To Arms

by Hew Strachan

  The principal cause of Russia’s loss of budgetary control was artifice. The opportunity afforded the Tsar to undermine the Duma made the war fund an instrument in the battle for autocratic control. The Duma protested about the bookkeeping fictions over which it retained oversight, but to little avail. However, incompetence also played its part. Ribot expressed the view of many of his Entente colleagues when he described Peter Bark, a banker and Russia’s minister of finance throughout the war, as ‘a child who knows nothing, neither of his resources, expenses, nor budget’125. Even if Bark had wished to assert control, he probably lacked the machinery to do so. The execution of the 1914 Finance act was the last on which the state audit department was able to report: the growth of the budget and the diminution of the department’s staff through the demands of military service spelt the end of any rigour in accounting controls.126

  France before 1914, like Germany and Russia, paid for the growing costs of central government, particularly the military ones, by borrowing. Unlike Germany and Russia, it made rather less effort to disguise the fact. In 1907 it budgeted for a deficit of 295 million francs, in 1908 for 54 million, in 1909 for 45 million, and in 1910 for 48 million. In 1912 Klotz showed a surplus, but only by an accounting sleight of hand, which was repeated in 1913. The 1914 budget anticipated a deficit of 794 million francs, all of it and more generated by the 1913 three-year service law. Between 1904 and 1914 fresh expenditure totalled 1,777 million francs, but normal income only netted an additional 800 million francs. France’s consolidated debt in July 1914 was 27,000 million francs, its annual arrears on that 967 million francs, and all its obligations of whatever description 34,188 million francs.127

  Perhaps more surprising than the pre-existing burden of debt which France carried into the war was the ease with which such a fiercely republican country could slough off the principles of parliamentary control. Caught up in the symbolism of 1793, the assembly’s authorization of extraordinary credits by decree was a willing delegation of power to the centre in a time of crisis. Even when parliamentary activity resumed in December, Ribot was surprised to find that the financial committee of the senate was only interested in matters of secondary importance: ‘we did not speak of the general financial position and of the possible means to provide the treasury with the sums it needs.’128

  The chamber agreed that the government should have provisional credits, given in twelfths, and in December accorded the government six twelfths (in other words, cash for six months) to the tune of 9,000 million francs. When, in June 1915, fresh credits were needed the period was reduced to three months, and there it remained for the rest of the war. Although in December 1914 the government had drawn up a list of headings under which the money would be disbursed, the allocations were not binding and the credits were effectively voted as undivided blocks. The assembly was authorizing expenditure without any calculation as to income; lacking a firm hold on how the money was meant to be spent, it possessed no means of monitoring how it had been spent. Its limited knowledge led it to encourage expenditure without regard to revenue. The credits voted in 1915 totalled 22,804.5 million francs. They then rose by approximately 10,000 million francs in each year of the war, to reach 54,537.1 million in 1918.129

  In practice, actual spending in France exceeded the credits voted. Moreover, their global figures did not encompass the special accounts created at the beginning of the war to ensure food supplies. Technically, the accounts could show favourable balances, since they sold commodities as well as bought them. The most important embraced wheat, sugar, petrol, coal, and the merchant marine. Their foreign purchases, as well as their multiplicity, made proper control problematic—even after the war had ended. In 1920 30,000 million francs passed through the special accounts. During the war their adverse balances amounted in all to 10,305 million francs, including 3,904 million in 1916 alone.130

  What the special accounts highlighted was the difficulty for a country that was itself a major battlefield in distinguishing between civil and military expenditure. The voting of lump-sum credits meant that even without the device of the extraordinary budget France lost control of its peacetime disbursements as surely as did Germany and Russia. Parliament lacked the information to be able to balance non-military spending against normal income.

  In December 1914 the assembly left itself with two instruments with which it could scrutinize the government’s financial affairs—the budget committee of the chamber and the finance committee of the senate. Although passive at first, these two bodies—especially the latter—became more assertive as the war lengthened. In particular, they tried to get the ministry of war to justify the credits it requested and to monitor the disbursements it then made. The ministry’s hand was not strong: a law of 1869 permitted the commander-in-chief at the front to authorize expenditure. Much of France was a front, and Joffre reasonably protested that his headquarters had more pressing concerns than the keeping of accounts. Army commissaries and paymasters-general were requested to produce monthly statements—a request honoured as much in the breach as in the observance. The ministry of finance, under pressure from the two committees of the assembly, tried, somewhat feebly, to get the ministry of war to channel orders through it, and to control prices through the centralization of the competing demands of the service departments.131

  Ribot’s determination to establish control was not strong. His financial advisers, including the same Paul Leroy-Beaulieu who had recognized before the onset of hostilities that a long war could be funded on credit, were unconcerned about the loss of budgetary control. Debt mounted in proportion to the government’s existing borrowings, not according to its receipts, which did not even match its normal peacetime outgoings. Ribot defended his position by reference to the military situation: with so much territory under occupation normal fiscal self-discipline was irrelevant. At the end of 1915 he drew up a draft law which aimed to compare total credits with total expenditure, and thus show whether France was in balance or deficit. Nothing came of it. In May 1916 he engaged in a similar exercise when, in order to argue for increased taxation, he tried to match outgoings to income. But the first promise of a proper budget had to wait until June 1917, when Thierry, finance minister in the Painlevé government, projected his expenditure and his receipts for the third quarter of 1917, and announced his intention to produce a proper annual budget in 1918. His aim, minimal as it might seem, was to stabilize France’s non-war costs, and to end the system of provisional credits.

