What World War I Teaches Us About Managing Money
As we reach the 100th anniversary of the end of World War I (November 11, 1918), I’ve found myself becoming more fascinated with an era that’s relatively unknown to me. Even though I’ve visited Kansas City’s famous National WWI Museum & Memorial a few times, I’m not as familiar with the stories of The Great War. Let’s be honest, all the best war movies are set in World War II!
As I dived into learning about life 100 years ago, I’ve been struck with all the ways we’re still experiencing the after-effects of this conflict. If you scan the current headlines, you can probably draw a line back to something that happened during the World War I era.
- Tensions between Saudi Arabia and the West: See the intentional break up of the Ottoman empire, 1918-1922.
- Increasing interest rates: Possible because of the creation of the Federal Reserve System, which financed the war with bonds and loans and tried to keep inflation down after the Armistice.
- Tax law changes: Income taxes started right before the war with the 16th Amendment, but the war turned this tax system into something more recognizable to us today.
- The gains female candidates made in recent elections: Word War I helped accelerate women’s suffrage as women joined the workforce and called for the US to grant voting rights, like many of its war allies already did.
During my research, one money lesson stuck out to me in particular. World War I highlights one financial principle in an extreme way—a way that probably benefits everyone reading this.
To explain, let me set the backdrop. Going into the war, the uncontested financial and global powerhouse was Great Britain. World finance centered around London. The United States was a relatively little player on the worldwide money stage.
All that changed as the result of the war. World War I was when America went from being a regional player to being a global leader. Even though the U.S. did not officially enter the war for several years, American companies played a major role in providing weapons and supplies to the nations fighting in Europe. As countries became more desperate in the horrible struggle, they increasingly depended on U.S. companies for production. The debts Europeans owed to Americans built up.
In essence, World War I became a massive wealth transfer from the old nations of Europe to the relatively new United States. You could argue that if the war had ended in 1916, before the U.S. officially entered the war the next year, the true winner would have been American companies.
It could also be argued that the debt owed to America was the real reason it entered the war at all. The famous Zimmerman telegram and aggressive German submarine campaigns brought the war broad public support. But it may have been a fear of its debtors failing that truly convinced politicians to declare war. America could not afford for the Allies to lose.
That transfer of wealth accelerated when the US officially joined the combat:
“American banks and exporters extended long-term loans to their [European] customers, and in 1917 and 1918 the U.S. Treasury extended huge loans to [European governments]. Britain had originally bankrolled the Allied governments, but its war-weakened reserves led to the primacy of the U.S. Treasury as the world’s preeminent banker. By the end of the war, the United States had lent more than $10 billion to foreign governments, almost half of it to Britain, and it flexed its financial muscles by requiring that its loan money be spent on U.S. products. This ensured that the United States would be the arsenal and breadbasket of Europe.
“By war’s end, the United States had become the world’s most important trading nation as well as its largest banker. Its tax-collecting arm, the Bureau of Internal Revenue, had quadrupled in size, and the income tax, which now produced thirty-one times as much revenue as it had in 1916, had solidified its position as the most powerful fiscal device of the modern U.S. state.”
This is the lesson I take away from World War I history: Debt can be dangerous. Why?
- Debt is a transfer of wealth from borrower to lender. Over time this transfer, in the form of interest, can add up to much larger amounts than the original loan.
- Once you’re in debt, you’re no longer in control. As the Jewish proverb says, “The borrower is a slave to the lender.”
- Debt transfers financial burdens to the future. If the future turns out differently than expected, those burdens can become crippling.
- Once you’re in debt, your finances are interwound with the lender. Either party can drag down the relationship.
This 100-year old wealth transfer dramatically changed the trajectory of the twentieth century’s economies. Believe it or not, some of the debts from this war were still being paid as recently as 2014.
There’s a lesson here for us all: Debt isn’t always bad, but it is definitely something to be avoided.
Principle #2: Before You Add More Debt, Ask Yourself These Questions