To Arms

by Hew Strachan

  Germany tried to get Austria-Hungary to take a share of the burden. The Turks preferred Skoda’s artillery to Krupp’s, and by April 1916, according to the calculations of the latter, its Austrian competitor had secured orders worth £T4.2 million. These were paid for by loans from Austria-Hungary: an advance of 47 million crowns, agreed in May 1915, had risen to 240 million by January 1917. Gwinner of the Deutsche Bank was furious: ‘German money is being used for Turkey via Austria and competes or directly damages German interests.’432 The transaction was handled by the Orient Group, a consortium of Austro-Hungarian banks which hoped to develop Austro-Turkish trade after the war. But Skoda’s primary obligation was to the Austrian army itself, and it never delivered the full consignment of guns. Thus, the Orient Group did not fulfil its aspirations, the Turks were left short of artillery, and the Germans concluded that the proceeds of Berlin’s loans to Turkey were being spent in the dual monarchy and not in the Reich.433

  Austro-German competition was also fuelled by the efforts of the two allies to get Turkey to deliver raw materials to them and to agree post-war economic concessions. Germany established a central purchasing agency in Turkey in 1916, and Austria accepted that its ally should act on behalf of both powers, with the produce being split in a ratio of 11:10 between Germany and Austria-Hungary. Efforts focused on foodstuffs and metals. However, once again Turkey got the better of the deal. By 1 October 1916, the Germans reckoned that they had sent 600 million marks’ worth of goods to Turkey but had received only 50 million marks’ worth in return. Moreover, Turkey contrived a profit of 200 per cent on their exports and insisted on payment in advance in cash. Even in 1918, when Ludendorff and OHL used the leverage of German loans in a bid to get industrial and raw material concessions, the Turks avoided any significant reciprocal obligations to their allies.434

  Turkey’s strength in these negotiations derived ultimately from Germany’s strategic dependence. However, in 1918 it also resulted, ironically enough, from Germany’s refusal to extend credit. Turkey was forced into launching its first and only war loan. Thus, Constantinople diminished its reliance on Berlin’s funding. The terms of the loan were generous— interest was payable in gold at 5 per cent—and it raised £T7,851,120. But the target was £T37million. In July Djavid was back, asking Germany for more money. By August so desperate was the position of the Central Powers that Ludendorff was robbed of the will to push for concessions in return, and £T45 million was advanced without conditions.435

  The costs of the war to Turkey were, in fiscal terms, minimal. The public rejection of the note issue dampened its liquidity and curbed monetary overhang. In March 1917, when Djavid computed that his country’s war debt would reach £T180 million by August, only £T15 million was domestic, and even that had been generated indirectly—through requisitions. At that stage of the war he still did not anticipate launching a war loan, and when one was eventually issued it was limited and late. Almost all of Turkey’s war debt was external, and most of it was held by Germany. During the war Turkey was able to brush off domestic anxieties about its borrowing, claiming that it was guaranteed by the German government, whose ordinary budget (at least formally) had no deficit and whose international standing ensured that it would not default. Djavid reckoned Turkey would pay off its combined pre-war and wartime borrowings (calculated in March 1917 to be £T330 million) within twelve years of the war’s end. In the event, the German debt was repudiated on Turkey’s behalf by the Entente after the war. But Djavid’s wartime declarations were not simply wishful thinking. If Turkey had had to pay Germany, the burden would not have been great. Turkey’s foreign debt in 1914 was already large, £T161 million; it did not quite triple by 1918, when it totalled £T454.2 million.436 Depreciation within Turkey—the domestic exchange rate—kept the real value of this debt remarkably low.