  It was not fulfilled. When Clemenceau became prime minister in November 1917 France adopted the principles of Lloyd George to the securing of victory. To mix national metaphors, Klotz, who succeeded Thierry as minister of finance, belonged to the Helfferich school. ‘He signed cheques’, Clemenceau said of him, ‘as though he was signing autographs.’132 After the war Klotz boasted that, while on the chamber’s budget committee, he had never obstructed an order placed by the ministry of war—indeed, quite the reverse—and he rationalized his position—as Helfferich did—by saying that the payment by a defeated enemy of an indemnity would solve the problem of accumulated debt. Ribot’s horror at Klotz’s ambition to be minister of finance proved well founded.133

  Klotz kept the provisional twelfths for war credits. He followed Thierry in announcing his intention to meet the costs of civil administration and of servicing the debt from ordinary income, but he did not achieve it. France in 1918 was still budgeting for a deficit in its ordinary accounts. But at least parliamentary control was reasserted to the point where on 29 June 1918 the first budget of the war was approved134.

  Perhaps Thierry need not have worried. Britain had a budget for every year of the war, but parliament still lost control of expenditure. The chancellor of the exchequer dutifully informed the House of Commons what he anticipated the country’s disbursements would be in the coming year, and how he proposed to fund them. But when the cost of war exceeded its budgeted figure, the government supplemented its receipts with emergency vo
tes of credit. On 12 February 1917, for example, the House of Commons voted £350 million to see the government through until the end of May. But on 9 May Bonar Law, the chancellor since December 1916, was back asking for £500 million. Furthermore, he told the House that the average daily cost of the war was £7.45 million, when only a week before he had declared it to be £5.5 million. These were extremes, but in such circumstances it was impossible for Members of Parliament to grasp the full financial picture.135

  The British annual budget, nonetheless, served three principal functions. First, the debate which it engendered showed that, except during the chancellorship of Reginald McKenna (May 1915 to December 1916), the House was inclined to greater financial radicalism than the government. Thus, the cabinet was not held back from potentially unpopular taxation for fear of its political effects. Secondly, the appearance of parliamentary accountability and of financial rigour was enormously important in sustaining domestic confidence and foreign credit. And thirdly, the effective result was that Britain, alone of all the European belligerents, continued to cover its peacetime expenditure through income. A calculation that aggregated revenue through taxation and then deducted interest charges and the pre-war civil budget showed that over the war years Britain generated a surplus of $5,396 million. By contrast, Germany showed a deficit of $4,180 million, Russia (to 1917) of $1,142 million, France of $3,346 million, Austria-Hungary of $401 million, and Italy of $787 million.136

  The controls that Britain lost were specifically over war costs. Furthermore, they were willingly forfeited. Neither the War Office nor the Admiralty was used to ordering without restraint. It required Lloyd George to tell the War Office in October 1914 not to come to the Treasury for approval for orders.137 Even then the culture of penny-pinching was sufficiently ingrained for the chancellor to have to continue hectoring, and eventually—as minister of munitions—to take over the job of spending himself. In other words, in Britain civilian government deliberately loosened the reins rather than having them prised from their grasp.

  Responsibility for their daily handling lay, of course, not with parliament but with the Treasury. But in 1914 the Treasury was ill-prepared to supervise the expenditure of an empire in a world war. It mustered thirty-three officials in its administrative class.138 It then found itself neglected and humiliated by its political head. Keynes reflected the Treasury’s disillusionment. Lloyd George ‘soon got bored with’ Sir George Paish, one of his principal financial advisers, ‘and stopped reading his lengthy memoranda. [Paish] was, however, given a good salary and an exalted title . . . and . . . a room set at a considerable distance139.’

  McKenna, when he succeeded Lloyd George in May 1915, found ‘hopeless financial disorder at the Exchequer, so great indeed that we could not have carried on for another three months’.140 He himself had served as financial secretary a decade before, so he ought to have known what he was talking about. But, somewhat surprisingly, that was not the prevailing view. His own financial secretary, Edwin Montagu, agreed with him that the department was in confusion, but on little else. His political colleagues felt that he was simply keeping the seat warm for Lloyd George, and that therefore calls for fiscal rectitude ill behoved him. On finance itself, E. C. Grenfell of Morgan Grenfell characterized him ‘as a very ignorant man . . . [who is] inclined to try to appear wise’.141

  Some, at least, of McKenna’s problems derived from the fact that by the time he assumed office the new culture had taken hold in the departments of disbursement. In a memorandum of February 1916 Keynes showed how munitions orders were being increased. The War Office added a margin over what it reckoned it needed, and the Ministry of Munitions then made a similar supplement to the War Office’s already inflated request: thus, a scheme for 3,404 guns had been elevated to one for 4,362.142 McKenna complained that Lloyd George was not only ordering more munitions than he could use but that, in the process, he was actually impeding output rather than promoting it. A retrenchment committee was created in July 1915, and in November McKenna secured an undertaking that all contracts worth more than £500,000 would be referred to the Treasury143.

