Those War Debts Revisited

There was something more to this story than met the eye, and with some interesting things to say about current politics. At the worst point of the 1920s, the cost of servicing the colossal debts incurred in the Great War weighed heavily on government finances, accounting for 28% of total expenditure. Furthermore, The Treasury policy of returning Britain to the Gold Standard at the pre-war rate of $4.83 requires historically high interest rates and the War Bonds themselves paid a fixed rate of 5%. To cap it all, the deflationary policies required to try and deal with that debt, return to and then maintain the Gold Standard, meant low growth and persistent structural unemployment. Thus welfare spending remained high, and tax receipts constrained. Thus, the debt remained intact.


The coming of the Great Depression and the 1931 financial crisis that saw Britain come off the Gold Standard changed all that. The remedy adopted was one of spending cuts, and a clearly stated intention of a balanced budget. One of the most important impacts of the end of the Gold Standard the government tried so desperately to avoid was the cheap money of the 1930s; interest rates fell to 2% and stayed there. The new chancellor, Neville Chamberlain, decided to take advantage. He might have been expected to try and pay off the national debt. Instead, he opted not to pay it of at all. The War Bonds were repaid and new undated bonds substituted, at the lower rate of 3.5%. Two years later most of the spending cuts were reversed. Not only that, a housing boom was also key to the economic recovery in the middle of the decade: one in three of those houses were, in fact, council houses, subsidised by central government. What role, one might ask, did the choice to merely service an indefinite debt and, indeed, a failure to balance budgets have on that recovery.

And Mr Osborne did history.

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