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Economics in the Shadow of the First World War

The Costs and Finances of World War I According to Eli F. Heckscher

Les coûts et le financement de la Première Guerre mondiale selon Eli F. Heckscher
Klas Fregert
p. 515-524


Heckscher published in 1915 a book on the economics of World War I in Swedish. He analyzed the costs and the finances of war along similar lines as his contemporary Pigou (1916). Heckscher reached farther by making a distinction between the short and the long-run costs of war. He also provided a comprehensive theoretical and empirical analysis of the sources of funds for war finance, including a pioneering analysis of the inflation tax.

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1In 1915, Eli F. Heckscher (1879-1952), published a book Världskrigets ekonomi. En studie av nutidens näringslif under krigets inverkan (The Economics of the World War. A study of contemporary business life under the influence of the war) directed at the educated public. Heckscher, then professor at the newly formed business school Stockholm School of Economics, had begun his work on Världskrigets ekonomi in the summer of 1915 with a five-week tour of the Netherlands, United Kingdom, France and Germany. The book was written quickly, with the foreword signed in November 1915.

  • 1 It cannot be denied that the abandonment of the theoretical base of economics often have enticed r (...)

2Heckscher noted in the opening pages that the war had revealed the ultimate purpose of all economic life, namely “what people need to live and act.” (Heckscher, 1915, 1) There could be no social gains from war, only costs and transfers of income. That Heckscher belonged in the liberal British tradition, while dismissing the German historical school,1 is evident in several places in the book, exemplified by:

J.M. Keynes’s two articles in Economic Journal 1914 …, contain an investigation of the then current situation without regard to anyone’s sensitive feelings, which leads to conclusions that stand in complete agreement with what the science of economics has found in the last hundred years. (Heckscher, 1915, 2)

3He went on to argue that economics had proved itself in the war:

One has gained an invaluable service in the knowledge of the elasticity and adaptability of business life, which mostly confirm the least accepted inferences of economics, but of deeper modifications of the economic sciences results there are yet no signs. (Heckscher, 1915, 2).

  • 2 Heckscher (1915) also treated a number of topics not treated here (war and international trade, pre (...)

4In this article, I shall present Heckscher’s main conclusions on the costs and finance of World War I, as well as highlight his original contributions to understanding the economics of war.2 The first section will focus on Heckscher’s main thoughts regarding the costs of war, including his distinction between short and long-run costs. In the second section, the argument will move to consider Heckscher’s discussion of the financing of the war. The conclusion draws these themes together, speculates on why the book, despite its quality, did not affect the contemporary Swedish debate, and offers some brief comparisons with Pigou’s book, The Economy and Finance of the War (Pigou, 1916).

1. Heckscher on the Costs of War

5In the second chapter of Världskrigets ekonomi, Heckscher presented an overview of the war costs. His was not the first account to discuss the costs of the war, and he cited Crammond (1915) for the United Kingdom and Jastrow (1914) on the initial mobilization of Germany. Heckscher made a distinction between the long-run costs of war and short-run adjustment costs based on Marshall’s discussion of the mobility of factors.

6In terms of the long-run costs, Heckscher divided these between real capital losses, loss of lives, and income losses. Regarding real capital losses, Heckscher identified two types. First, damages to real capital from war activities, which he judged to be small as typically only small tracts of land are affected by war. Heckscher illustrated this with the initial capital losses of the large countries (United Kingdom, France and Germany) which mainly consisted of the loss of ships. An exception was the small country (Belgium) of which large areas had become fighting grounds. In this case the capital losses appeared “enormous”. Second, Heckscher considered real capital taken over by the government for war purposes. Real capital directly useful for war—such as houses, railways etc.—only made up a small part of total real capital: “Even the German army cannot eat railways and port facilities or clothe itself with bricks and mortar.” (Heckscher 1915, 10) The only substantial part of real capital that could be used immediately was consumable real capital: “Half the cattle stock, the total stock of agricultural products, half the timber assets, two thirds of the inventories of the industry and trade, and one third of the assets in the hands of the consumers.” (Heckscher 1915, 10) Using Swedish estimates of consumable capital at 16 per cent of national wealth, Heckscher concluded that only a small part of national wealth could be used for war.