  For the Treasury, the key issue was whether finance should be the regulator of British policy or its servant. One traditional interpretation of British strategy contended, in the words of Austen Chamberlain in 1903, that ‘Our defensive strength rests upon our financial not less than upon our military and naval resources’.144 Britain’s determination to cling to its international convertibility in 1914 reflected its commitment to this approach. But the actual experience of major war injected pragmatism into its formulation, not least for McKenna. Outwardly, his policies seemed to accommodate the needs of the City of London. He was, for example, loath to use compulsion when securing control of American securities, not because of any political commitment to Liberal principles, but because he feared that foreign investors would withdraw their deposits. His ultimate objective, therefore, was not to prop up the City but to preserve Britain’s liquidity.145 And it was this pragmatism which made him a shifty and even uncongenial ally for any one camp. McKenna saw funds not as an end in themselves but as the means to purchase goods for the prosecution of the war. Therefore, at bottom he reckoned production, not purchasing power, to be the regulator of British strategy. The key issue was the division of manpower between output and military service. If Britain’s productive effort was directed to the latter to the detriment of the former, it would have to buy the munitions its armed forces and its allies would need from overseas, and so jeopardize its financial supremacy.146 Herein was the nub of British strategy. It was a battle which McKenna fought in the cabinet from late 1915 until the early summer of 1916, and lost.

  Ultimately, controls on British spending were reimposed not by parliament or by the Treasury, but by the United States. Britain’s need for American credit provoked the United States into demanding co-ordination among its new allies in their overseas purchasing. The scale of British and French orders made the management of the exchange rate a key aspect in regulating their cost. The bankers regarded this as their business, and Lord Cunliffe, the governor of the Bank of England, was convinced that the accumulation of gold and its export when required were the keys to its regulation. By appointing Cunliffe as chairman of the London Exchange Committee McKenna hoped to defuse a fraught situation. Cunliffe was not an easy man: E. C. Grenfell thought the problem was his teeth, and that if he had only seen a dentist all would have been all right.147 But the underlying difficulty was that neither the Bank nor the London Exchange Committee had real bite. His deputy, Montagu Norman, was as frustrated with the Treasury as Cunliffe: ‘one might as well talk to an airball as them.’148 By 1917 Cunliffe was openly undermining the Treasury’s policy in the United States, insisting that Britain should ship gold. In July he challenged the Treasury’s increasing intervention in the management of the exchange rate. Bonar Law, as chancellor, told Cunliffe that in war the Bank must be subordinate to the national interest and follow the Treasury. Cunliffe huffed and puffed, was overruled, and resigned in April 1918.149 The confrontation did more than mark the completion of the process by which the Bank of England became a central state bank. It gave the Treasury the whip hand in the key component of British financial policy: control of foreign dealings became the substitute for the lack of control of domestic disbursements.

  Some of the same effects could be observed in France. The efforts to reimpose peacetime budgetary procedures in 1917–18 coincided with American pressure on France to reduce its call for American credits. Furthermore, the squeeze which the United States placed on Britain was relayed to Paris in British restrictions on French borrowing through London. The inter-allied purchasing committee forced on the Entente by McAdoo in August 1917 therefore provided the external constraint on France’s spending departments which its government had failed to impose internally. The value of its imports fell from over 3,000 million francs to under 2,000 million in the autumn of 1917. In 1918 France found it was underspending on t
he credits afforded it in the United States, and in the summer the franc rose against the pound and the dollar.150

  The United States thus imposed some discipline on its allies. But it too found that domestically the control of the war’s costs was not necessarily easier for a democratic power than an autocratic one. Like Britain, it sustained the outward form of public accountability. However, its spending on the war far exceeded that of any other nation, averaging $42.8 million per day between 1 July 1917 and 30 June 1919. That of each of the other major belligerents hovered around $32 million over the same period. Federal expenditure rose 2,454 per cent between 1916 and 1919.151

  The contrast in financial management between the United States and, say, Austria-Hungary was therefore much less striking than the difference in their political structures might have suggested. Austria did not even consult its parliament between 1914 and 1916. But its principal fiscal problem, that of controlling the army’s expenditure, was a difference of degree rather than of substance. The complaints of the Austrian finance minister152—that the army paid for its needs without regard to the market rate, that efforts to control costs in the higher administration of the army were undermined by independent commanders in the field, that civilian procedures had been usurped by military necessity—found echoes throughout the nations. Whatever their nominal controls, all powers were operating some form of arrears to fund their war efforts. Britain’s wartime budget deficit, if calculated in current prices, was 60.6 per cent of its pre-war national income; Germany’s, at 64 per cent, was little higher.153 All powers, therefore, ended up borrowing. The crucial questions were how they managed that borrowing, and how they juxtaposed it with taxation.