In 1914, as the United Kingdom prepared for the First World War, the government sought to rapidly raise funds through a public war loan aimed at securing £350 million. Though widely celebrated at the time as a resounding patriotic success, recent historical research reveals that the initiative fell far short of its target, managing to raise only £91 million—less than a third of the intended sum.

Newly examined archival materials, analyzed by scholars at Queen Mary University of London, disclose that senior officials at the Bank of England, including Chief Cashier Gordon Nairn and his deputy Ernest Harvey, purchased large portions of the loan in their own names. These holdings were concealed within the Bank’s accounts to mask the shortfall and maintain public confidence. Nairn later testified that the entire £350 million had been sold to the public, despite evidence to the contrary. Attempts to leverage patriotic fervor and appeals to sacrifice failed to generate sufficient investor interest, forcing the Bank of England to cover the gap and avoid a damaging public relations setback.

This historical episode carries renewed relevance as the UK government contemplates rising defence spending and revisits the idea of issuing war bonds. Various proposals have emerged suggesting that bonds specifically tied to defence expenditure could provide a means for the government to finance its military ambitions while engaging the public directly.

Nicholas Lyons, chair of Standard Life, has advocated for inheritance tax-exempt defence bonds, arguing they could attract wealthy investors seeking tax-efficient ways to pass on wealth to future generations. By accepting lower interest rates in exchange for inheritance tax exemptions, investors might help reduce the government’s borrowing costs. However, critics note that introducing a distinct class of gilts with unique tax treatment could fragment the market and reduce liquidity. Additionally, lower immediate interest expenses may be offset over time by reduced tax revenue, presenting a trade-off rather than a net fiscal gain.

The Liberal Democrats propose issuing £20 billion of special defence bonds to enable the public to invest directly, framing it as a collective national effort. This approach aligns with broader Treasury objectives to diversify the domestic investor base and lessen dependence on foreign and institutional creditors. Enhanced marketing and simplified mechanisms for retail investors could make such bonds appealing, especially if incorporated into broader initiatives to promote government securities.

Nonetheless, the lessons of 1914 caution against overreliance on patriotic appeals to secure favorable borrowing terms. Retail investors may demand higher yields in exchange for locking in funds, making war bonds potentially more expensive and less flexible than traditional government debt.

More fundamentally, any additional borrowing, regardless of structure, represents increased government debt. While borrowing can accelerate rearmament in the short term, it does not address sustainable financing for long-term defence commitments. Given the likely permanent elevation of defence budgets amid shifting global security dynamics and reduced reliance on the United States, the UK will ultimately need to reallocate public spending, raise revenues, or pursue both measures. War bonds and other borrowing strategies, while potentially helpful, cannot substitute for these core fiscal decisions.