7Regarding the loss of lives, Heckscher (1915, 13) cited the initial cost estimates by Crammond (1915), who defined this as the loss of human capital calculated as the capitalized value of future earnings of the dead. Heckscher was skeptical of such calculations on account of humans being the “goals for all earthly activity”. He was not alone in skepticism. For example, Kiker (1966, 492), in a survey of the concept of human capital, cited Robert Giffen’s (1880) analysis of the loss of life in the Franco-German War.

8Another reason for Heckscher’s skepticism was the uncertain effects of the loss of lives on the future growth of the economy. To quote him at length on this:

These changes are in their nature imponderable; as a war and the new political situation thereafter will liberate plenty of moral and immoral forces in a people, even not considering the demographic changes (in birth rates etc.) a war is thought to bring. The new forces may either increase the return on human capital far more than the loss of life and blood—one thinks of Germany after the Franco-German war—or the reverse, that is, multiply the injuries brought by the war. (Heckscher, 1915, 14)

  • 3 A critical survey of various estimates and methods to estimate World War I costs of lost lives is p (...)

9An early discussion of “the new forces” was provided by Bowley (1931) and further developed by Milward (1984). Since nothing was known about these forces in 1915, Heckscher suggested that “If the limit is set in this way, the question about human losses can with some reason be put aside; as the men who are under arms, even as living, are outside the realm of productive activity” (Heckscher 1915, 14). Putting this another way, the effect of the loss of life on national income per surviving person could be ignored until more was known about the ultimate consequences of the war.3

10Income losses due the mobilization of men and the transfer of workers to provide food and munitions for them would constitute the largest losses by far. Heckscher argued that the flow of losses would equal “the value of the lost working days plus the interest on land and—even more—the capital (factories, mines, etc.) which, due to the lack of workers, cannot be used.” (Heckscher 1915, 16)

11Heckscher estimated from available data that the transfer of workers and capital to munitions represented a large reduction of the national income. The movement of capital to munitions occurred through the adaptation of civil factories to war production.

12Turning to short-run costs, Heckscher discussed those which arose from the difficulty of adjusting a peace economy to a war economy. In principle, these costs would be overcome with time and could be reduced by a well-organized transition to the war economy. He added:

There is something seemingly unnatural in that the war situation after a while becomes normal in that the new situation follows its own rules without hitches. …The social organization has, metaphorically speaking, been shaken down into the form which suits the war situation. (Heckscher, 1915, 29-30)

13Heckscher divided the short-run costs according to whether they were caused by internal or external factors. The internal short-run costs concerned the adjustments due to the movement of resources into the military sector. He dismissed the idea that war would be a free good because it would absorb unemployed men. The internal disturbance from the war would require a large adjustment, meaning that it would take time to shift labor from sectors in which demand decreased due to the war (such as from services and luxury industries) to sectors where demand was unchanged or increased in order to replace mobilized men in those sectors. Heckscher (1915, 24-25) expressed astonishment at how smooth the transition went in Germany and Great Britain as revealed by the simultaneous increase in labor force participation and employment of women and the small effects on unemployment. Germany returned to the low pre-war unemployment figure by the summer of 1915, and in Great Britain by the winter of 1914.

14The external short-run costs affected all countries who were not self-sufficient—which, Heckscher argued, would be virtually all countries. The external costs differed from the internal ones only in that they depended on the specifics of the war situation, such as changes in blockades. They presented the largest surprises compared to previous wars due to, first, the larger degree of dependence between countries which no longer were self-sufficient, and second, the dismantling of the international trading and financing system as economic warfare had set in from the beginning of the war.

15A final type of short-run costs were the peace adjustment crisis costs, which no one had thought about at the start of the war, and which, writing in 1915, Heckscher believed were still underestimated (Heckscher, 1915, 30). He conjectured that, come the end of hostilities, the peace crisis would be larger than the crisis at the start of the war.

