by Hew Strachan
In reviewing the German exploitation of its alliance with Turkey and the threat of holy war from Morocco to India, it is too easy to criticize. The Germans over-extended themselves; they never had the manpower to back up their demands on others, and their aspirations conflicted with the war aims of the Turks. The British and the French are, therefore, mocked for taking too seriously a threat that never became substantial. They were the powers in possession; they had the resources to hand.
But in the years 1919–21 ample proof was provided of just how unsteady the European hold on the Muslim world could be. The reduction and partition of Turkey in the peace settlement provided the general context for more specific frustrations. Egypt threw off British rule in 1922; Libya continued its resistance to Italy for a further decade; Algeria was ravaged by strikes in 1919 and 1920. In Central Asia, a coup ended Britain’s indirect control of Persia in 1921 and eventually installed Reza Pahlavi as Shah in 1925. Habibullah, the prudent Emir of Afghanistan, was assassinated in February 1919, and his brother Nasrullah led Afghanistan into its third war with British India. And in India itself the emergency measures of 1919, the Rowlatt acts, carried the provisions of the Defence of India act into the peace. The Punjab, which had failed to rise in 1915, seethed in 1919, and British anxieties were reflected in overreaction and massacre at Amritsar. The pan-Islamists seized control of the Muslim League in December 1918, and the priesthood mobilized the fanaticism of the masses in the Khilafat movement. Much of this had its roots in post-war problems. But it is hard to conclude that Germany had been barking up the wrong tree.
The corollary, therefore, of German failure was Entente success. In the end, French and, particularly, British rule rested on their reputations as liberalizing and progressive powers. The educational and legal systems which they established gave them a following within the indigenous populations which the Germans could never fully match. But these were passive, not active reasons for their defensive triumph. The positive contribution was the quality of their intelligence. In North Africa it enabled French propaganda to stay one step ahead of the Germans. In India counter-intelligence penetrated all the major revolutionary groups, and to such an extent that Indian revolutionaries were set working against each other. Britain did not in the end mobilize large forces to hold India or its forward defences. It did not do so because it was always in a position to deal with certainties rather than contingencies.
By 1916 Germany had begun to recognize that the appeal of holy war was, for too many Muslim states, an indirect form of Ottoman imperialism. Thereafter, Berlin’s propaganda relied on nationalism. But this carried two attendant difficulties. First, Germany thus placed itself athwart the intentions of its Turkish ally. Secondly, the strongholds of nationalism tended to be the middle-class professionals, very often small in numbers, the recipients of western education who were impressed by French and British liberalism. Nor were they likely to be traditional Muslims.
The shift to the use of nationalism emphasized the revisionist nature of Germany’s revolutionary strategy. German support of the Young Tunisians and of the Persian nationalists was not primarily a covert form of German imperialism. In May 1917 the Germans were happy for the Berlin Indian Committee to establish a propaganda bureau in Stockholm and so formalize its links with international socialism. The Indians now looked increasingly to Russia rather than to Germany. In November 1917 the Berlin Committee briefed the Bolsheviks; in December 1918 it would move its activities to Petrograd. The German foreign office did not obstruct such obvious manifestations of Indian independence.227 The Germans’ espousal of the nationalism of others could be real enough. In October 1915 Colmar von der Goltz wrote, as he was about to take command of the 6th Turkish army for its push into Persia and India:
If we are defeated this time, perhaps we will have better luck next time. For me, the present war is most emphatically only the beginning of a long historical development, at whose end will stand the defeat of England’s world position. The hallmark of the twentieth century must be the revolution of the coloured races against the colonial imperialism of Europe.228
10
FINANCING
THE WAR
Of the two main arms of economic capability in the First World War, industry and finance, current scholarship is far more preoccupied with the former than the latter. It was not always so. Before 1914 the competition in arms had created such abundance that there seemed little need to consider wartime procurement. How the war would be paid for promised to prove much more intractable. And, in the 1920s, the assessment of reparations and the urgent need to understand the sources of inflation—whether it had been generated in the war or in its aftermath—provided the study of wartime finance with a continuing relevance.1
