by Hew Strachan
Like Britain, France created its own governmental missions to represent its interests in the United States, with André Tardieu as its high commissioner. Ribot put his country’s needs at $218 million a month, of which $133 million would be spent in the United States and $85 million elsewhere in the world. McAdoo advanced $100 million for each of May and June 1917, plus $10 million for the population of the battle zones of northern France. Firmer arrangements would, he said, have to await the outcome of the first American loan issue in July. He suggested that the French could then expect $150 million a month until the end of 1917. The French were disgruntled on three counts. First, the British were doing better out of the United States than they were. Secondly, they resented America’s demand that the money be spent on the purchase of American goods, and that it be channelled through the banks of the Federal Reserve System. Thirdly, the Americans wanted to know how the money was spent. The French in Paris responded by demanding $160 million a month. The French in Washington told their compatriots not to antagonize the Americans, and that $130 million would be enough. In the event, so successful were American efforts to control France’s imports—or so profligate had been France’s policy hitherto—that the full monthly credit was not actually spent. France disbursed $150 million in July and only $130 million in August. By the end of 1917 the United States had advanced France $1,130 million since May, but the latter had spent only $1,082 million.
Nonetheless, Franco-American tensions multiplied. Only a third of France’s expenditure, $355 million, represented government purchases in the United States. The proportion of private buying funded through government loans, $250 million, was comparable with the pattern of French purchasing in Britain.
But most vexing for McAdoo was the fact that $331 million of the total had been transferred to Britain. France, for its part, was having to refinance loans contracted with American banks early in the war, but was doing so without the public backing of the American government, and in one case at an interest rate of 7.5 per cent. In October 1917 France’s interest and redemption payments totalled $38.5 million. Thus both powers approached the negotiations at the beginning of 1918 on a collision course. Although French spending in January totalled $134 million, Klotz wanted $170 million for the month. McAdoo, mindful that American troops were now spending dollars in France, and anxious to confine France’s credits to French payments in America, envisaged $60 million as an appropriate credit for February.
McAdoo came off worst. On 12 March he suggested that the French should hold a maximum reserve of $30 million, and that they should only seek fresh credits when their cash in hand fell below this sum. On this basis each advance remained higher than McAdoo wanted, between $100 million and $150 million, but the period for which it lasted was not fixed and was related to the size of the unexpended balance. Nine days after France accepted these terms, on 21 March, the Germans mounted the first of a series of successful offensives. The loss both of territory and of population reduced France’s yield from loans and taxation. At the same time the growth of the allied armies in France increased the note circulation. On this basis France secured a modification of the agreement of 12 March. Rather than reduce American credits to France as France’s receipt of American army dollars rose, the Americans continued to give credits in dollars to France and used dollars to buy francs for their troops. The French intention was to continue to fund current purchases in America through American credits while creating a reserve of dollars in France for postwar use. In June 1918 Clemenceau, France’s prime minister since the previous November, intervened, adding to France’s demands a delivery of gold to cover the note increase generated by the expenditure of the American army. The Americans refused the gold but agreed to an extraordinary credit of $200 million in August. When this was added to ordinary credits of $895 million for the year, America’s support for 1918 was only marginally less than that for May to December 1917. The dispute over the trade-off between French credits in America and the spending of American troops in France continued until 1919. But procrastination was now in France’s interests. The franc recovered against the dollar from late August, and thus the relative cost of the redemption of maturing French loan stock diminished with each succeeding day.515
At times between 1917 and 1918 France felt itself squeezed between Britain and the United States. But given the reluctance with which it curbed its overseas purchasing, such sentiments reflected more the needs of self-justification than of legitimate grievance. McAdoo would no doubt have argued the reverse—that the United States was being squeezed between France and Britain.
In the case of Italy the United States was more successful in warding off British efforts to secure dollars in compensation for its credits. By 31 March 1919 Italy owed 10,676 million lire to Britain as opposed to 8,332 million to the United States.516 But Anglo-Italian financial links were not as embedded by April 1917 as those between Britain and France, and the United States therefore found it easier to insert its own concerns into the relationship. Moreover, the picture was complicated by the fact that the growth of French and Italian trade during the war (it roughly quadrupled in value) made the flow of funds four-sided rather than tripartite.517
Britain’s call on the dollars lent by the United States to Italy was couched in terms similar to those developed in the French case. In 1917, to save on Mediterranean shipping, Britain ceased to provide coal for Italy, and the responsibility was taken up by France. But Britain continued to demand compensation as France replenished its own coal stocks by increasing its imports from Britain.518 In the same fashion, Britain contended that if it exported steel to Italy it, in its turn, had to increase its steel imports from the United States. Ultimately Britain could, by using these arguments, make things sufficiently unpleasant to get its own way at least some of the time. Thus Italy, like France, paid Britain in dollars for wheat imported from India on the grounds that Britain had to import a similar quantity from the United States. On 27 July 1918 British credits to Italy were fixed at £8 million a month, of which £1.5 million was useable outside the British empire; the United States, by contrast, agreed to provide $10 million per month to be used by Italy in neutral markets, and to allow a proportion to be transferred to Britain so that it could purchase on Italy’s behalf.519
The crucial check on the extent of British control was the fact that the lira never came to depend on the pound in the way that the franc did. In 1916 the lira was left to float freely; in 1917 it depreciated rapidly, and after Caporetto it crashed. Nitti immediately set about its stabilization. His objective in doing so was to facilitate a massive increase in Italy’s foreign debt. He aspired not only to get the British and Americans to pay Italy’s war costs, but also to enmesh them in a commitment to Italy’s post-war recovery. The Americans responded to the crisis of Caporetto with an advance of $230 million.520
But Nitti’s initial efforts to control Italy’s foreign exchange were frustrated. The Finance Ministry lacked the manpower for the job and the Bank of Italy opposed the thinking behind the scheme. In January Nitti formed a national institution for exchange with the co-operation of the seven principal commercial banks. Only they were authorized to deal in foreign currency; all imports required a licence and all foreign-exchange earnings had to be passed over to the national institution for exchange. The institution began operations in March, but it lacked sufficient reserves, and contracts were therefore concluded in lire at rates below those fixed by the institution. Thus the depreciation of the lira was not halted.
