by Hew Strachan
The prime motor in the Board’s declaration, therefore, was financial. But the force of its views was also political. In the recent presidential elections Morgan’s had supported the Republicans, while the Democrat, Woodrow Wilson, campaigned on a neutralist ticket. Wilson was re-elected. By curbing Entente credits, he could pressurize the allies into peace negotiations. If this policy failed, then the probability was that America would be forced into the war on the Entente side. From an economic perspective its investment would give it little choice; from the political, German policy seemed to be eliminating any room for manoeuvre. If America joined the war it would need its domestic loan market for its own military effort, flush with liquid funds and not already committed to medium-term foreign stocks.497
The Federal Reserve Board did not formally revise its statement of November 1916 until 8 March 1917. It then declared itself to have been misunderstood in November, said that it had no intention of impugning foreign credit or of limiting exports, and announced its permission for all forms of allied loans without any requirement for gold as cover. Thus, the immediate advice to the cabinet of Asquith and McKenna against precipitate action was wise. The London exchange committee wanted a moratorium on payments to the United States, but this would have effectively ended the convertibility of sterling. A few days later both Asquith and McKenna were out of office, replaced by Lloyd George as prime minister and Bonar Law as chancellor. The new cabinet reflected the British frustration with Morgan’s, and decided it needed direct Treasury representation with the Federal Reserve Board. Accordingly Sir Hardman Lever arrived in New York in February: Harding, already modifying the Board’s position, responded to Lever’s pressure.498
Until March, however, Britain had no choice but to muddle through the winter of 1916–17 as best it could. It shipped $300 million in gold; it let £358 million in uncovered debt accumulate with Morgan’s; and it issued $250 million in stock in January 1917.499
It also reviewed its position with its allies. Unable to launch a major American loan for $100 million until late March, France could only raise $15 million from Morgan’s and $17 million through a credit with the National City Bank.500 On 19 January 1917 the Bank of England revised the April 1916 agreement with the Banque de France, increasing its credit from £60 million to £72 million, but requiring the French bank to boost its deposit of gold from £20 million to £24 million. Further negotiations in March, designed to update the terms of the Calais accord of August 1916, were blocked by a French refusal to ship more gold. A compromise extended the existing arrangements for a further month.501 Italy and Russia were easier to deal with, as all their American orders were effectively channelled via London, and by blocking them exchange could be saved.502
Nonetheless on 1 April 1917 Britain’s cash in the United States was all but exhausted. In New York, against an overdraft of $358 million and a weekly spend of $75 million Britain had $490 million in securities and $87 million in gold. At home the Bank of England and the joint stock banks could command a reserve of £114 million in gold.503 But just at the point when the exhaustion of Britain’s finances was about to cut the Entente’s Atlantic trade Germany declared unrestricted U–boat warfare, with the intention of achieving the same result. The effect was finally to precipitate the United States’s entry into the war. Although Germany’s U–boat campaign represented strategic miscalculation at a number of levels, this was the most significant in the long term. The submarine constituted the most serious threat of the war to Britain’s maritime supremacy, but on one interpretation it saved Britain.504
The failure of German intelligence which produced this blunder cannot be attributed to lack of raw data. Britain’s financial plight was evident to every American investor. Rather, what it displays is the narrow framework within which German strategy was shaped. Winning the war was seen to be a matter of operational solutions, whether by sea or by land, and the expanding power of OHL militated against a broader conception. Finance, seen by many before 1914 as the component which would end war soonest, had dropped out of German strategic calculations by 1917. Max Warburg, an opponent of U–boat warfare, declared in February 1916 that, ‘If America is cut off from Germany, that means a 50 per cent reduction in Germany’s financial strength for the war and an increase of 100 per cent for England’s and France’s’.505 But Warburg was a representative of the very commercial interests which the industrial associations had already begun to marginalize before the war and which were now increasingly isolated thanks to it. The liquidity in industry generated by war-related profits made the big firms independent of the banks, and this found reflection in German economic thought more generally. Helfferich, minister of the interior and deputy chancellor since May 1916, opposed unrestricted U–boat warfare during the course of 1916, but declared his support in the Reichstag in January 1917. Even in his post-war reflections he could do no more than acknowledge in passing the financial boost American belligerence gave the Entente:506 because he himself saw financial policy as the servant of Germany’s war effort, not its master, or even its partner, he could not envisage its potentially decisive implications for the Entente’s war effort.