  Very similar points emerge from an examination of Bulgaria’s management of its financial relationship with Germany. It had funded the Balkan wars by three forms of credit. It borrowed from the national bank against increased note issue; it levied a compulsory domestic loan; and it raised funds from banks in France, Russia, and Austria-Hungary. Anxious in July 1914 to consolidate these floating and short-term debts, it secured 500 million gold leva at 5 per cent over a fifty-year period from a consortium headed by the Diskonto-Gesellschaft. The deal was not without its domestic critics, both those averse to aligning Bulgaria with the Triple Alliance, and those angry at the rights over Bulgarian coal, railway construction, and post development which were conceded in exchange. The first tranche of 250 million leva was due on 30 September 1914, but when the war broke out Germany, as allowed under the terms of the agreement, made the funds conditional on Bulgaria’s political alignment. An indication of Sofia’s ability to manipulate Berlin was the fact that it secured 150 million leva in February 1915 not for belligerence but for its continuing neutrality. Moreover, Bulgarian obstructionism ensured that the benefits Germany derived from the mining concessions were minimal.

  Therefore, Bulgaria did not enter the war in September 1915 to secure funds, but having done so ensured that its own disbursement on the war’s conduct was matched—virtually in a 50 : 50 relationship—by Germany.437 Germany agreed to provide its ally with a subsidy of 50 million leva a month at 5.5 per cent. The money was lodged in the Bulgarian national bank’s account with Diskonto-Gesellschaft in exchange for Bulgarian treasury bills. Bulgaria’s claim that its domestic economy thus derived no direct benefit was spurious. A law passed in 1912 allowed the national bank to treat foreign loans as metallic cover for its note issue. The bank’s reserves of gold and silver rose only from 83.6 million leva in 1914 to 103.78 million in 1918 (as opposed to a tenfold increase in note circulation). By contrast, Germany’s advances totalled 350 million gold leva. Thus, the German loans underpinned the growth in Bulgaria’s money supply, which was in turn reflected in bank deposits. Those of the national bank rose from 42 million leva in 1914 to 85 million in 1917, those of the Bulgarian Agricultural Bank from 8.9 million leva to 14.1 million, and those of the Central Cooperative Bank from 8.4 million to 79.9 million. Flush with funds, the banks were able to support the creation of 155 new companies with a total initial capital of 156.7 million leva between 1913 and 1918; by contrast, in the first of these years only five new companies had been set up and their combined capital was a mere 4.5 million leva. Germany’s frustration was compounded by the fact that Bulgaria’s tobacco exports kept the leva strong against the mark, thus enabling the Bulgarian banks to buy their allies’ notes at low rates and sell them in Germany and Switzerland at a profit.438

  Germany’s toleration of this relationship did not—unlike that with Turkey—extend beyond December 1917. For the last year of the war Bulgaria had to fall back on domestic borrowing, primarily by discounting treasury bills with the national bank. Its debt in paper leva doubled from 319.99 million in 1917 to 688.88 in 1918, and at the year’s end it had 822 million leva outstanding with the Bulgarska Narodna Banka. Inflation was no longer held in check, and prices doubled.

  Nonetheless, although Bulgaria bore more of the real monetary costs of its war effort than did Turkey, it was far from facing them in their entirety. It never launched a domestic war loan, and its domestic debt, even in 1917, was a third that of its foreign borrowing. Moreover, the latter was written off by the peace settlement. Put crudely, the experience of both powers showed that the financial burden of fighting a world war for an underdeveloped power was less than that for a state possessed of industrial abundance. In this respect Turkey, and to a lesser extent Bulgaria, fulfilled at least some of the expectations of pre-war economists concerning the greater financial resilience of the more backward nations.

  But the explanations for strength in the management of wartime finance are not monocausal. Forwardness was also an advantage; sophistication in the machinery of credit created flexibility. The Entente powers proved adept at externalizing their debt, and displayed in doing so a degree of mutual support whic
h, however tinged with exploitative overtones, provided a clear instance of co-operation within the alliance. Admittedly this co-ordination was the consequence of one power’s financial supremacy at any one time—Britain’s in the early stages of the war, and the United States’s in the latter. Moreover, prewar national rivalries were not simply forgotten. France resented Britain’s presumption of financial leadership, and was restrained largely by Ribot’s Anglophilia and his determination not to compromise relations between the two powers.439 Britain financed Belgium in the Congo because France was funding the Belgian army: ‘we believe’, wrote a member of Asquith’s cabinet in December 1914, ‘that France would like to get the Belgians in her pocket—but we have not resisted a German protectorate over Belgium in order to have a French one.’440 However, neither this jockeying for position nor the relative lack of collaboration between the military high commands of the allies until 1918 should obscure a much more broadly based and fundamental sharing of monetary and other resources from 1915 onwards.

