by Hew Strachan
The decline of the British and French exchanges caused almost as much concern in New York as it did in London and Paris. McAdoo was well aware how contingent American prosperity was on Entente purchasing: he could not afford to let the value of the dollar price American goods out of the market. The behaviour of the Federal Reserve Board reflected these commercial interests. Benjamin Strong was keen to use the war to promote the use of dollar acceptances for two reasons. First he saw no reason why trade between the United States and the rest of the world, particularly South America, should be funded by credits from London. Secondly, the alternative, for American exports to be paid for in gold, would render the United States vulnerable to the return of normal trading conditions, when the gold would emigrate once more. The Board adopted the principle of rediscounting commercial acceptances in April 1915, but made an exception for arms and munitions. In August, under pressure from McAdoo, the Board revised its policy, and banks were permitted to rediscount all commercial acceptances. Politically too—although the president remained reluctant publicly to commit himself—the mood changed. America’s protest to Germany over the torpedoing of the Lusitania with the loss of American lives on 6 May prompted the strongly neutralist Bryan to resign. He was succeeded as secretary of state by Lansing, who had of course already shown himself sympathetic to the financial needs of the Entente. On 19 August 1915 a German U–boat sank the Arabic, and two more Americans were drowned. Not for the last time the German use of submarines came to the rescue of Britain’s imperilled finances. When Britain enquired at the end of the month about the possibility of publicly launching a government loan in the United States, it was accorded muted approval. Wilson would not give any flotation his public benediction, but nor would he oppose it.478
McKenna’s anxiety to enforce the primacy of British finances in the Entente remained. Thus, he proposed that a government loan launched in America should be in Britain’s name only, although France and Russia should share the proceeds. Similarly, the cabinet decision of 22 August to ship gold rested on the presumption that both Britain’s Entente partners would contribute to the pot. Ribot was not happy with either idea. At Boulogne on 21 August, the two finance ministers agreed that the loan would be joint, and that gold would not be sent immediately but that each power would hold $200 million in reserve in case it was needed. The speed with which the meeting was convened prevented Russia from being represented, but the two western allies shed few tears: they recognized that Russia’s poor reputation in America could cause the failure of the loan.
However, the converse did not apply. Russia’s exclusion did not guarantee the loan’s success. Lord Reading, who was sent by the British government to negotiate the loan’s terms, was told by McKenna that he would be happy with $100 million; his aim was to get America used to the idea of foreign loans.479 In the event, the nominal capital of the issue was $500 million. It was sold at 98 and paid 5 per cent. But American investors were used to a rate of 5.5 or 6 per cent. Furthermore, they were not accustomed to a loan on this scale nor one which lacked collateral. Only $33 million was subscribed by individuals; on this evidence American sentiment remained strongly neutral—whatever the popular responses to the sinking of merchant ships or the financial self-interest generated by Entente purchasing. Indeed, without the latter the loan would have flopped completely. Six companies with major allied orders brought £100 million of the stock. Little interest was shown in the Midwest, where German agitation was strong. By the close, on 14 December 1915,$187 million was still unsold and had to be taken by the banks which had underwritten the issue. The banks’ price was 96, the stock rapidly fell to 94 and, despite Morgan’s intervention, it was trading even lower by the end of February 1916.480
Nonetheless, the loan achieved a number of important objectives. At the price of growing indebtedness in New York, it secured British exchange rates.
By the beginning of 1916 the pound exceeded $4.77, and it never fell below $4.76 for the rest of the war. The loan thus provided a secure platform from which the British exchange committee could begin its operations in November 1915.481 Furthermore, it linked the franc to the pound, thus stabilizing the former as well as the latter. The pegging of the exchange rate kept the dollar artificially weak, but in so doing sustained Entente orders and thus deepened America’s own need to support sterling and its associated currencies.
