The McKenna Rule and UK World War I Finance
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.
|Date of creation:||Apr 2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 64 4 471-3767
Fax: 64 4 471-2270
Web page: http://www.rbnz.govt.nz
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shaun P. Vahey & James M. Nason, 2005. "Over the Top: U.K. World War I Finance and Its Aftermath," Computing in Economics and Finance 2005 22, Society for Computational Economics.
- Albert Marcet & Thomas J. Sargent & Juha Seppala, 1996.
"Optimal taxation without state-contingent debt,"
Economics Working Papers
170, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2001.
- Ohanian, Lee E, 1997. "The Macroeconomic Effects of War Finance in the United States: World War II and the Korean War," American Economic Review, American Economic Association, vol. 87(1), pages 23-40, March.
- George J. Hall & Thomas J. Sargent, 1997. "Accounting for the federal government's cost of funds," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jul, pages 18-28.
When requesting a correction, please mention this item's handle: RePEc:nzb:nzbdps:2007/08. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Reserve Bank of New Zealand Knowledge Centre)
If references are entirely missing, you can add them using this form.