The comparative neglect of finance by modern scholars can no doubt be explained by the fact that its administration was not apparently decisive to the outcome of the war. By 1918 goods were running out faster than cash; the maximization of resources was much more important than the management of money. Few had anticipated this. On finance, the banker I. S. Bloch, so often cited as the perceptive but unheard prophet of the true nature of the war, was wrong. Bloch, on the basis of tactical and technological development, correctly anticipated that a future war would be protracted and indecisive. Extrapolating from the evidence on expenditure in earlier European wars and from defence budgets at the end of the nineteenth century, he anticipated that even the advanced nations would have considerable difficulties in funding this long war; smaller nations would find it unattainable. Bloch’s implicit, if optimistic, conclusion was that war between the powers of Europe might now be impossible.2
Most of his contemporaries in the world of finance disagreed; they reckoned that a war would occur but that it would be short. Bloch had begun with the tactics and saw that the finance did not fit; they—in so far as they thought through the problem—went the other way, shaping the operational model to the financial imperative. They were more realistic than Bloch, in that they did not think that the probable nature of the war would deter the powers from fighting. They were, of course, wrong about its length. Nonetheless, their prewar orthodoxy, that the war would be short, continued to shape financial thought well into 1915. At a dinner party on the occasion of Kitchener’s visit to France on 1 November 1914, the assembled statesmen and soldiers of the Anglo-French Entente deliberated over the length of the war. Ribot, France’s finance minister, cut across Kitchener’s pronouncement that Britain would not be fully mobilized for another year by saying that finance would determine the war’s duration, and that it would end by July 1915 because the means to pay for it would have been exhausted. Accordingly, at the beginning of that year, on 30 January, L’Économiste français announced that the war would not last longer than another seven months. In May Edgar Crammond opined in the Journal of the Royal Statistical Society that economic exhaustion would force some belligerents to stop fighting from July.3
Crammond was no doubt entitled to feel surprised that poverty did not force states to fall out of the war. Pre-industrial societies like Turkey and Serbia were at war virtually without ceasing from 1912, and yet continued the struggle as long as the major powers. Their prostration by 1918 followed from the depletion of their resources in kind, not from the expenditure of cash. Of the principal belligerents, Russia’s early exit in 1917 was not in any direct sense a consequence of its small taxable base or its limited capacity for further borrowing. Financial primitivism did not betoken a lack of military staying-power.
For the perceptive few this point had already been demonstrated by the Balkan wars. Lack of money, Raphael-Georges Levy pointed out in the Revue des deux mondes in 1912, had never stopped a nation from fighting. Paul Leroy-Beaulieu extended the argument in L’Économiste français on 23 August 1913. A major European war could be sustained over a long period despite a shortage of funds. Money was needed before the war for its preparation, and afterwards to settle the consequent debts. But during the war states s
urvived by requisitioning, by price control, and by credit: thus, paying for a war could in large part be postponed until after its conclusion.4
Such faith in the flexibility and extendability of credit in wartime ought to have been a logical consequence of the policies of the European states in peacetime. Between 1887 and 1913 France’s national debt rose 39 per cent (from an already high base-point), Germany’s 153 per cent, and Russia’s 137 per cent. However, the burden of borrowing declined in real terms owing to the economic growth of the three powers. Germany’s fell from 50 per cent of net national product to 44.4 per cent, and Russia’s from 65 per cent to 47.3 per cent. Most of Leroy-Beaulieu’s contemporaries were more alarmed by the absolute figures than they were reassured by the net cost. This tendency was encouraged by the example of Britain, which over the same period cut its debt by 5 per cent. In 1913 Britain’s public debt was only 27.6 per cent of net national product, and a bare 10 per cent of total expenditure was allocated to its service.5
