The Deluge

by Adam Tooze

  All the main European combatants began the war with what were by modern standards remarkably strong financial balance sheets, solid public finances and large portfolios of foreign investments. In 1914 fully a third of British wealth was held in private overseas investment. As the war began, the mobilization of these domestic and imperial resources was compounded by an immense transatlantic financing operation. This involved all the governments of Europe, but above all the British in a new form of international action. Before 1914, in the era of Edwardian high finance, London’s leading role was generally acknowledged. But international finance was a private affair. The conductor of the gold standard orchestra, the Bank of England, was not an official agency but a private corporation. If the British state was present in international finance, its influence was subtle and indirect. The UK Treasury remained in the background. Under the extraordinary pressures of the war, these invisible and informal networks of money and influence were quite abruptly solidified into a claim to hegemony of a far more concrete and overtly political kind. From October 1914 the British and French governments put the weight of hundreds of millions of pounds of government loans behind the ‘Russian steam roller’ that was to crush the Central Powers from the east.11 Following the Boulogne agreement of August 1915, the gold reserves of all three major Entente Powers were pooled and used to underwrite the value of sterling and the franc in New York.12 Britain and France in turn assumed responsibility for negotiating loans on behalf of the entire Entente. By August 1916, in the wake of the terrible cost of the Verdun battle, France’s credit had sunk to such a low ebb that it fell to London to underwrite the entire New York operation.13 A new network of political credit had been created in Europe with London at its centre. But this was only one leg of the operation.

  In accounting terms the financing of the Entente’s war effort involved an enormous reshuffling of national assets and liabilities.14 To provide collateral, the UK Treasury organized a forced purchase scheme for private holdings of first-class North American and Latin American securities, which were exchanged for domestic UK government bonds. The foreign assets, once in the hands of the UK Treasury, were used to provide security for billions of dollars’ worth of Entente borrowing from Wall Street. The liabilities that the UK Treasury incurred in America were counterbalanced in Britain’s national balance sheet by vast new claims on the governments of Russia and France. But to imagine this gigantic mobilization as the effortless redirection of an existing network underplays the historic significance of the shift and the extreme precariousness of the financial architecture that emerged. After 1915, the Entente’s war borrowing upended the political geometry of Edwardian finance.

  Before the war billions had been lent by private lenders in London and Paris, the rich core of Imperial Europe, to private and public borrowers in peripheral nations.15 As of 1915, not only had the source of lending shifted to Wall Street, it was no longer railways in Russia or diamond prospectors in South Africa queuing up for credit. The most powerful states of Europe were now borrowing from private citizens in the United States and anyone else who would provide credit. Lending of this kind, by private investors in one rich country to the governments of other rich developed countries, in a currency not controlled by the government borrower, was unlike anything seen in the heyday of late Victorian globalization. As the hyperinflations after World War I were to demonstrate, a government that had borrowed in its own currency could simply print its way out of debt. A flood of new banknotes would wipe out the real value of the war debt. The same was not true if Britain or France borrowed in dollars from Wall Street. The most powerful states in Europe became dependent on foreign creditors. Those creditors in turn extended their confidence to the Entente. By the end of 1916, American investors had wagered two billion dollars on an Entente victory. The vehicle for this transatlantic operation, once London took charge in 1915, was a single private bank, the dominant Wall Street house of J. P. Morgan, which had deep historic ties to the City of London.16 This was a business operation for sure. But it was coupled on the part of Morgan with an unabashedly anti-German, pro-Entente stance and a backing within the United States for President Wilson’s loudest critics, the interventionist forces within the Republican Party. The result was a quite unprecedented international combination of public and private power. In the course of the gigantic Somme offensive over the summer of 1916, J. P. Morgan spent more than a billion dollars in America on behalf of the British government, no less than 45 per cent of British war spending in those crucial months.17 In 1916 the bank’s purchasing office was responsible for Entente procurement contracts valued in excess of the entire export trade of the United States in the years before the war. Through the private business contacts of J. P. Morgan, supported by the business and political elite of the American Northeast, the Entente was carrying out a mobilization of a large part of the US economy, entirely without the say-so of the Wilson administration. Potentially, the Entente’s dependence on loans from America gave the American President huge leverage over their war effort. But would Wilson actually be able to exercise that power? Was Wall Street too independent? Did the Federal government have the means to control the activities of J. P. Morgan?

  In 1916 the question of war finance and America’s relations with the Entente became embroiled in the debate that had been raging for more than a generation over the governance of American capitalism. In 1912, forty years after it had recommitted itself to the gold standard in the aftermath of the Civil War, the United States had still lacked a counterpart to the Bank of England, the Bank of France or the Reichsbank.18 Wall Street had long lobbied for the establishment of a central bank to act as a lender of last resort. But banking interests were far from happy when in 1913 Wilson signed into existence the Federal Reserve Board. For the tastes of the Wall Street interests, notably J. P. Morgan, Wilson’s Fed was far too politicized.19 It was not a truly ‘independent’ institution on the model of the privately owned Bank of England. In 1914, as war broke out in Europe, the new system had survived its first test. The Fed and the Treasury intervened to prevent the closure of the European financial markets from causing a collapse on Wall Street.20 Between 1915 and 1916 the American economy was driven upwards on a vast export-led industrial boom. To meet the needs of the European war, the factory towns of the Northeast and the Great Lakes were sucking in labour and capital pell-mell from all across the United States. But that only increased the pressure on Wilson. If the boom was allowed to proceed unchecked, America’s investment in the Entente war effort would soon become too big to be allowed to fail. The American government would in fact lose the freedom of manoeuvre that promised to give it such power in 1916.

