Financing War: Taxation, Bonds & War Loans, 1790-1918 (Edexcel A Level History: Paper 3 Options): Revision Note

Paying for war: taxation

• Several wars directly led to the introduction of new taxes and the imposition of higher rates for existing ones

The French Revolutionary and Napoleonic Wars 1792–1815

• To help pay for these wars, the Prime Minister, William Pitt the Younger, raised existing taxes, such as those on windows, servants, salt and alcohol

  • He also introduced new taxes, for example on hair powder (1795) and dogs (1796)

• These wars also led to a graduated income tax being introduced in Britain for the first time

  • In total, this raised £155 million by 1815

The Crimean War, 1854–56

• The Crimean War was limited in scope and came during the economic boom of industrialisation, but it still needed to be paid for

• The Chancellor of the Exchequer, William Gladstone, increased taxation to help pay for it

• When Sir George Cornewall Lewis became Chancellor in 1855, he raised income tax to 1s 4d ( 1 shilling and 4 pence) in the pound

  • He cut income tax only in 1857, after the war

The Boer War 1899–1902

• Although relatively short, the Boer War was very expensive and cost in excess of £217 million

• To help pay for this, sugar imports and coal exports were taxed

  • Income tax was also increased from 8d in the pound in 1899 to 15d per pound in 1902

The First World War 1914–1918

• The First World War was ruinously expensive for Britain

• To help pay for it, war budgets were introduced in November 1914 and September 1915

• Income tax was doubled in November 1914, and the September 1915 budget raised it to 3s and 6d in the pound

  • In 1918, this increased to 6s in the pound

• The exemption rate was lowered, meaning those on low incomes also had to pay

• An Excess Profits Duty (EPD) was introduced on business profits above pre-war levels

  • EPD was initially introduced at a rate of 50% but increased to 80% in 1917

Bonds, consols and war loans

The French Revolutionary and Napoleonic Wars, 1792–1815

• Pitt borrowed heavily by selling consols (first issued in 1751)

  • Consols, or Consolidated Annuities, were a type of government bond that had no fixed repayment date

  • Unlike bonds, which guaranteed the government would repay the money on a certain date, consols were a perpetual debt

  • This means the purchaser of a consol would receive a set amount of interest every year

  • However, if they ever wanted their original money back, they would have to sell the consol to another investor

  • This raised money for the government but also increased the national debt

• In 1796, the Loyalty Loan raised £18 million from the public in a few days

• By 1815, the national debt had reached about £862 million

• Income tax was abolished in 1816, and Peel reintroduced it in peacetime in 1842

The Crimean War, 1854–56

• Gladstone also borrowed by selling government bonds

  • Government bonds secured money for the government and guaranteed those who bought them that they would receive their money, plus interest, back in the future

• Taxation was not enough so Cornewall Lewis also borrowed heavily by selling bonds

• Half of the cost of the Crimean War was met through the sale of bonds and government borrowing

The Boer War, 1899–1902

• Although new taxes did help to pay for the Boer War, two-thirds of the cost was covered by the sale of bonds and consols

The First World War, 1914–1918

• Despite the sharp increase in taxation, taxes covered only about a quarter of the cost of the First World War, and borrowing covered most of the rest

  • This led to a significant increase in the national debt

    • From about £650 million in 1914 to about £7,400 million in 1918

• As well as the sale of bonds and consols, Britain borrowed money from other countries

  • By 1918, Britain owed £1,000 million to the USA alone

• Income tax rose to 30% by the end of the war (6s in the pound)

War loans and the population, 1914–18

• The government raised most of its war borrowing from the British population through three War Loans:

  • November 1914 (3.5%, £350 million)

  • June 1915 (4.5%, about £900 million)

  • January 1917 (5%, about £2,000 million)

• From 1916, War Savings Certificates (15s 6d each) and later War Bonds let ordinary people lend small sums

• In 1918, touring "tank banks" encouraged people to buy certificates and bonds

• This enabled the general population, not just wealthy investors, to finance the war effort

How did the government finance Britain's wars, 1790–1918?

• Taxation was undoubtedly essential to enable Britain to fight the wars between 1790 and 1918

  • Not only did it give the government a regular income or revenue, but it also helped to convince investors that Britain would be able to afford to pay its debts

  • In the French Wars, taxation (including Pitt's income tax) paid a larger share than in any later war, but borrowing through consols still built a huge national debt

• Between 1815 and 1914, smaller wars such as the Crimean War and the Boer War were paid for by a mix of higher income tax and bonds or consols

• Britain could not have covered the immediate costs of the major wars it fought through taxation alone

• Bonds, consols and international loans helped Britain to quickly secure enormous sums that were vital in raising and equipping armies and navies

• The First World War was different in scale

  • Taxes covered only about a quarter of the cost, so War Loans and savings schemes drew in millions of ordinary people

Judgement

• Taxation paid most of the cost of the French Wars and half of the Crimean War, but borrowing paid most of the Boer War and First World War