Many Germans did, of course, feel that the United States, by dint of its supply of munitions and of the availability of its credits for war orders, was already a covert belligerent before April 1917. On this reading America’s formal entry to the war did no more than make public and legal what was already practice. By contrast, there were moments in the ensuing eighteen months when some in Britain felt that the shift in American policy after April 1917 was not sufficiently dramatic or altruistic to represent a full acceptance of alliance obligations. Certainly, those in the Treasury who hoped that Britain, having financed the Entente and its overseas orders for three years, would now be able simply to pass that particular function over to the United States proved to be both optimistic and naive.
The American Treasury did not, as the British had done, take finance as a self-contained component of the war economy. McAdoo wanted to create an inter-allied economic committee, but his objective was to restrict and coordinate Entente purchasing in America, not to pursue a joint policy in relation to borrowing. By eliminating wastefulness in the orders of the European allies, he would of course reduce their need for credits. But he did not see the support of their rates of exchange as a component of this strategy. Nor did he see the undertaking of long-term financial support to the allies as desirable or sensible. Indeed, he argued the reverse: by restricting American support to short-term funds he would force the allies to confine their demands to immediate necessities.
Thus, America’s entry helped develop the machinery for the acquisition and distribution of commodities. The joint committee on war purchases and finance was established in August 1917. But Britain’s pre-existing leadership in the area of co-ordinated purchasing (particularly for wheat) and Woodrow Wilson’s insistence that America was an ‘associate’ rather than an ‘ally’ of the Entente both militated against true American economic leadership. Even on the basis of co-ordinated and restricted orders, the Entente’s demand for goods exceeded the United States’s ability to deliver. The committee’s remit therefore came to embrace purchases in neutral countries as well as in the United States. However, since America banned the export of gold in September, it could not aspire to the dominant position in Entente overseas finance enjoyed by Britain. America resisted British pressure to take over the Entente’s debts in the United States and yet at the same time insisted that the allies should spend their American credits in America. Consequently America’s entry helped soften adverse balances of payments. But it did not ease the pressure to husband gold reserves or to acquire foreign exchange. Nor did it enable the weaker Entente currencies to use dollars to bolster their own credit. Finance itself became subject to largely bilateral negotiations, and Britain, for all its huffing and puffing, found that its primacy in the field was never as comprehensively usurped as its parlous position suggested.507
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bsp; Lever told the US Treasury on 9 April 1917 that Britain needed $1,500 million as soon as possible, with a third of that necessary just to cover the spending of the next thirty days. On 25 April McAdoo began to eke out a succession of short-term loans to America’s new allies. Britain got $200 million, France and Italy $100 million each, and a further $100 million was pledged to Russia and $45 million to Belgium. The effect was to displease everybody. The advances were not only insufficient to meet the Europeans’ demands, but they also gave them no idea as to what they could expect on a regular monthly basis. On the other hand, they were sufficient to threaten America with a mounting short-term debt which could reach $7,000 million in six months.508
McAdoo’s response in June was to try to cut the Entente’s demands for credits. Britain, as the biggest American borrower and also the biggest Entente creditor, was the principal victim. It was running an overdraft of $400 million with Morgan’s, was confronting earlier loans which were now falling due, and was continuing to provide more than twice as much financial support for its allies as the United States. On 20 June Lever demanded $50 million with immediate effect and a promise of funding for the next two months. When McAdoo only agreed to $15 million, Britain threatened to default in the United States. If this had happened the dollar-sterling exchange would have collapsed, and with it the whole structure of Entente finance. Confronted by a choice that was no choice, McAdoo conceded the full $50 million. But he still refused Britain satisfaction on its basic demands—that America should pay the debt with Morgan’s, that American loans could be used to support the exchange, and that America should take over from Britain responsibility for Entente purchasing in the United States. McAdoo complained of a lack of information. The Americans were being asked to take on trust the British claim that it was carrying the burden for the Entente. This was the premiss on which Britain demanded that the pound be held at $4.76 and that it receive seven-tenths of the American funds available for foreign loans. If it were not true, British policy smacked of self-interest rather than of alliance altruism.509
Britain was in part paying the penalty for its reliance on Morgan’s to speak for its interests in America—a dependence ingrained in 1915 and 1916. Its experience in those years had been with Wall Street, which was Republican in sympathy, rather than with the American government and its Democrat president. The declaration of the Federal Reserve Board in November 1916 had warned of the need to change tack. However, Lever’s mission, for all its short-term success, did not establish the ideal basis for Anglo-American financial relations at the governmental level. McAdoo did not get on with Lever; he did like Lord Northcliffe, who was appointed to co-ordinate all the British missions in America on 31 May 1917, but Northcliffe lacked financial expertise. Moreover, Northcliffe’s presence crystallized a bifurcation in British representation in America: on the one hand were the wartime missions speaking for economic interests and concentrated in New York, and on the other was the embassy, focused on traditional diplomacy and based in Washington. On 5 September 1917 Lord Reading was appointed to succeed Northcliffe. Reading, though Lord Chief Justice, had worked in the City of London and in the wartime Treasury. In February 1918 he replaced Sir Cecil Spring Rice as ambassador, and thus the two arms of British policy were united under one head.510
