Global Inflation during the First World War

Last Banknote Issued by the German Empire, 50 Marks

By Nicholas Mulder, Columbia University

The Great War required war-making states to mobilize and sustain the financial resources for a global war on an unprecedented scale. What made war finance during the conflict so special is that this challenge had never been confronted in a world economy as large, deeply interconnected, and sophisticated as that which existed in 1914. [With the belligerents, for example, taxation]  served to control inflation and to uphold the creditworthiness of governments in the eyes of their creditors. By removing excess money supply from the civilian economy, taxation would reduce the strong upward pressure on prices caused by increased spending and money issuance. [Note: This article does not cover the great German inflation of 1918–1923 or the origins of the Great Depression].

The First World War created a global rise in prices. Taking the price level of the last prewar year, 1913, as a benchmark level of 100, the increases were significant everywhere. In all economies that were at officially war, prices had risen at least twofold by 1918: from 196 in Japan and 203 in the USA to 235 in Great Britain, 217 in Germany (soon to cascade into dangerous hyperinflation), 340 in France, and 409 in Italy. Shortages of raw materials, excess liquidity spillovers, and foreign import binges also affected the neutrals, most of which saw the 1913 price levels more than triple.  

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Selected Commodity Prices Before and After
the First World War

Since European central banks also controlled currency and securities circulating in their colonial economies, deficit financing in the metropole caused inflation in the periphery. Because colonial subjects lacked rights and democratic institutions, this inflation fueled social unrest and anti-colonial uprisings. In Central Europe, town-country exchange was breaking down by the end of the war, causing famine in urban centers; Asian peasants from the Indian Ocean to the Pacific confronted a rice crisis that would persist for three years after the end of the war.  

The way that these high price levels were brought down was through a sustained, purposeful deflation of the global money supply, initiated by the Federal Reserve’s hiking of interest rates in March 1920 and (due to America’s leading role in the return to the gold standard) thereafter forcibly followed by most central banks around the world. The economic result was a sharp worldwide recession in 1920–1921. This monetary consolidation was accompanied by a wave of violent political repression and counterrevolution—a “world-wide Thermidor” that ended the revolutionary aftermath of the Great War. 

Source: Encyclopedia 1914-1918; Research Gate by Niall Ferguson