  Might the Entente for its part have done better to rely rather less on the resources of the United States? Germany after all fought the war without the benefit of such largesse.21 But that comparison demonstrates precisely what the importance of American imports actually was (Table 1). After the draining battles at Verdun and on the Somme in the summer of 1916, Germany remained on the defensive on the Western Front for almost two years. The Central Powers limited themselves to less expensive operations on the Eastern and Italian fronts. Meanwhile, the blockade took a heavy toll on their civilian populations. From the winter of 1916–17 the city dwellers of Germany and Austria were slowly starving. Ensuring the supply of food and coal to the home front was not an incidental consideration in World War I, it was an essential factor in deciding the eventual outcome.22 Economic pressure took time to force the issue, but in the end its influence was decisive. When the Germans launched their last great offensive in the spring of 1918, a large part of the Kaiser’s army was too hungry to sustain the offensive for long. By contrast, the relentless offensive energy of the Entente in 1917 – the French offensive in Champagne in April, the Kerensky offensive in the East in July, the British assault in Flanders in July – and the final drive in the summer and autumn of 1918, would have been impossible both in military and politica
l terms without North American backing. In London, at least until the end of 1916, there were voices calling for Britain to escape dependence on American loans. But they were by the same token calling for a negotiated peace. They were overridden by the advent of the Lloyd George coalition government in December 1916 committed to delivering a ‘knock-out blow’. What no one seriously contemplated was continuing the war at full force without relying on supplies and credit from the United States. From 1916, once the Allies had taken up their first billion dollars in credit in their first major effort to break the Central Powers through concentric assaults, the momentum was cumulative. The assumption behind all subsequent offensive planning was that it would be sustained by substantial transatlantic supplies. And this then reinforced the dependence. As the billions piled up, maintaining payments on the outstanding debts, avoiding the humiliation of a default, became overriding preoccupations both during the war itself and even more in its aftermath.

  Table 1. What the Dollars Bought: The Share of Vital War Materials Purchased by the UK Abroad, 1914–18 (%)

  II

  In any case, the transatlantic struggle over the future course of the war was never merely economic or military. It was always eminently political. It was on politics that the willingness to continue the war depended and this too was a transatlantic question. But here the contours of the argument were far less clear-cut than they were with regard to economic and naval power. The image that we have of the relationship between American and European politics in the early twentieth century is profoundly shaped by the later experience of World War II. In 1945 well-fed, self-confident GIs appeared in Europe amidst the ruins of war and dictatorship as heralds both of prosperity and democracy. But we should be careful in projecting this identification of America with an alluring synthesis of capitalist prosperity and democracy too far back into the early twentieth century. The speed with which the United States claimed pre-eminent political leadership was as sudden as the emergence of its naval and financial power. It was a product of the Great War itself.

  Not surprisingly, against the backdrop of its terrible civil war, America’s democratic experiment had attracted mixed reviews in the half century that separated 1865 from the outbreak of 1914.23 The newly unified Italy and Germany did not look to America for constitutional inspiration. Both had their own home-grown tradition of constitutionalism. Italy’s liberals modelled themselves on Britain. In the 1880s the new Japanese constitution was modelled on a blend of European influences.24 During the heyday of Gladstone and Disraeli, even in the United States the first generation of political scientists, the young Woodrow Wilson amongst them, looked across the Atlantic to the Westminster model.25 Of course, the Union side had its own heroic narrative with Abraham Lincoln as its great tribune. But it was only after the shock of the Civil War had dissipated that a fresh generation of American intellectuals could affirm a new, reconciled national narrative. As the western frontier closed, the continent was unified. The Spanish-American War of 1898 and America’s conquest of the Philippines in 1902 added swagger. The industrial dynamism of the United States was unprecedented. Its agricultural exports brought abundance to the world. But, among the progressive reformers of the gilded age, America’s self-image was ambiguous. America was a byword for urban graft, mismanagement and greed-fuelled politics, as much as for growth, production and profit. In search of models of modern government, it was to the cities of Imperial Germany that American experts made pilgrimage, not the other way around.26 Looking back from 1901, Woodrow Wilson himself remarked that though ‘the nineteenth century’ had been ‘above all others a century of democracy . . . the world’ was ‘no more convinced of the benefits of democracy as a form of government at its end than it was at its beginning . . .’ The stability of democratic republics was still in question. Though the commonwealths ‘sprung from England’ had the best track record, Wilson himself admitted that the ‘the history of the United States . . . has not been accepted as establishing their tendency to make government just and liberal and pure’.27 Americans themselves had reason to trust in their own system, but as far as the wider world was concerned, they still had much to prove.

