [Chickering, p. 104.]  The Germans were able to borrow money to cover about two thirds of the cost of the War.  Much of the rest was financed by the expedient of printing money, setting in motion an indltiinry spiral.  The Imperial Govrnment's debt rose from only 5 billion marks before the War to 156 billion by the end of the War.  Most of the purcharsrs of the bonds issued to banks and civilians lost their principal after the War in the hyperinflation of 1923. 

<!
Officially, Germany didn't leave the gold standard in August 1914. What they did was suspend the convertibility of paper money into gold. This was seen as a reasonable precaution to prevent a run on the banks. The Reichsbank was still formally obliged to back every currency note it issued by its gold reserves.

Unofficially, however, they introduced a series of wartime measures that in practical terms meant an abandonment of the gold standard, even while the government was reassuring its people that the Mark was still perfectly stable and backed by gold.

Foremost of these measures was the creation of Loan Bureaux (Darlehnskassen) under Reichsbank control, which allowed private citizens and organisations to mortgage their assets in return for 'loan bureau notes' (Darlehnskassenschein). These notes were not considered currency, and so did not have to be backed by gold. They were, however, accepted by all State and government bodies as legal tender for payment of debt on the same basis as currency. In other words, they were currency; just not called that, in order to evade the rules. There was no legal limit on how many of them the bureaux could issue.

The result was that during the four years of the war, the money supply in Germany increased by 600%. In effect, the government and Reichsbank were paying for the war using their printing presses. The State issued bonds, which were purchased by the Reichsbank and paid for with freshly-printed paper money.

Consumer price inflation was kept under control, at least nominally, by rationing and legal price restrictions: but in practice this just meant that goods disappeared from the shops and the black market thrived at inflated prices.

This is officially not a banknote, even though it says "20 Marks" and was exchangeable for goods and services.

Why did they do it?

The big problem was Imperial Germany's decentralised and, frankly, rather ramshackle constitutional arrangements. The Reich government was not, for example, allowed to levy income taxes; it had to rely on indirect tariffs and consumption taxes for most of its revenue. An attempt during the war to introduce a national income tax was blocked by opposition from the federal states; while the Social Democrats in the Reichstag blocked the raising of consumption taxes as placing an undue burden on the poor. The result was that Germany was forced to rely on borrowing rather than taxation to finance the war effort. (While the same was true in every country to some extent, Britain and France were able to increase direct taxes significantly more than Germany managed).

Another factor was that the German government expected the war to be a short one. (They were not, of course, alone in this delusion.) Increased borrowing and inflationary monetary policies were seen as a temporary and emergency expedient. Normal financial stability could be restored once Germany had won. Indeed, the German government was planning to impose huge financial indemnities on its defeated enemies, which they expected to be able to use to pay off the loans they'd incurred paying for the war. They'd done the same to France in 1871, after all.

Another factor was that Germany in 1914 lacked a powerful and sophisticated financial market comparable to those of London, Paris or New York. The Reichsbank's gold reserves were relatively low — a factor in their quick imposition of conversion controls. Germany also lacked the depth of privately-owned banks and financial institutions that in Britain and France were able to purchase government bonds using their own resources. In Germany, that burden had to fall far more on the Reichsbank itself, which paid for the bonds by printing more money.

The end result was that the German government found itself trapped; the temporary expedients they'd adopted to pay for a short, victorious war became increasingly strained as the war dragged on for year after year. They maintained the threadbare fiction that the Reichsmark was still backed by gold in order to preserve public confidence, and clung with increased desperation to the hope that they'd win and be able to force their enemies to pay off their debts. Even a status-quo compromise peace would mean financial disaster for Germany; and defeat was unthinkable.
>

<br>
<h3>Italy</h3>
<p> Briain finamced a substantial portion of the Italian war effort.
<br>
<h3>Russia</.h3>
<p>
<br>
<h3>United States</h3>
<p> The Treasury under William Gibbs McAdoo used some of the same voluntary tactics adopted in Europe. McAdoo oversaw massive public rallies to sell war bonds. The Federal Government also created the War Industries Board which was administered by financeer Bernard M. Baruch,. The Board had broad powers, but for the most part used persuasion rather than draconian administrative action. Baruch was unsure of the legality of the Board's power and personally reluctant to oversee extensive Government intervention in the economy. He thus relied on persuasion, and on a few occassions public redicule.  Entites unrelated to the War was an ongoing debate in the Unites States over an income tax.  One had beem imposed durind the Civil War, but repealed ended after the War debat was paid off (1872).  The Progressive Movement promoted a graduated income tax as one of its primary reforms.  Congress approved a new income tax as part of the 1894 Tariff Act.  It got entangled in litigation over 'direct' taxation that went all the way to the Supreme Court--<i>Pollock v. Farmers' Loan & Trust Co.</i> (1895).  This led to the 16th Amendment (1913).  .  
Congress created an income tax as part of the Revenue Act of 1913 which levyied a 1 percent tax on net personal incomes above $3,000 (a sizeable income in 1913) and a 6 percent surtax on incomes above $500,000.   This totally unconected to the War, the United States had a way to finance a war just before the War unexpectedly broke out in Europe.  And the Government sharply increased rates when Anerica entered the War (1917).  The top rate of the income tax was increased to 77 perceng (on income over $1 million) to help finance the War.  This significantly reduced what the United States had to borrow and to pay off much of the War debt in the 1920s.  .  
<br>
<h2>Sources</h2>
<p> Ahamed, Liaquat. <i>Lords of Finance: The Bankers Who Broke the World</i> (2009). 
<p> Chickering, Roger. <i>Imperial Germany and the Great War, 1914–1918</i> 2nd ed. (Cambridge: Cambridge University Press, 2004). 
<p> Eichengreen, Barry. <i>Golden Fetters. The Gold Standard and the Great Depression 1919-1939</i> (New York: 1992).
<p> Horn, Martin. <i>Britain, France, and the Financing of the First World War</i>


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