The focus in the literature is on the sense of continuing crisis generated by the battle to secure American funds and to maintain the convertibility of sterling in New York. But the irritability and frustration which bubbled up in London should not be allowed to obscure the specific advantages which accrued to Britain from the Anglo-American financial relationship. Nor should the attention to the deficit in Britain’s Atlantic trade overshadow the broader picture of Britain’s balance of payments. Shipping profits helped offset the loss of other earnings. In 1913 Britain’s trading surplus (aggregating visible and invisible trade) was £181 million; during the war it still averaged £50 million; and only in 1918 did the account show a major deficit, £204 million.482 Furthermore, Britain’s economic leadership of the Entente helped compensate for the imbalance in its American trade. France spent almost as much in Britain during the war, 23,000 million francs, as it did in the United States (between 26,000 and 27,000 million francs). In 1913 French visible exports to Britain were worth 1,453.8 million francs, and its imports 1,115 million; by 1915 this modest French surplus had been turned into a deficit of 2,938.7 million francs, and in 1917 the deficit was 5,791.2 million francs.483
Britain therefore became the banker not only to Russia and Italy but also to France. Ribot opened an initial credit of £400,000 at the Bank of England at the outset of the war, and French treasury bills to the tune of £2 million were placed in London in October 1914. Negotiations for a loan of £10 million continued during the winter of 1914–15: Ribot felt the total was too low, but Cunliffe feared the short-lived strength of the franc and the possible depreciation of the pound. The fall of the franc and the February 1915 conference cleared the way for an Anglo-French deal in April. Ribot asked for, and got, £12 million to cover France’s purchases in Britain for the next six months, and a further £50 million for acquisitions in North America: two-fifths of France’s American costs in sterling were to be backed by gold sent to the Bank of England. In November 1915 Britain moderated its closure of the stock exchange to foreigners, allowing France to sell its first war loan stock, an operation which raised over £19 million. A continuation of the April 1915 agreement was negotiated in February 1916. Britain agreed to discount French treasury bills at the rate of £4 million per month from the end of June; it also advanced £6 million a month for three months from mid-April to cover French payments in New York. In exchange France shipped £1 million in gold to Britain for each of February, March, and April, so allowing Ribot to conclude the total credits were £11 million per month rather than £10 million, as the British reckoned.484
The two powers concluded their February 1916 discussions by saying they would meet again at the end of the year to concert their financial plans for 1917. But McKenna had promised that London would take measures to support the franc when the pound passed 25.50 francs. By the end of January it had risen to 28 francs. Paris’s position in the United States had been secured until mid-April by the Anglo-French loan, but its deficit in Britain was increasing at the rate of 100 million francs per month. Cunliffe was prepared to make a sufficiently large advance to buoy the French exchange rate and to continue the migration of French gold to Britain: he suggested a credit of £120 million, to be divided between the Banque de France and the state, and to be secured one-third in gold and the balance in treasury bonds. Ribot regarded £120 million as insufficient: he wanted £160 million. McKenna, however, feared that a large British loan to France would hit the dollar-sterling exchange, and stipulated a maximum of £30 million over three months. On 14 April Ribot got £60 million, one-third covered by gold. The exchange rate, which had reach
ed 29 francs to the pound, stabilized at 27 francs.
By May 1916 France had become dependent on British guarantees for its overseas purchases. Well over a third of Britain’s advances to France in the war, £177.2 million of £445.75 million, were made in 1916. France’s subordination was evident in the terms to which Ribot was bound in April. The agreement was to be suspended if the exchange rate became any more favourable to the franc, and the level of interest on the loan—when the 6 per cent payable on the treasury bonds was added to the loss of interest on the gold—aggregated at 9 per cent.485
While France was negotiating with Britain, its credit with the United States was ebbing away. By 8 July 1916 France owed Morgan’s $726,686, and the payments on the Ministry of War’s orders due in August totalled 264 million francs. The ministry’s American purchases in 1916 were running at double the level of 1915. But Morgan’s counselled delay in the issue of a fresh loan. The 1915 Anglo-French loan stock remained depressed until April; the danger of a war between the United States and Mexico created the possibility that the American government itself would enter the loans market; and confidence in French military prowess as well as French financial strength was low.
