The resignation of Carl Jung from the presidency of the International Psychoanalytic Association was a major blow to the psychoanalytic movement, especially since it followed soon after the resignations of Alfred Adler and Wilhelm Stekel. But the resignations were quickly overshadowed by the beginning of the First World War, which was a major setback for the movement and its members.

The war was started by the assassination of the Austrian Archduke Franz Ferdinand in Sarajevo, Serbia, on June 28, 1914, by a Bosnian who was a member of a group of Serbian nationalists. The rulers of the Austro-Hungarian Empire decided to retaliate by punishing the Serbs, but this quickly drew the opposition of Western European powers such as France and England. Soon almost all of Europe was involved in the conflict. The war lasted for four years and involved horrific casualties on both sides, in part because of the use of new technologies such as automobiles and poison gas. Freud was too old to fight, but his three sons, Martin, Oliver, and Ernst, were all drafted. They were occasionally in difficult straits; Martin, for instance, spent a great deal of time in an Italian prisoner of war camp. Still, they all came out mostly unharmed.

Psychoanalysis also emerged mostly unharmed, although this eventual outcome seemed unlikely during the war. All international congresses were canceled, since half of the nations represented at the International Psychoanalytic Association's were at war with nations represented by the other half, and communications between members were restricted for the same reason. Freud's staunchest supporter in England, Ernest Jones, managed to smuggle letters through to Vienna, but in general Freud's correspondence with his psychoanalytic colleagues and followers dwindled. The Jahrbuch, the Association's first journal, disappeared. Only the Zeitschrift für Psychoanalyse and Imago, the journal for non-medical applications of psychoanalysis, survived, with Freud doing most of the editing himself.

Many psychoanalysts were drafted into the war effort, either as general physicians or as psychiatrists for the increasingly common "war neuroses." Many psychiatrists and military officials at the time believed that when soldiers showed symptoms of constant nervousness, nightmares, and traumatic memories or even hallucinations of war experiences, they were merely cowards trying to escape combat. During the First World War, this perception started to change. Many people began to think that these symptoms were signs of real psychiatric problems. Psychoanalysis, with its focus on neurosis due to early childhood trauma, seemed perfectly situated to deal with war neurosis: it had an explanation for why some soldiers got "shell shock" and others did not (Oedipus complexes, inappropriately cathected libido, etc.) and it had a way to treat them (psychoanalysis).

This use of psychoanalysts during war time, while a distraction from the main task of psychoanalysis, had long-term benefits for the movement: it connected a number of psychoanalysts to people in power in the military and the government, and it increased the prestige of psychoanalysis in the eyes of the public. In 1918, with the war winding down, the fifth International Psychoanalytic Congress met in Budapest, Hungary. Sandor Ferenczi, himself a Hungarian, was elected president of the Association. For the first time, a number of government officials from Austria, Germany, and Hungary attended the congress because of the interest sparked by the application of psychoanalysis to war neuroses.

During the war, Freud had very few patients. He continued to treat those that he did have, but spent much of his time writing. In the winters of 1915–1916 and 1916–1917, he gave a series of lectures on psychoanalysis at the University of Vienna which were later published as the General Introduction to Psychoanalysis. One of Freud's most important patients during the war years was a Hungarian named Anton von Freund. Freund was a wealthy Hungarian who was treated by Freud for a minor neurosis. Enthusiastic about his treatment and excited by the congress in Budapest in 1918, Freund donated a large sum of money to the Association in order to found a psychoanalytic publishing house. The house was officially founded in January of 1919 and run by Otto Rank until 1924. Unfortunately, Freund's generosity was rendered almost insignificant by postwar economic conditions in Austria. Rampant inflation turned what had been Freund's small fortune into a barely-sufficient nest egg. After this inauspicious beginning, the Internationaler Psychoanalytischer Verlag, as the publishing house was called, was almost never solvent: it depended mostly on donations from supporters of psychoanalysis, dues from members of the Association, contributions from authors published by the Verlag, and sales of Freud's books–the only profitable books published by the Verlag in its 19 year existence. The Verlag was finally done in not by economic difficulties, but by the annexation of Austria by Hitler in 1938.