  The prime mover in effecting such a rapid progression towards financial fusion was not the wealth of Britain but the impoverishment of Russia. Russia’s leverage over its allies in 1914–15 bore comparison with that of Turkey over Germany. Both Britain and France regarded their eastern ally as a source—by dint of its manpower—of latent military supremacy. Money was the oil to ease the machinery of the Russian ‘steamroller’.

  Neither Britain nor even France confronted major problems in their foreign borrowing until 1915 or possibly 1916. But much of Russia’s pre-war industrialization was already predicated on investment by both London and, especially, Paris.441 It filed its first request for British funds almost as soon as the war began, and in October 1914 the Treasury agreed to advance £20 million. Russia went on to borrow £568 million from Britain, almost £200 million a year for each year of its belligerence. Of £974.7 million in British loans to the Dominions and allies outstanding at the end of the financial year 1916–17, almost half, £400.6 million, was Russian debt.442 France, which found itself shoring up the finances of Serbia, Belgium, and Montenegro as well, allocated at least a third, and by some calculations almost a half, of its foreign credits to Russia. At the war’s end Russia owed Paris 3,530 million francs.443

  Only a small proportion of this debt was contracted in order to purchase war materials directly from Russia’s Entente partners. Its immediate purpose was to pay dividends on the shares and interest on the government loans already held abroad before the war. The few Russian stocks belonging to German and Austrian investors in 1914 migrated to neutral markets. Thus, there was no relief from the need to continue payment even on these.444 Since 80 per cent of Russia’s foreign cash balances were in France and consequently were caught by the French moratorium, they could be only gradually released. French government loans to Russia were therefore being used to reward the pre-war speculation of French private investors.445 In August 1915 Bark told the Duma that of Russia’s new, wartime debt 500 million francs and £10 million had been used to cover the cost of borrowing contracted before the war.446

  Even without this prior call on Russian borrowing, little could have been spent within Britain and France. The war industries of both were fully taken up by their own nations’ needs. The major source of Russian munitions was the United States. But Russia had no entrée to the American money market. A Jewish lobby in America, headed by one of the managers of Kuhn Loeb, and outraged by the anti-Semitism of the Tsarist government, blocked Russia’s attempts to raise loans in New York before the war. Thus, although American policy sought improved relations with St Petersburg from July 1914, the infrastructure for the extension of American credit was not in place. Not until 1916 did a determination that America should dominate Russo-American trade lead the National City Bank to become active in the Russian loan market. In the first year of the war the Russians tried to borrow in the region of $1,000 million but came away with only $60 million. However, the barriers to American money did not constitute barriers to American goods.447

  On 17 August 1914 Britain and France, as a result of a French initiative, established the Commission Internationale de Revitaillement. Its task was to co-ordinate and control allied purchasing, so as to keep down prices and to prevent inter-allied competition. Neither Britain nor France intended the Commission to become an agent of Anglo-French financial co-operation: they did not use it to obtain funds, and France placed orders outside it. But both did use it to manage the spending of their allies. In September Russia and Belgium joined the Commission, and in due course the other allies followed suit.448 The effect was to give the weaker financial powers the credit status of Britain in international markets. Russia could therefore buy American produce under Anglo-French auspices, and pay for it with the debt that it contracted in London and Paris rather than in New York. American exports to Russia grew from a value of $32.2 million in 1913 to $640 million in 1916. The United States’s funding of Russia was prodigious: by November 1917 $2,615 million had been advanced, $1,229 million between January 1916 and April 1917, and $902 million between the two revolutions. But of this, only $435 million constituted direct advances and only $840 million was secured in Russia’s own name: $460 million was debt contracted in the name of France and $880 million in that of Britain. Thus, when Britain and France borrowed in the United States between 1914 and 1917, more often than not they did so on Russia’s behalf. Over 70 per cent of American funds lent to the two west European powers in the period of American neutrality were destined for Russian use.449