France needed Britain’s name to get credit in New York. In mid-July Ribot canvassed the notion of a second Anglo-French loan at a conference in London attended by all four Entente powers. But the remit of the conference was economic in its widest sense: it followed on a discussion of economic war aims in Paris in June, and its focus was as much material as financial. The need for munitions generated by the battles of Verdun and the Somme was as pressing a consideration as the method of paying for them. Lloyd George, driven as usual by the former rather than the latter, argued that America was more dependent on Entente orders than the Entente was on American money: he felt that presidential support for an Anglo-French loan would be forthcoming and therefore supported Ribot. However, McKenna reckoned America would not lend. His priorities were unchanged: to extract gold from Britain’s allies, to curb Britain’s indebtedness to the United States, and to float loans in Britain’s name only.
Ribot left the conference under a misapprehension. He had shifted his own ground since December. He was now less determined in his subordination of war finance to the imperatives of strategy, and more appreciative of McKenna’s general point, that the military effort might have to be scaled back so that it was more in step with financial capacity. France’s overseas payments had totalled 282 million francs in January, and had risen to 500 million by June. But the fears he expressed domestically had been moderated by at least some of his allies. Asquith had intervened in April to overcome McKenna’s doubts about the increased British loan to France. Now Lloyd George seemed similarly bullish. Ribot and McKenna agreed that the launch of any joint loan should be postponed until after the American presidential election in November. But their policies, although driven by similar interpretations of their own nations’ individual needs, took divergent courses.486
Ribot pressed ahead with a scheme on which Homberg had been working since January. The evidence of 1915 showed that France would not be able to raise a loan on its own account without collateral. This upset Ribot: the name of the French government should be sufficient credit in itself. Homberg’s solution was to form a banking syndicate, the American Foreign Securities Company, backed with $120 million in neutral shares. On this basis a loan for $100 million was issued on 19 July 1916, and was oversubscribed three days before it was due to close. The credit of the French government—or perhaps more properly Ribot’s amour propre—remained inviolate.487
But Britain too needed credit in America. McKenna and Keynes felt that all that had saved the situation so far was the failure of American firms to deliver contracts to time and the lack of cargo space to ship those orders that had been completed.488 But as American industry accustomed itself to allied war needs the first of these constraints on Britain’s spending was eased. At the beginning of May 1916 the Treasury thought that the country could be bankrupt by the end of June, and McKenna warned Ribot that he might not be able to stick to the February 1916 agreement.489 On 19 May the Treasury calculated that $434 million was required by the end of September, just to cover its existing commitments. At the end of August the British government, acting on the advice of Morgan’s but against that of the Bank of England, floated a loan of $250 million. Britain, unlike France, acted in its own name, and furthermore provided as collateral North American and neutral securities worth $300 million.490 The effect was to trigger a fall not only in the 1915 Anglo-French stock but also in the new French loan of July 1916. Ribot was furious. He had not been consulted. The principle which he had contested with Homberg had been subverted by the unilateral action of France’s ally. A precedent had been set which France, partly through its reluctance to commandeer the neutral shares of its own citizens, could not follow. Henceforth an unguaranteed loan would be impossible, and in the short term the American Foreign Securities Company could not return to a market glutted with British stocks. British credit, which Ribot had understood from the July conference was being held in reserve for joint use, had been expended. Moreover, the issue was not particularly successful: only $200 million was subscribed and its price fell.
