Covid-19: Why the true historical comparator is not the Second World War but the First

Comparing Britain’s current battle to stamp out the spread of Covid-19 to that of the nation at war is becoming a common trope; people are dying by the thousands, there is no clear path to victory nor any clear consensus on what “victory” might be.

And, like wartime, this battle is about survival, not just of people but of the state. History teaches that plagues destroy not only lives but institutions as well. The Black Death of England’s 14^th century wiped out the feudal system and serfdom which supported it. Successive waves of random deaths are likely to undermine not just the health and social care systems but also entire supply chains upon which the delivery of goods and services, and payment for them, depends. Indeed, both democratic and plutocratic governments have seen their authority challenged in recent weeks. If a state cannot protect the lives and property of its citizens, what is it for? That is why Britain—and every other industrialised nation—is emptying its coffers to fight both the pandemic and its ensuing economic fallout.

In finding a historical comparator, it is not the plucky spirit of Britain during the Blitz of the Second World War which is the proper benchmark, but rather, that of Britain in the Great War 1914-18. Like the current pandemic, it was a war for which the duration and cost the nation was completely unprepared and to which the government was slow to respond. “Business as usual” was Lloyd George’s pronouncement at the outset of war.  Male conscription did not begin until 1916, serious efforts to stamp out profiteering and inflation did not begin until 1917 and rationing of scarce goods did not begin until early 1918. By the time of the Second World War, some hard lessons of the First had been learned.

But while history of the Great War focuses on the military conflict 1914-18, much less attention is paid to what came after. The unpleasant reality is that inter-war Britain was a seething mass of conflict between its newly-empowered working classes—union membership broadly doubled between 1913 and 1920—and its aggrieved middle classes, angered by tax increases that were partly intended to relieve working-class suffering.

Indeed, so angered were the middle classes that the newspaper barons Lords Rothermere and Northcliffe formed the “Middle Class League” and their respective organs regularly stoked its outrage. When trade unions sought to organise general strikes, the middle classes—including students at Oxford University—mobilised to act as strike-breakers. The bitter debate about taxation and spending did not occur in a vacuum. Britain could see its European neighbours jostling with the emergence of threats to democracy in the form of Bolshevism and Fascism, each of which might emerge at home if discontent were left to fester.

But nothing could alter the fact that war had left Britain mired in debt. So too, will the cost of extracting Britain’s economy from Covid-19. During wartime, Britain’s top tax rates went from 6 per cent to 30 per cent and an Excess Profits Duty was levied on up to 80 per cent of additional profits earned during wartime. Moreover, the tax base was expanded downwards, drawing in millions of working-class wage earners. The immediate cost of war was paid for with borrowed funds, of which 80 per cent came from the pockets of British savers. According to research by Professors Martin Ellison and Andrew Scott, Britain’s debt-to-GDP ratio went from 25 per cent at the start of 1914 to 128 per cent at the start of 1920. When that bill fell due, beginning in 1919, the burden was enormous. In the 1923 fiscal year, for example, payments of maturing government debt and debt service accounted for 40 per cent of total expenditure, leaving little room for either tax cuts or “class abatement.”

One solution to quickly resolve the debt overhang—initially embraced by the Conservative/Liberal coalition—was that of a wealth tax. This would be levied on total wealth including securities, homes, businesses. Industry vehemently opposed this, arguing it would impede badly-needed investment in new ventures. Conservative support ebbed, partly on fears that it would prompt “fire sales” of assets to raise cash to pay this tax, driving values down. But Labour support continued, with exception for those whose holdings were no more than £1,000.

The compromise was to tax the income of the living and the wealth of the dead; estate duties were raised to 40 per cent from 20 per cent.

In thinking about how Britain will face the inevitable “War After the War on Covid-19,” the idea of a wealth tax is likely to loom large. Indeed, the idea has already attracted attention from economists on both sides of the Atlantic, looking, among other things, at how industrialised nations will pay for their ageing populations. Moreover, given the outpouring of support for the National Health Service, it is hard to imagine that voters will not demand greater resources for health. Where will the money come from?

There are two important differences between the Great War and today’s Pandemic War worth mentioning here. First, in 1914-18, Britain’s economy underwent a supply shock; demands for labour, goods and services to fight the war drove government spending and ultimately, inflation. Now, Britain is undergoing a negative demand shock. Government spending is aimed not at buying supplies, but rather, at enabling businesses and households to go on consuming despite having no income of their own.

Second, capital is now cheap and plentiful. A century ago, it was much less so and cost much more to borrow. For example, 10-year gilts are now paying interest at roughly 0.25 per cent. In 1917, Britain struggled to borrow below 6 per cent.

In 1919, Britain’s economic woes were exacerbated by its desire to return to its role at the centre of global trade; although it abandoned the Gold Standard that year, it vowed to return at pre-war parity to the US dollar. That tied Britain to a deflationary monetary policy through the decade. Unemployment, after shooting up to average 11.5 per cent over 1921-22, barely fell below 10 per cent thereafter. The strong pound hobbled Britain’s export industries where unemployment was concentrated. This was at a time when taxpayer support for the unemployed was very limited although fear of Bolshevism spurred chancellor Stanley Baldwin to gradually expand it.

Currently, Britain is operating unemployment support on a previously unimaginable scale. Ultimately, the billions of pounds of additional spending—to provide incomes for some of the unemployed, to extend loans to businesses closed by lockdown, to pay for unprecedented demand for health care—will have to be repaid. Of course, there are key differences. For one thing, the Bank of England has said it stands ready to effectively print money for the government to spend. After the Great War, money loaned directly by the Bank—then shareholder-owned—had to be repaid quickly.

What lessons will today’s policymakers take away from history? Perhaps the greatest failure after the Great War was that the nation’s leaders could not—or would not—see the profound changes to Britain’s economic, fiscal and social institutions that had been forced by war. They designed policy to suit an age that no longer existed. It would require the Second World War to create a universal safety net intended to protect people when markets failed. That safety net required previously unimaginable levels of taxation.

Kenneth Scheve and David Stasavage, in their book “Taxing the Rich,” show that in recent times, even participatory democracies with universal suffrage are only willing to levy high taxes on the very wealthy following wartime. And even then, it is only after wars requiring universal conscription and widely-shared sacrifice that creates this willingness to tax. In the aftermath of this pandemic, the battle will be over how the burden of rescuing both lives, and the broader economy, should be paid for.