How Governments Pay for Wars

The three ways governments finance wars - taxes, borrowing and printing money - and the lasting effects of each.

Wars are extremely expensive, and governments must find the money quickly. Throughout history they have used three main methods, often in combination.

Raising taxes

Taxes pay for the war as it happens. During the Second World War, the United States greatly expanded its income tax. The number of Americans paying income tax rose from a few million to tens of millions, and tax withholding from paychecks became standard. Britain also raised taxes sharply. Taxation spreads the burden across the current population and avoids leaving debts for the future.

Borrowing

Governments also borrow heavily in wartime. They sell bonds to banks, investors and ordinary citizens. During both world wars, governments ran large campaigns urging people to buy war bonds, framing it as a patriotic duty.

Borrowing leaves a legacy of public debt. After the Second World War, Britain’s government debt peaked at over 250 percent of GDP, and U.S. federal debt held by the public exceeded 100 percent of GDP. Both countries reduced these ratios over the following decades mainly through economic growth and moderate inflation, not by paying the debt off in full.

Printing money

The third option is creating money to pay for spending. This is quick but can cause inflation, which acts like a hidden tax by reducing the value of people’s savings. In extreme cases, it has led to hyperinflation, as in several countries during and after wars.

Paying for the First World War

During the First World War, Germany relied heavily on borrowing and printing money, expecting to repay debts from a defeated enemy. When it lost the war, it was left with huge debts and reparations, contributing to the hyperinflation of 1923. Britain financed a larger share of its war costs through taxes, which helped it avoid a similar collapse.

Who bears the cost

Each method shifts the burden differently. Taxes fall on today’s taxpayers. Borrowing shifts some of the cost to future taxpayers who must pay interest. Inflation falls on savers and people on fixed incomes. Economists and historians study these choices because they shape a country’s finances long after the fighting ends.

Thinking wars are paid for only by those who fight them

The financial costs of war are shared across society, and often across generations. Wartime borrowing can leave debts that take decades to reduce, and inflation can quietly erode the savings of people far from the front line.

Key takeaways

Governments pay for wars through taxes, borrowing and printing money.
The Second World War greatly expanded income taxes in the United States and Britain.
Borrowing leaves large debts, reduced over decades mainly through growth and inflation.
Printing money can cause inflation or even hyperinflation, as in Germany in 1923.