McKenna and Ribot met at Calais on 24 August to rebuild the bridges of cross-Channel financial co-operation. McKenna denied that he had breached any earlier agreements but was probably more apologetic than he need have been. He said that the loan was a response to an immediate crisis on the exchanges. More to the point was the fact that Britain’s action on the exchanges and in the export of gold was not entirely self-interested; it was designed to support the American purchases of all the Entente. He offered to increase French credits to £25 million per month for six months; £10 million of this was to be used by the Banque de France to support the franc. In return, Britain’s allies were to disgorge a further £100 million in gold—half of which was to come from France, £40 million from Russia, and £10 million from Italy.491 The real opposition to these proposals came not from Ribot but from Bark. Russia had not yet shipped £20 million of the £40 million in gold agreed on in September 1915. At the London conference in July Britain had accorded Russia credits of £25 million per month for the next six months, in addition to £63 million for immediate use in military orders and to a further £63 million in the autumn provided Russia held £40 million in gold ready for shipment. The Foreign Office feared that the Treasury was blackening Britain’s image in Russia in its pursuit of gold, and McKenna moderated his demands. If the £20 million outstanding under the September 1915 agreement was remitted, Britain would only require a further £20 million; the first instalment was received in November 1916 and the second in February 1917.492
Neither Britain nor France could afford to be soft with their ally. McKenna had accepted at Calais that an Anglo-French committee on finance should be set up, and it held its only meeting between 3 and 10 October 1916. The two powers calculated that their spending in America over the six-month period October 1916 to April 1917 would total $1,500 million. France expected its monthly deficit to run at between £8 million and £10 million despite the £25 million British credit. Two-fifths of Britain’s daily spending on the war was disbursed in the United States, giving a monthly expenditure of $250 million.493 In the five months ending on 30 September 1916, three-fifths of British spending in America had been covered by gold or by existing British investments in the United States and two-fifths by loans. The allied agreement to raise £100 million in gold could contribute $500 million towards the $1,500 million required, but prudence suggested that half this gold should be kept back. Thus, perhaps five-sixths of allied spending in the United States over the next half-year would have to be funded by loans—a total of $1,250 million. Borrowing on this scale would itself clog the market, as each issue would compete with the last. The principal problem was its pace: ‘the question’, Keynes wrote, ‘is whether the money can be turned over in America and brought back to us in
the form of loans as fast as we are spending it.’494 Furthermore, nobody had any idea how the war could be financed beyond April 1917. McKenna, reflecting advice from Keynes, reckoned that by June 1917 the United States would be in a position to dictate terms.495
The only break in a dark and troubled sky was Morgan’s view of the short-term state of the New York market. They reckoned it to be in a much more receptive mood. Britain therefore issued loans worth $300 million in October, half offered at 99.25 and maturing in 1919, and the other half at 98.5 and maturing in 1921: both paid 5.5 per cent. A credit for $50 million for French industry was organized by a group of American bankers in November 1916. At the end of September the city of Paris successfully floated a loan for $50 million, which it then transferred to the government; on 24 November Lyons, Marseilles, and Bordeaux followed suit.496
The French cities loan quickly raised $34.5 million, and then shuddered to a halt on 28 November 1916. On that day the press published a warning from the Federal Reserve Board to its member banks, advising against the purchase of foreign treasury bills. The announcement also carried an injunction to private investors to consider carefully the nature of their overseas investments, particularly in the case of unsecured loans. Allied shares fell, and $1,000 million was wiped off the stock market in a week. The ensuing run on the pound could only be staunched with the shipment of more gold. To save its exchange, Britain stopped its American orders and tried to curb those of its allies.
London’s ire over the Board’s declaration was directed more towards Morgan’s than it was towards Washington. Morgan’s had advised the British and French that an unsecured joint loan could be issued by both governments in January 1917. H. P. Davison, a partner in Morgan’s, met the Federal Reserve Board on 19 November and told them that up to $1,000 million in treasury bills would be issued in the near future. Davison’s manner, despite the fact that the Board had already halved the projected value of the French industry loan in the same month, was not conciliatory. He miscalculated the mood of the Board. Its membership was already divided as to future financial strategy. Benjamin Strong was most favourable to the Entente’s position: he saw the creation of foreign credit as a hedge against the end of the war, when the gold that had poured into the United States during hostilities would move again. But Strong was ill. Possessed of the opposite view was Paul Warburg, a German by birth, who played on the fears generated by American dependence on allied orders. Inflation and a rising cost of living were only the obvious manifestations. In 1915–16, when allied purchases were predicated on shipments of gold, the war had boosted the reserve status of the banks and so brought forward the full effectiveness of the Federal Reserve act. But once unsecured medium-term loans began to oust gold the reverse process occurred. Moreover, these foreign obligations were denying short-term funds to domestic business and so distorting America’s industrial growth. Thus there were long-term adverse implications in America’s short-term prosperity. By extending credit, America was investing not only in the continuation of the war but also in the prospects of Entente victory: a sudden end to hostilities or—or even, and—the defeat of the Entente would cause an economic crash. On this interpretation America’s best policy was to let allied orders wind down as the Entente’s power to pay also declined. Thus, the adjustment could be gradual. These views convinced the Board’s president, W. P. G. Harding.