Italy’s proposal to deal with the problem was an inter-allied exchange office. This might have commended itself to the American Treasury if the latter’s approach to allied financing had been similar to that of Britain. But it was not. The United States wanted Italy to redeem its debts first, and thus France— which, like Italy, stood to benefit from such an arrangement—withdrew its backing. Therefore, the pattern of bilateral agreements continued.521 The significant outcome was that the United States support
ed the lira on the foreign exchanges through the establishment of a joint committee of the Italian national institution for exchange and the Federal Reserve Board. In June 1918 the Americans undertook to finance Italy’s commercial deficit in the United States, and the Federal Reserve Board advanced $100 million for the support of the lira. The Americans correctly reckoned that with the end of the war emigrant remittances to Italy would recover and that as demand for America’s holdings of lire increased the exchange rate would go up.
The effect of the agreement was to exclude Britain from the routing of dollars to Italy. Britain’s first response was to refuse to co-operate in support of the lira. But as the gap between the value of the lira in New York and the value in London widened, Britain found itself being confronted with exclusion from Italian trade. This threat to the City of London’s international position compelled the modification reflected in the agreement of 27 July 1918.522 On 4 August France too came to the support of the lira. Compensation for existing debts was settled and Italian advances for French troops in Italy regulated. France opened a monthly credit of 25 million francs for Italian payments in France, secured on Italian treasury bonds.523 The lira recovered rapidly against the dollar in July and August, and more steadily against the pound and the franc.
The United States’s entry to the war may ultimately have ensured the Entente’s victory, particularly if in twentieth-century warfare such outcomes rest on economic resources. But to the allies in 1917 and 1918 there were times when dollars seemed as hard to come by as they had been before 1917. America’s decision to create a mass army, effectively from scratch, meant that its government wished to reserve a larger proportion of New York’s money market for its own use. British, French and Italian loans had to compete with American.
Thus, the last eighteen months of the war accelerated and deepened the need to expand the network of borrowing to other nations. Neutrals acquired gold and dollars as they exported commodities to the belligerent states; their holdings exceeded their domestic needs and threatened inflation. The logical step for the belligerents was to borrow from this neutral wealth in order to pay off their debt in the United States. McAdoo, however, insisted that Britain use the dollar proceeds to fund its current purchasing in America, and so ease the burden on the US Treasury. Bonar Law agreed to this in April 1918, provided the United States would replace the funds so raised if Britain was required to repay its American debt.524
Two factors dictated the geographical spread of this borrowing. The first was the need to focus purchasing in states that were geographically contiguous in order to economize on shipping; this pressure was, of course, particularly acute after Germany’s declaration of unrestricted U–boat warfare in 1917. The second was the necessity to acquire food, particularly meat and grain. The combined result was to concentrate the acquisition of credits in neutral Europe and in South America.
By 1915 France was already aware of its changing trading relationship with the neutral European powers. Its lack of shipping increased the need to import from Spain, Switzerland, and Scandinavia. But the effect was to upset the balance of trade and to depress the franc against other European currencies. By August 1915 the peseta had gained 11 per cent on the franc. In May 1916 France negotiated its first Spanish credit, for 200 million pesetas. The deal, which was secured on French holdings of Spanish shares, fell foul of Spanish nationalist efforts to repatriate foreign holdings and to prevent the export of capital. But its pattern was repeated elsewhere that summer. Between June and August banks in Switzerland, Sweden, Norway, Holland, and Denmark all opened credits for the French government. In the Dutch case, the advance, for 12 million florins to buy food, was secured against French shares with a margin of 30 per cent. But in the other instances the securities were principally French holdings of shares of the country in which the loan was contracted.525
The continuation of this policy, therefore, depended on France’s ability to command the foreign shares held by its citizens. The rejection of compulsory sequestration curtailed its development. After April 1917 Britain and the United States increasingly restricted their credit to sums sufficient to meet France’s expenses only in those two countries, but France’s efforts to extend its borrowing among the neutrals were hamstrung for lack of sufficient appropriate guarantees. Norway accepted French treasury bonds deposited in the Banque de France, and Swiss credits were secured on French railway stock. But in Spain France had to sell French holdings of Spanish shares and of Spain’s own overseas debt.526 France’s strength in international finance no longer rested on its pre-war position as an exporter of capital.
