Still Paying World War I Debt, 100 Years Later

The enduring financial legacy of a century-old conflict

A Tower of London Guard wanders through an art installation commemorating those who died in World War I. (Peter Nicholls/Reuters)

It has been 100 years since the start of the First World War, which was fought for four years and claimed the lives of more than 6,000 soldiers a day. Countries in Europe began marking the centenary earlier this year, and the Tower of London is awash in ceramic poppies in beautiful tribute to the men who died.

The scale of World War I was unprecedented in several ways, including the cost of financing it. In fact, several of the countries involved are still facing related debts.


Last week, the U.K. announced it would repay £218 million ($349 million) from the £2 billion of debt that it incurred during the war. National War Bonds were issued to the public in 1917 to support the effort, promoted by widespread patriotic publicity campaigns and an attractive interest rate (both then and now) of 5 percent. (About 3 million Britons bought the debt, and this is how The Spectator covered the creation of National War Bonds.)

Ten years later, the bonds were refinanced by Winston Churchill into 4-Percent Consolidated Loans—"4 percent Consols" for short. Facing the huge financial strains of the Great Depression, Chancellor Neville Chamberlain used patriotism again to convert some of those 4 percent Consols into perpetual bonds, which give the debtor the right to never pay the principal as long as the interest—which he cut to 3.5 percent—is paid. The government has been paying about £136 million a year to holders of the perpetual bonds and war loans. The government estimates it has paid £1.26 billion in total interest since 1927. Still, the Great War is estimated to have cost the U.K. around £3.25 billion.

Britain can now refinance the 4 percent Consols at more favorable terms to the taxpayer, and so it will pay off a tiny amount of its total debt in February—for the first time in 67 years. There are 11,200 registered holders of these bonds, with 92 percent holding less than £10,000 worth.

Incredibly, because the 4 percent Consols were used to refinance even older debt, some of the debt being repaid in early 2015 goes as far back as the 18th century. “In 1853, then-Chancellor [William] Gladstone consolidated, among other things, the capital stock of the South Sea Company originating in 1711, which had collapsed in the infamous South Sea Bubble financial crisis of 1720,” the U.K. Treasury said in a statement. And Chancellor George Goschen converted bonds first issued in 1752 and subsequently used them to finance the Napoleonic and Crimean Wars, as well as the Slavery Abolition Act of 1835.

All of this bodes quite well for repayment of the debt the U.K. took on to finance the invasion of Iraq in 2003.


On October 3, 2010, Germany finally paid off all its debt from World War I. The total? About 269 billion marks, or around 96,000 tons of gold.

The reparations were part of many humiliating clauses imposed by the Treaty of Versailles following Germany’s defeat in 1918, mainly by France, which suffered so much during the war and was also fearful that without the weight of such repayments, Germany would rise again quickly as a military power and attack it.

The U.K. sent a certain economist, John Maynard Keynes, as the principal representative of the British Treasury to the Paris Peace Conference. He resigned in June 1919 in protest at the size of reparations. “Germany will not be able to formulate correct policy if it cannot finance itself,” Keynes said. All very prescient, as Adolf Hitler and his Nazi Party seized on popular hatred of the Versailles treaty to take power. Following the Great Depression in 1929, Germany’s debt was cut to 112 billion marks, payable over a period of 59 years. Not that it mattered—Hitler suspended reparation repayments in 1933.

In 1953, following the end of the Second World War, West Germany agreed at a conference in London to pay off its debts from before World War II, and in return was allowed to wait until reunification before paying €125 million in outstanding interest owed from 1945-1952. In 1990, the Berlin Wall fell and Germany started paying off that interest—the very last of which was paid in October 2010 on the 20th anniversary of reunification.

One of the lessons of World War II was the consequences of saddling a losing nation with huge debts. “After WWII, they decided to hang the leaders but not to punish the nation,” Mark Harrison, an economics professor at University of Warwick, told the BBC. “But in WWI, it was the other way around.”


As journalist Matt Phillips has noted, the U.S. was virtually debt-free before World War I—with debt just 2.7 percent of the economy in 1916. The surge in debt associated with World War I was financed largely by selling bonds to the U.S. public and, in the war's aftermath, the U.S. hit a new record high debt-to-GDP ratio of about 33 percent, with more than $25 billion in debt.

The U.S. only entered the war in 1917, but much of the post-war financing revolved around the emerging global superpower. In the aftermath of the war in the 1920s, Weimar Germany faced hyperinflation and was on the verge of collapse under the weight of its Versailles debt payments. The war left a curious issue, in that the U.K. and France borrowed huge amounts from the U.S. but could not pay them back, as they were owed huge amounts by Germany, which was broke.

So the solution to this was brokered by the future U.S. Vice-President Charles Dawes, who in 1924 proposed that the U.S. lend money to Germany to fund its reparation payments to France and the U.K., who in turn would use the money to repay their war debts. The solution was so good that Dawes won the Nobel Peace Prize the next year in recognition. And the plan worked.

“With a combination of budget surpluses, expenditures aimed explicitly at paying off debt early, and payments from the losers of war, the U.S. made significant progress in whittling the debt down,” Phillips said. “It fell by more than $9 billion by 1930, a reduction of more than a third.”

The 25-year U.S. loans to Germany envisioned by Dawes paid interest at 7 percent. American investors were thirsty to get involved—until Hitler defaulted on the loans.