16Heckscher estimated that between 20 to 25 million men would be demobilized, a situation that—with the exception of the peace crisis following the Napoleonic wars—had no counterpart in the history of man. To give a brief outline of this situation: soldiers’ tasks would end immediately come the eventual return of peace (except for the ones needed for occupation), while their mobilization at the outbreak of the war had taken some time; most soldiers would have no previous positions to return to in contrast to their pre-war occupations; workers from industries, which had expanded to replace imports during the war, would have to relocated; and the administrative problems in establishing the peace economy would also be vastly more difficult. While it would be possible to keep the soldiers for a while under the flag:

only when the struggling millions have become new consumers and producers, will it be possible to see where there will be use of them: it is not possible for ordinary humans to map out the new peace economy before the soldiers have returned to civil society. (Heckscher, 1915, 31)

2. Heckscher on the War Finance

17Heckscher’s analysis in Världskrigets ekonomi outlines five means of financing a war: (1) paying with new currency; (2) taxation; (3) domestic borrowing; (4) foreign borrowing; and (5) the sale of foreign assets. He argued that the methods ultimately financed the flows of real resources to the government corresponding to the costs. While some consumable capital could be used up, the main task was to finance the flow of new goods needed for the war: munitions and food to the mobilized soldiers, and food to the soldiers and the workers in the munitions sector. Heckscher set out how this happened in order to get behind the veil of money and finance to dispel common fallacies.

18Heckscher estimated how the government budgetary costs were financed among the main belligerents according to the five methods. He explained how the financing by paying with new currency enabled the government to command a flow of real resources, with an algebraic example, analogous to Keynes (1922, 42-43) example. According to Kleiman (2000), the first clear explanation of the inflation tax is Keynes (1922). As Heckscher’s explanation may be the first clear exposition of the inflation tax, I provide an extended quote, which may be compared to Keynes’s example:

  • 4 Heckscher added a footnote hinting at further complexities (for example, that the example presumes (...)

Through the new amount of currency the government gains purchasing power. But against this newly created purchasing power there is no corresponding quantity of new goods. If a certain given amount of goods corresponded to an amount of media of payment (bills, coins and other credit instruments) of for example 10 billion and now, without an increase in the amount of goods, the media of payment … increased to for example 12 billion, it means that every new unit of the new means of payment only correspond to five sixths of the amount of goods one could previously get for every unit; while one before could buy for each unit of the means of payment a ten-billion part of the amount of goods, it can now only buy one twelfth-billion part. The consequence is thus an increase in the general price level. But by having acquired—in the example—2 billion of the 12, which are in circulation after the actual operation, the government has, despite the decrease in value of the money acquired one sixth of the amount of goods in the country and reduced the purchasing power of the population to five sixths of what it was before. Thus this operation can finance war expenditures, a forced saving, while in a very unfortunate form, since the method at the same time corrupts the general unit of account. (Heckscher, 1915, 165)4

19Heckscher (1915, 166) argued that an increase in the demand for real balances enabled the government to get an equivalent increase in real resources without inflation. He believed this could happen at the start of the war as the public would hoard currency, particularly if it began to doubt the safety of the banking system.

20Regarding taxation, domestic loans and the inflation tax, Heckscher made the clear point that all methods would have to reduce current private consumption and investment to correspond to the increase in government consumption, with the addition of consumption of consumable capital. The difference between taxation and domestic loans lay in the question of on whom the burden fell and how easy it was to procure the resources. Loans had the advantage of being immediately paid by those who could most easily abstain from consumption. Taxation would affect all and probably mostly the wealthy. Regarding foreign borrowing and selling off foreign assets, he pointed out that these methods enabled the country to consume and invest more than its national income.

  • 5 Nason and Vahey (2007) provide an analysis of the “McKenna rule”.

21Writing in 1915, Heckscher (1915, 182-196) made an attempt at estimating the relative importance of the means for war financing. He found that for France, Germany and the United Kingdom, 20 per cent was financed by the printing press (increase in central bank money minus increase in their gold holdings) and 80 percent by borrowing (short and long term). The only attempt to tax was the slight increase of taxes in Great Britain introduced by the Chancellor of the Exchequer, Reginald McKenna.5

22The most original part of Heckscher’s study of war finance was his attempt to estimate what he labelled the sources of the financing of the war effort (Heckscher 1915, 196-204). By the sources he meant the division of expenditures of national income into consumption (private, C, and government, G) and investment (domestic, I, and foreign, the current account), plus the consumption of national wealth. These sources represented yet another aspect of the national accounts in addition to the cost calculations and the financing. Heckscher hypothesized that domestic and foreign investment would cease in a war economy, and that the savings used to finance investment would be the main source of finance for the war, rather than consumption, mainly absorbed through the government’s borrowing. He found support for these suppositions by comparing pre-war savings estimates for Germany and the United Kingdom with the war emissions of government bonds. He also cited reports in The Economist concerning the virtual disappearance of new public stock offerings indicating the cessation of new investment.

