The McKenna Rule and UK World War I Finance

James Nason () and Shaun P. Vahey

No DP2007/08, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: This paper argues that UK WWI fiscal policy followed the ‘English method’ identified by Sprague (1917) and his discussants, and revived by the US to finance the Korean War (see Ohanian 1997). During WWI, UK fiscal policy adopted the “McKenna rule” named for Reginald McKenna, Chancellor of the Exchequer (1915-16). McKenna presented his fiscal rule to Parliament in June 1915. The McKenna rule guided UK fiscal policy for the rest of WWI and the interwar period. We draw on narrative evidence to show that motivation for the McKenna rule came from a desire to treat labour and capital fairly and equitably, not pass WWI costs onto future generations, and commit to a debt retirement path and higher taxes. However, a permanent income model suggests the McKenna rule adversely affected the UK because a higher debt retirement rate produces a lower consumption-output ratio. Data from 1916-37 supports this prediction.

JEL-codes: E6 N4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-his, nep-mac, nep-pbe and nep-sea
Date: 2007-04
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Related works:
Working Paper: The McKenna rule and U.K. World War I finance (2007)
Journal Article: The McKenna Rule and UK World War I Finance (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:nzb:nzbdps:2007/08

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