Britain’s intolerance of debt, intensified by the burdens of the Napoleonic wars, had been reinforced by the costs of the war in South Africa. In reality, the message of that conflict was reassuring; a cavalry captain, R. S. Hamilton-Grace, writing on finance and war in 1910, observed that two-thirds of its costs had been funded by borrowing and one-third by taxation, exactly the same proportions as those of Britain’s wars between 1688 and 1785. Hamilton-Grace’s conclusion was unequivocal: borrowing in wartime was easy, and Britain in particular was well placed to do it. Moreover, he argued, in contradistinction to Bloch, ‘it is improbable that any nation with reasonable chances of victory will be deterred from declaring war owing to lack of funds’.6
Nonetheless, the Gladstonian orthodoxy persisted: war should be paid for out of current income. Thus, British economists tended to underestimate the resilience of credit. In the autumn of 1914 J. M. Keynes predicted that Germany’s use of credit would give rise to inflation, and that Britain would be better able to stand the strain of a long war. Not until September 1915 did Keynes clearly articulate the argument that note inflation itself would not bring the war to an early end. ‘As long as there are goods and labour in the country the government can buy them with banknotes; and if the people try to spend the notes, an increase in their real consumption is immediately checked by a corresponding rise of prices.’ What would determine Germany’s eventual economic exhaustion, therefore, was not financial catastrophe but the depletion of commodity stocks. However, the bogey of credit inflation was not laid to rest; it was simply reassigned. In Keynes’s analysis the power which it now endangered was Britain, which through the importing of resources and the subsidy of allies was spending far more lavishly than Germany.7
Keynes was not necessarily wrong in his analysis of the economic effects. But he exaggerated their impact on strategy. The problem with his warnings about inflation was that their focus was on the long term. Financial theory looked to the post-war world more than to the winning of the war itself. In the short term the war put into reverse most nostrums about economic behaviour. The tempo of the war economy was set by consumption, not by production. Thus, worries about overproduction were no longer a concern. Capital investment was nonetheless limited to the satisfaction of immediate needs. The primary purchaser of the goods that resulted was the state rather than the private sector. Therefore the state replaced the individual in requiring credit. Most perverse of all, a nation’s standing could depend, not on its solvency or its financial prudence or even its international trading position, but on its military performance. Victory, after all, was the pay-off for a war economy. ‘Success’, Lloyd George instructed the cabinet in 1916, ‘means credit: financiers never hesitate to lend to a prosperous concern.8’ The position of the German mark on the New York exchange proved his point. In October 1917 100 marks bought $13.73; by April 1918, after Russia’s humiliation at Brest-Litovsk and Ludendorff’s offensives in the west, 100 marks stood at $19.589. Short-term military outcomes, not long-term economic management, could determine foreign financial confidence.
THE GOLD STANDARD
What shaped the distant perspectives of economists was faith in the gold standard—belief that it had regulated international finance before the war, that it continued to operate after a fashion during the war, and that it would be fully restored when the war was over.
By July 1914 fifty-nine countries were on the gold standard.10 In other words, they used gold coin or backed their paper money with a set percentage of gold, and they determined a gold value for their currency and guaranteed its convertibility. Domestically, this discipline was believed to check inflation since it regulated the money supply. Internationally, the gold standard maintained the balance of payments. If one country had an adverse trade balance, it would pay out in gold. The process might be corrected spontaneously, as the weakened exchange rate would encourage owners of foreign funds to speculate on the gains to be made when the losses were stopped. Ultimately, the central bank could raise interest rates, so sucking back into the country the gold that had emigrated. If this happened, prices rose and the demand for imported goods fell. Thus, the balance of payments was restored by adjusting the balance of trade. The system was therefore deeply inimical to the requirements of a war economy: it limited note issue, it pivoted around international commerce, and it normally stabilized the economy without active government intervention.