  • 6 See Hobson (1915).

23Regarding the consumption of national wealth (the stock of assets), Heckscher pointed out two sources. First, by neglecting to repair existing capital or using up consumable capital, the economy could increase its consumption or investment. Second, the nation could trade its foreign assets, part of national wealth, for foreign goods. This source was particularly important for the United Kingdom, with its large foreign assets acquired through decades of capital exports, as exemplified by the British sales of American railway bonds back to the United States in exchange for American imports.6 France also had large foreign assets, but was hampered by capital import restrictions, which Heckscher pointed out were counterproductive with regard to the war effort. Germany owned relatively few foreign assets and lacked access to the large capital markets. Some German assets were sold to neutral countries like Sweden.

3. Concluding Comments

24On its first publication, Sven Brisman (1916, 93) gave Heckscher’s Världskrigets ekonomi high marks in a review, claiming that “the treatment is exhaustive and strictly scientific” and that it had made “a stronger impression upon economically interested people than any other publication so far seen in this country”. It is clear from this book that Heckscher was a master of economic analysis using theory to pose questions and empirical estimates to answer them. Yet the book did not leave any imprint on the war-time economic debate in Sweden: beyond the 1916 review by Brisman, there was no discussion in the Swedish Economics Journal ( Ekonomisk Tidskrift) for the years 1915-1922. Similarly, the book is not mentioned in Anders Östlind Svensk samhällsekonomi 1914-1922 [The Swedish Economy 1914-1922] (Östlind, 1945), which provides a monumental treatment of the Swedish economy during World War I and explores the contemporary debates among economists. The most likely explanation for the book’s lack of impact is its character of a general treatise, which made it inconsequential for the Swedish debate during the war.

  • 7 Keynes’s (1940) essay and his work for the Treasury is credited with the introduction of expenditur (...)

25However, in its analysis of the costs and the finance of the war, Heckscher’s 1915 book provides several original insights, two of which I believe still warrant consideration. First, Heckscher’s use of the Marshallian distinction between the short and the long run—in particular his focus on the potentially large short-run costs of the peace crisis—a calculation that cannot be found in later texts dealing with the total cost estimates of World War I, such as Bogart (1920), Bowley (1930), Clark (1931) or Broadberry and Harrison (2005). Second, Heckscher’s stress on the investigation of the sources of war finance as coming from consumption or investment would add to our understanding of war economics from an intertemporal perspective. It should also be noted that Heckscher gave a clear explanation of the inflation tax as a source of revenue for the state predating Keynes (1922). He also presented estimates of the sources of the financing of the war effort using the division of national income into consumption and investment, which predate Keynes’s (1940) estimates in his essay How to Pay for the War.7

  • 8 He identified the German economist Werner Sombart as a proponent of this view.

26It is interesting here to briefly compare Heckscher’s 1915 work with a similar book—The Economy and Finance of the War— published by his British contemporary, Arthur Pigou, in March 1916. Heckscher’s primary aim was similar to Pigou’s, namely to try and rid the general public and politicians of fallacious arguments regarding the economics of war. Yet while the pedagogical style and zeal of these two economists (at least in their writings on the economics of war) were near identical, Heckscher’s analysis went into considerable more detail. For example, while it is possible to find analogous views in these two books on the proper way to measure war costs as opportunity cost, the two men differed on the most likely type of popular confusion. Heckscher (1915, 7) took up the underestimation of war costs coming from the fallacious (in his view) idea—popular in the beginning of the war in Sweden and in Germany8—that the war diminished unemployment. Pigou (1916, 15-22), on the other hand, warned against double counting by adding budgetary costs to the lost production from the enlisted men.

  • 9 His comments in this on Napoleon’s blockade of Great Britain also offered comparisons with World Wa (...)
  • 10 Heckscher would participate for the rest of his life in public debates on contemporary matters, whi (...)

27The economics of World War I inspired Heckscher to produce two more works – a book, The Continental System: An Economic Interpretation (1918/1922)9, and a study of Sweden’s monetary history from 1914-1925 (1926/1931)—both of which were translated into English by the Carnegie Endowment for International Peace. Yet only in his 1915 work, Världskrigets ekonomi, did Heckscher explicitly deal with the economic costs and finance of the war.10

I would like to thank the anonymous referees and the editors Christopher Godden and Jean-Sébastien Lenfant for their useful comments.