  Nor should we assume that with the outbreak of war the tables were immediately turned. Until the death toll became unbearable, the European combatants saw the great mobilization of August 1914 as a miraculous vindication of their nation-building efforts.28 None of the combatants were full-blown democracies in a late twentieth-century sense, but nor were they ancien régime monarchies or totalitarian dictatorships. The war was sustained if not by patriotic ecstasy then at least by a remarkably extended consensus. Britain, France, Italy, Japan, Germany and Bulgaria all fought the war with their parliaments in session. The Austrian parliament reopened in Vienna in 1917. Even in Russia the early patriotic enthusiasm of 1914 brought a revival of the Duma. On both sides of the front line, soldiers were above all motivated to defend the systems of rights, property and national identity in which they felt themselves to have a profound stake. The French fought to defend the Republic against a hereditary foe. The British volunteered to do their bit to defend international civilization and put down the German menace. The Germans and Austrians fought to defend themselves against French resentment, Italian treachery, the overbearing demands of British imperialism and the worst menace of all, Tsarist Russia. Though open calls for mutiny were suppressed and though strikers could find themselves incarcerated or drafted to dangerous sectors of the front, open talk of negotiated peace was commonplace in a way that would have been unthinkable on either side in the latter stages of World War II.

  When the British government was reconstructed in December 1916 under Prime Minister Lloyd George, it was precisely so as to reassert the ultimate goal of delivering a ‘knock-out blow’ to Germany, against increasingly vocal calls for a compromise peace. Most of the important cabinet seats were claimed by the Tories, but the Prime Minister himself was a liberal radical with a sure instinct for the popular mood. Already in May 1915 his predecessor Asquith had introduced trade unionists into the British cabinet. Early twentieth-century European politics was more inclusive than it is often given credit for. In France, the socialists were an essential part of the Union Sacrée, the cross-party alliance that saw the Republic through the first two years of the war. Even in Germany, though the government remained in the hands of the Kaiser’s appointees, the Social Democrats were the largest party in the Reichstag. Chancellor Bethmann Hollweg consulted with them routinely after August 1914. When in the autumn of 1916 generals Hindenburg and Ludendorff put the war economy into top gear, they relied on the co-opted support of the trade unions.

  The reaction of Americans of Teddy Roosevelt’s stripe to this spectacle of European mobilization was not one of superiority, but of awed admiration.29 As Roosevelt put it in January 1915, the war might be ‘terrible and evil, but it is also grand and noble’. Americans should ‘assume’ no ‘attitude of superior virtue’. Nor should they expect Europeans to ‘regard’ them as ‘having set a spiritual example . . . by sitting idle, uttering cheap platitudes, and picking up their trade, whilst they had poured out their blood like water in support of ideals in which, with all their hearts and souls, they believe’.30 For Roosevelt, if America was to vindicate its emergence as a legitimate great power, it must prove itself in the same struggle, by throwing its weight behind the Entente. But to Roosevelt’s immense frustration, the pro-war forces were a minority in America even after the sinking of the Lusitania in May 1915. Millions of German-Americans preferred neutrality, as did many Irish Americans. Jewish Americans were hard pressed not to celebrate the advances of the Imperial German Army into Russian Poland in 1915, where they brought welcome relief from Tsarist anti-Semitism. Neither the American labour movement nor the remnants of the agrarian populist movement, which had assembled around Wilson’s bid for the presidency in 1912, were pro-war. Wilson’s first Secretary of State was none other than William Jennings Bryan, the evangel
ical fundamentalist, pacifist and anti-gold standard radical of the 1890s. He was profoundly suspicious of Wall Street and its connections to European imperialism. As the clock ticked towards the July crisis of 1914, Bryan toured Europe signing a series of mediation treaties that would avoid the possibility of American involvement in a war. When war broke out he advocated a truly comprehensive boycott of private lending to either side. Wilson overrode this proposal and in June 1915, following the sinking of the Lusitania, Bryan resigned in protest when Wilson threatened Germany with hostilities if it did not cease U-boat attacks. But Wilson himself was anything but a pro-interventionist.

  Before he was hailed as a world-famous liberal internationalist, Woodrow Wilson rose to prominence as one of the great bards of American national history.31 As a professor at Princeton University and the author of best-selling popular histories, he had helped to craft for a nation still reeling from the Civil War a reconciled vision of its violent past. One of Wilson’s earliest memories of childhood in Virginia was of hearing the news of Lincoln’s election and the rumours of a coming civil war. Growing up in Augusta, Georgia, in the 1860s – what he would describe to Lloyd George at Versailles as a ‘conquered and devastated country’ – he experienced from the side of the vanquished the bitter consequences of a just war, fought to its ultimate conclusion.32 It left him deeply suspicious of any crusading rhetoric. Nor was it just the Civil War that scarred Wilson. The peace that followed was, if anything, even more traumatic. Throughout his life he would denounce the Reconstruction era that followed, the effort by the North to impose a new order on the South that enfranchised the freed black population.33 In Wilson’s view it had taken America more than a generation to recover. Only in the 1890s had something like reconciliation been achieved.