But for all its overt commitment to international finance, the gold standard in practice was shot through with national considerations. Only active cooperation between the central banks enabled the system to cope with major crises, and the experience of those crises could encourage the hoarding of gold, even in normal times. In 1903 a third of the world’s gold was either in domestic circulation or held by the Banque de France. In 1914 two-thirds of France’s holdings of gold, a total of 4,104 million francs against a note circulation of 5,911 million, were in the bank: 475 million francs were added in the first six months of the year11. Gold, therefore, acted as its own protection without frequent changes in French interest rates. In 1907 both the Banque de France and the German Reichsbank had to draw on their reserves in order to support the Bank of England, caught by heavy American borrowing. In November 1907 the Reichsbank’s interest rate, which had stood at 4.5 per cent in 1906, reached 7.5 per cent: the flow of gold to the United States was still not checked. By 1910 31 per cent of the world’s official gold reserves were held in the United States, but much of it was immobilized in the Treasury, and America still financed its trade through London. Almost 60 per cent of the world’s gold money supply had now been appropriated for official reserves, as opposed to 31 per cent in 1889.12 The Germans, therefore, concluded that they too should increase their holdings of gold, so as to use it in the same manner as the French. Their resolve was hardened by the 1911 Moroccan crisis. In 1909 the Reichsbank’s purchases of gold totalled 155, 241, 225 marks; in 1913 they reached 317, 450, 056 marks.13 This ‘monetary nationalism’14 carried clear implications for the financial management of all types of crisis, that of war as well as those of peace.
Britain alone did not build up its reserves. The Bank of England’s holdings of gold rarely exceeded £40 million, as opposed to £120 million in France.15 It helped that three of the world’s principal sources of gold, South Africa, Australia, and the Klondike in Canada, lay within the empire; furthermore, India’s favourable balance of trade buttressed the market against the seasonal highs and lows of American demands. The Bank of England, therefore, argued that gold was a commodity to be used, and that, because London’s money market was the world’s largest, its manipulation of interest rates was more effective than would have been French or German use of the same policy. The fact that foreign bankers kept their sterling balances in London meant that a balance of payments’ deficit did not necessarily draw on the Bank’s own reserves. London’s strength was its liquidity. In appearance, therefore, the gold standard worked because it was ‘essentially a sterling exchange system’
;16 in reality, it did so only because of the collusion of the other central banks. As the Bank of England ensured stability and harmony in normal times, so the central banks of other nations supported it in times of crisis.17
The Committee of Imperial Defence did consider the imbalance between Britain’s gold reserves and its national wealth, but was content to accept the Treasury’s assurances that in the short term interest rates could be used to check a run on gold, and that in the long term a free market for gold would ensure the continuance of trade through London. The clearing banks were less confident. They, and not the Bank of England, held an increasing proportion of the country’s gold reserves, and yet the Bank was their lender of last resort. In a crisis the Bank of England would be pulled in two directions: as a central bank it had to increase interest rates to draw in gold, but such action would run counter to its obligations as a commercial bank providing services to its clients. Two dangers confronted the Bank. One was that the joint-stock banks had power without responsibility, since they were under no formal obligation to make their reserves available for patriotic purposes in the event of a crisis. The second was the ability of a foreign power to create a run on British gold; many British merchant banks (or acceptance houses) were heavily implicated in German overseas trade, which was paid for by bills drawn on account in London. At the beginning of 1914 the clearing banks lobbied for a royal commission on the country’s gold reserves. They noted that the existing reserves of forty-six banks in England and Wales represented only 4.04 per cent of their deposits: 5 per cent was their recommended target. They anticipated two pressures on gold. The first, an external one, would come from foreign powers anxious to exchange their bills. The second would be domestic—a desire from the British public to hoard cash. They therefore proposed that in an emergency the Bank of Engand should produce additional currency for the clearing banks, secured as deposits by the banks of one-third gold and two-thirds bills. Thus, the Bank of England would increase its holdings of gold and the public would get its money. Neither the Bank of England, still a private not a government institution, nor the Treasury was supportive of this suggestion. Rather than a royal commission, the banks were fobbed off with a Treasury memorandum affirming the status quo. External calls for gold would be met by increased interest rates, and excessive domestic demand would result in a suspension of the 1844 Bank act (which fixed the ratio between gold and the Bank’s note issue). Therefore the most likely initial outcome of a war would be an increase, not a reduction, in Britain’s gold reserves. The memorandum made the obvious point that, if such optimism proved unfounded, no gold reserves, however large, would be sufficient to prevent the suspension of cash payments: ‘regarded as a preparation for war, our Gold Reserves are either adequate in amount or else are incapable of being raised to a figure which would make them more adequate.’18