The primary means of raising funds is of relevance not only for the triggering of inflationary processes but also for the operation and long-term consequences of a war economy.
There are basically three ways of financing of war: 1. A wealthy state can procure the expenditure for a war at least in part by increasing taxes. In the USA and in Great Britain, one quarter of the costs of the First World War were covered by tax increases, while in Austria the contribution made by taxes to financing war expenditure was zero. 2. The costs of the war can be spread over many years, indeed over generations, by means of war loans. The terms of the Austrian war loans varied, the repayment period for the first loan in November 1914 being a few years, while the eighth and last loan, issued from May to July 1918, provided for a repayment period from 1924 to 1958, i.e. the loan would have been serviced into the period after the Second World War. 3. The simplest but in the long term most problematic means of financing a war, and one that is also available to economically weak countries, consists of borrowing directly from the central bank. This leads directly to inflation.
It was this approach that was adopted in the German Reich and in Austria-Hungary in the First World War. In both countries, 60% of the costs of the war were raised by war loans and 40% by borrowing from the central bank. The consequences of this method of financing were made worse by the fact that the absorption effect of the war loans was neutralised by the loans being issued as Lombard credits by the Austro-Hungarian Bank, further increasing the money in circulation and the potential for inflation.
Who subscribed to war loans? With the first loan, the share of private investors was still high, but thereafter institutional subscribers (banks, insurances and industrial enterprises) had more and more to step into the breach. Seen in national terms, the (German) Austrian investors subscribed more than the Czech parts of the country. Of the nominal 35 billion Krone subscribed in Cisleithania, roughly 24 billion was accounted for by the territory of what was to become the Republic of Austria.
Translation: David Wright
März, Eduard: Österreichische Bankpolitik in der Zeit der großen Wende 1913–1923, Wien 1981
Sandgruber, Roman: Ökonomie und Politik. Österreichische Wirtschaftsgeschichte vom Mittelalter bis zur Gegenwart, Wien 1995
- Raising the costs of the war
- War-related inflation in Austria
- The mechanism of financing the war
- Extent, causes and effects of inflation 1914 to 1918
- The losers under inflation: huge falls in employee real wages
- Discharge of debts through inflation
- The financial consequences of the war for the new republic