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Bogart, Ernest L. 1920. Direct and Indirect Costs of the Great War, 2nd edition. Carnegie Endowment for International Peace. New York: Oxford University Press.

Bowley, Arthur L. 1930. Some Economic Consequences of the Great War. London: Thurnton Butterworth.

Brisman, Sven. 1916. Review of Heckscher 1915. Ekonomisk Tidskrift, 18: 89-93.

Broadberry, Stephen and Mark Harrison. 2005. “The Economic Costs of World War I. An Overview. In Stephen Broadberry and Mark Harrison (eds), The Economics of World War I. Cambridge: Cambridge University Press.

Clark, John M. 1931. The Cost of the World War to the American People. New Haven (CT): Yale University Press.

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Heckscher, Eli F. [1918] 1922. The Continental System: An Economic Interpretation. Carnegie Endowment for International Peace. Oxford: Clarendon Press. Translation of Swedish original (1918).

Heckscher, Eli F. [1926] 1931. Sweden’s Monetary History from 1914-1925 And Its Relations to Foreign Trade and Shipping. In part III of Sweden, Norway, Denmark and Iceland in the World War. Carnegie Endowment for International Peace. New Haven. Translation of Swedish original (1926).

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Jastrow, Ignatz. 1914. Im Kriegszustand. Die Umformung des öffentlichen Lebens in der ersten Kriegswoche. Berlin: Reimer.

Keynes, John Maynard. 1922. Inflation as a Method of Taxation. Manchester Guardian Commercial Reconstruction Supplement. 27 July. Reprinted. with some extensions as section 1 of chapter 2 in John Maynard Keynes. 1923. A Tract on Monetary Reform. London: Macmillan.

Keynes, John Maynard. 1940. How to Pay for the War. London: Macmillan.

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Nason, James M. and Shaun P. Vahey. 2007. The McKenna Rule and UK World War I Finance. American Economic Review, 97(2): 290-294.

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Studenski, Paul. 1958. The Income of Nations. Part One. History. London: University of London Press.

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1 It cannot be denied that the abandonment of the theoretical base of economics often have enticed reputable German scientists to such fallacies.” (Heckscher, 1915, 153)

2 Heckscher (1915) also treated a number of topics not treated here (war and international trade, preparing for war, price formation and price regulation under war, gold and war).

3 A critical survey of various estimates and methods to estimate World War I costs of lost lives is provided by Broadberry and Harrison (2005).

4 Heckscher added a footnote hinting at further complexities (for example, that the example presumes a steady state with money growth equal to inflation): “It should be said that a great part of the “finer points” of monetary theory consciously have been neglected, so that the exposition will not be unnecessarily complicated. Every investigation in economics, scientific as well as popular, must simplify the problem by excluding the elements not pertinent to the question. If this is not done, one is forced to roll out the whole of theoretical economics at every stage, which cannot be considered beneficial.” (Heckscher, 1915, 165)

5 Nason and Vahey (2007) provide an analysis of the “McKenna rule”.

6 See Hobson (1915).

7 Keynes’s (1940) essay and his work for the Treasury is credited with the introduction of expenditure accounts in official national accounts after World War II. See Studenski (1958, 152-153).

8 He identified the German economist Werner Sombart as a proponent of this view.

9 His comments in this on Napoleon’s blockade of Great Britain also offered comparisons with World War I, and is still cited. See Findlay et al. (2006).

10 Heckscher would participate for the rest of his life in public debates on contemporary matters, while his scientific work would be in economic history.

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Bibliographical reference

Klas Fregert, « The Costs and Finances of World War I According to Eli F. Heckscher », Œconomia, 6-4 | 2016, 515-524.

Electronic reference

Klas Fregert, « The Costs and Finances of World War I According to Eli F. Heckscher », Œconomia [Online], 6-4 | 2016, Online since 01 December 2016, connection on 29 May 2017. URL : ; DOI : 10.4000/oeconomia.2454

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About the author

Klas Fregert

Department of Economics, Lund University.

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Les contenus d’Œconomia sont mis à disposition selon les termes de la Licence Creative Commons Attribution - Pas d'Utilisation Commerciale - Pas de Modification 4.0 International.

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