Reading’s frankness with McAdoo helped transmute the latter’s reluctant and short-term concessions to British demands into a more pragmatic relationship. On 23 July 1917 the United States agreed to a pattern of monthly advances—$185 million for August and $400 million for September. On 16 August McAdoo accepted in practice, if not in principle, that the United States would sustain the sterling exchange rate at $4.76. The resolution of the Morgan’s overdraft proved more protracted and tested the patience in particular of the British government’s principal financial adviser, J. M. Keynes. Between February and September 1918 the American Treasury helped Britain meet its maturities and outstanding debts, but did so while subrogating Britain’s collateral. Keynes’s sense of humiliation found reflection in a draft memorandum of May 1918 which, although never sent in its entirety to Reading, reflected the fact that, for all the latter’s success, McAdoo’s policy was still guided by the same principles as it had been twelve months earlier. The conditions of the Americans’ financial support were unpredictable; their understandings were committed not to paper but to ‘vague oral assurances.511
But Keynes’s frustration conveniently neglected the fact that his own advice of 28 July 1917, that Britain abandon the gold standard, had not had to be followed through. In the final analysis, the United States did not use the war to force out sterling as the principal medium of international exchange; it was instead prepared to see the dollar shore up the pound, and thus sustain both as convertible currencies.512 In March 1918 Bonar Law went so far as to suggest that America should finance the purchases of France and Italy in the United States, while Britain continued to carry this responsibility elsewhere in the world. France and Italy were to pay Britain in dollars obtained from the American government. Thus, Britain’s own need for dollars would be limited, its pivotal position in the world’s trade would be protected, and yet America would relieve it of final responsibility for the borrowings of its Entente partners.513 Although this suggestion reeked of British self-interest and was understandably not accepted as it stood, much of its spirit was reflected in Entente practice in 1918. That this was so was largely due to the changed, and improved, tenor in Anglo-French financial relationships prompted by America’s entry.
Bonar Law effectively outflanked the United States by reorganizing Anglo-French relations in advance of Anglo-American. On 29 May 1917 France accepted that its purchases in Britain would be limited to goods originating in Britain; thus, Britain’s credit to France for June was fixed at £14 million. France was to forward francs to cover the expenses of the British Expeditionary Force and Britain would reimburse France in sterling. France accepted that it would pay Britain in dollars for all the expenses that it incurred on France’s behalf outside the British empire, and that it would be responsible for its own dollar exchange and its own American payments.
However, America’s reluctance to move to firm arrangements for lending to its allies drove back up France’s need for sterling. At the end of June Britain suggested it advance £16 million a month for two months from July and France countered with a request for £18 million a month for three months. But America’s attitude also increased Anglo-French solidarity. Because the franc rested on the pound, the French had a direct interest in measures designed to reinforce the pound against the dollar. On 7 August the French agreed to pass over to Britain $40 million for that month, and to pay in dollars for goods bought through the Entente purchasing machinery, including food acquired from within the British empire. McAdoo’s frustration at Entente measures calculated to weaken the dollar was countered by allied sophistry, to the effect that if the Allied Wheat Executive had not provided wheat from India bought with sterling it would have had to do so with wheat from America secured through American credits.
At the same time, however, Britain used America’s pressure for the allies to co-ordinate and control their overseas purchasing to reinforce its own efforts in the same direction. France’s regulation of its imports was still lax: about £4 million of its monthly imports in mid–1917 were generated by private commerce, and the French government knew the exact use of, at most, two-thirds of its British credits. On 1 March 1918 Law reckoned that Britain’s loans to France had climbed back to £22 million a month. He tried to get all French orders, not just those of the government, channelled through the Commission Internationale de Ravitaillement. Klotz resisted this, but in July 1918 the French government began at last to put its own house in order, grouping and monitoring the main categories of import, and their cost. Britain’s credits to France tailed off as 1918 progressed: Law had been anxious to keep them below £20 million a month, and the final average for the year was only £10.5 million. On 13 August 1918 the exch
ange rate fell below 27 francs to the pound, the basis of the agreement of August 1916. France reckoned that the recovery of the franc should mark the return to a self-regulating market. But the Treasury went further and called on France to reimburse its bonds. France countered with a request for interest on the gold France had transferred to Britain. This formed the basis for a trade-off in October 1918.514