  By April 1917 58 per cent of all Entente borrowing, both that contracted between the belligerent powers themselves and that from the United States, had been generated by the needs of Russia.450 Much of it was misapplied. Britain and France felt that their funds were being used not for the purposes of the war but to improve Russia’s peacetime industrial infrastructure. Part of the problem was the difficulty of distinguishing what was civil from what was military in the conduct of war in the industrial age. Railway investment would benefit Russia after the war but was also vital during it: in 1916 and 1917 many of the goods shipped from the United States remained mired at Archangel for lack of transport.

  Like that of other belligerents, the deficit in the balance of Russia’s trade grew. But to blame the depreciation of the rouble on the balance of trade, as Bark did, was misleading.451 The rouble fell 28.2 per cent against the dollar by August 1915, 41.8 per cent by January 1916, and 43.9 per cent by April 1917.452 At their conference in February 1915 the finance ministers of Britain and France pledged to hold the rouble at par with the pound and the franc. As Russia paid for most of its imports with money borrowed from Britain and France, they— not Russia—bore the brunt of the rouble’s depreciation. London, rather than Petrograd, was the main international market for roubles. The Russian government, therefore, used Barings to buy roubles in London so as to shore up their value. In 1916, with the support of British Treasury funds, it set up an intervention account operated by Barings. However, these operations had little effect in halting the rouble’s downward slide.453

  London felt that the heart of the problem lay in Petrograd. Part of its solution was political: military victory and governmental reform would generate greater international confidence. But there was also a monetary aspect. The purchase of roubles on foreign markets had to be accompanied by effective blocks to the exodus of funds from Russia. Without them, there would always be more roubles on the international market than the market could absorb. No effective controls were ever put in place.

  In November 1914, as part of an effort to prevent trade with the Central Powers, a ban was imposed on the export of money or precious metals worth more than 500 roubles. The order was doubly inadequate. First, no limit was put on the number of transactions for sums of less than 500 roubles; thus, large amounts could be moved in successive small tranches. Secondly, the prohibition only applied to the physical transfer of metals and money, not to their consignment to overseas concerns.


  However, the biggest weakness in the policy was that Bark did not believe in it. He argued that some export of cash would facilitate Russia’s foreign purchasing, and that the notes would eventually return to domestic circulation. Thus, by the summer of 1915 the Ministry of Finance was itself authorizing exemptions to permit the migration of Russian capital. The trade was monitored by controls set up in July 1915, and centralized in a single department in January 1916. But no further efforts were made to restrict the movement of money until June 1916, and even the measures then adopted did little more than regularize existing practice. Large banks were allowed to consign sums to allied and neutral countries, and private individuals could do so to Britain and France. The exemptions granted in 1915 were not ended until December 1916. The legislation of the Provisional Government under this head also lacked substance. Payments abroad were prohibited unless they enjoyed the approval of the Ministry of Finance. But as the original allowance permitting exports of up to 500 roubles remained in place, those anxious to move large sums continued to transfer the permitted maximum every day.454

  London’s frustration at Russia’s failure to control its foreign exchange was cumulative. Russia’s resentment at the terms attached to Britain’s first loan was immediate. The demand for gold worried a power whose perch on the gold standard was so precarious. It also bridled at the Treasury’s efforts to determine how the proceeds of the loan should be spent. When the Russians asked for a second loan, of £100 million, in December 1914 the Treasury said that Russia’s war needs suggested it only required £40 million, and that 40 per cent of any part of the loan spent outside Britain should be backed by gold. Britain justified its demand for gold by saying that it was acting on behalf of all the Entente powers in the neutral markets of the world.455