Instead, what gave France leverage in the money markets was its membership of the Entente. By 1917–18 the alliance constituted the most powerful economic bloc in the world’s commodity markets. Central allied ordering, beginning with the Allied Wheat Executive in 1916, and continued with McAdoo’s policies in 1917, created near-monopolies in the purchasing of major foodstuffs. The implementation of the blockade and the control of shipping (in itself another near-monopoly) conferred on the allies the power of coercion. Neutral producers of raw materials still needed markets, and access to those markets, for their goods. Thus neutral credits could be turned on through the tap of trade.
Franco-Spanish bilateral negotiations over finance foundered in 1917. The Spanish were sympathetic to the Germans and were opposed to exports; the French refused to requisition the Spanish shareholdings of their citizens. Since Spain did not need to import from France, France lacked the foothold to clinch a lasting agreement. But Spain did need coal from Britain and cotton and oil from the United States. Furthermore, its agricultural produce was more dependent on overseas markets than some chauvinists cared to admit. Therefore, it was on Spain’s initiative that a central bureau for allied purchases in the peninsula was created in December 1917. Spain was still not keen to advance credits to France. But the United States suspended exports to Spain and put an embargo on Spanish ships until it did so. In March 1918, a Spanish banking consortium advanced 350 million pesetas, at a rate of 4.5 per cent per annum, and secured in French treasury bonds. France was required to spend a proportion of the money on Spanish wine and fruit, but it also got metals and pyrites.527
The United States gave France comparable support in its negotiations with Switzerland. The Swiss too had an export problem: demand for Swiss luxuries, and particularly chocolate, had fallen. But France could not afford to make its acquisition of Swiss credits conditional on increased French consumption of Swiss chocolate. The Swiss needed American wheat, and this was channelled through France. In December 1917, in exchange for easing the blockade and for a limited French purchase of Swiss luxury goods, the Swiss government permitted the Swiss banks to open credits for the French government of up to 150 million francs.528
The fact that America itself was buying goods in Spain and Switzerland also in due course helped to stabilize the franc. The United States had turned its face against the export of gold and also found its dollar advances committed to Entente needs. Imports from neutral powers were therefore most easily paid for in the currencies of its associates, and especially in francs. But the effect was to depreciate the franc yet further, and so increase the dollar credits required by Paris. At first America’s solution was to buy pesetas and Swiss francs with dollars, but as the demand for pesetas increased it negotiated credits to buy pesetas from France and thus simultaneously supported the franc.529
The strength which America’s entry gave the Entente in its negotiations for European credits was made most manifest in its handling of Sweden in May 1918. The Swedes agreed to channel their purchases of food, and particularly of wheat, via the Entente. In exchange, the Entente bought timber and minerals from Sweden, and the Swedes provided a credit of 50 million crowns to facilitate this. Thus, Germany was elbowed out of the Baltic trade, and finance was fused with economic warfare.530
Wheat was the centrepiece of this strategy. By monopolizing its purchase, the belligerents coul
d control its price for themselves and secure neutral exchange through the surpluses they sold within Europe. Most of Europe’s major suppliers—the United States, Canada, Australia, and India—lay automatically within the Entente’s nexus. The principal exception—and, of course, an outstanding meat producer as well—was Argentina. In the first three months of 1917 France spent 860 million francs on Argentinian produce.
In July 1917 the Allied Wheat Executive proposed to buy the entire Argentinian harvest. On the face of it much conspired against Argentinian cooperation. The 1917 harvest was low and initially exports were banned. Argentina could best exploit its position as a food producer in an open market. But, like other South American countries before the war, Argentina had been heavily reliant on foreign capital. Hostilities had switched off the flow of overseas funds while boosting trade; the cost of servicing the foreign debt expressed as a percentage of the value of exports halved between 1913/14 and 1918/19. By the end of 1917 the consequent strength of the peso, although reducing the burden of foreign debt, threatened to be an embarrassment to Argentinian exports. What was therefore attractive about the allied desire was its potential to stabilize the exchange. But the United States blocked Britain and France from using either gold or dollars in the proposed purchase. The two European partners therefore wished to fund their acquisition through a credit of 200 million gold pesos raised in Argentina: the effect would be to settle the peso and facilitate exports. No doubt American inducements to facilitate Argentina’s imports of coal, or allied threats to block them, also prompted Argentina’s decision. In January 1918 Britain and France were accorded credits to buy 2.5 million tons of cereals at fixed prices.531