by Hew Strachan
Britain’s final source of overseas gold was its Entente allies. By the end of the year Entente orders to the United States were stimulating a revival in American exports: in December sterling was already 1 cent below par on the New York exchange. In 1915 British imports from the United States would be 68 per cent higher than they had been in 1913. The fall in the pound was therefore a reflection of Britain’s need for foreign exchange to pay for American goods, and the weaker the pound the more expensive they would be. By June 1915 the pound stood at $4.7734.
London channelled orders to the United States not only on its own account but also on those of its allies. Its status as the world’s financial capital persisted despite the war. It did so, the Treasury argued, because it remained on the gold standard, and therefore its allies France and Russia, which had not, had an obligation to help keep it there. Crudely put, Britain required its co-belligerents to ship gold to London, overtly to pay for munitions in America, indirectly to keep the sterling-dollar exchange in equilibrium.
Initially the Russians proved more co-operative than the French. In October 1914 the Treasury agreed a loan of £20 million secured by the issue in London of Russian treasury bonds valued at £12 million and the shipment of £8 million in gold bullion. But when the Russians came back for a second loan in December, provisionally pitched at £100 million, they baulked at the Treasury’s insistence that they should support it with a further shipment of gold.35 Simultaneously the French began negotiations for a loan of £10 million. They had opened an account with the Bank of England at the beginning of the war to fund purchases which passed through London; by the end of the year £9.3 million had been paid out of this account, and expenditure was beginning to run away from income. The Bank of England demanded that the loan be secured with gold. The French refused.36
France had abandoned international convertibility precisely in order to buttress the franc domestically; the spectre of the assignat, which had promoted galloping inflation in the wars of the French Revolution, promoted conservatism in relation to gold in the war of 1914–18. By December 1915 the Banque de France had added a further 1,000 million francs to its gold reserves, thus prompting the British to see its governor, Georges Pallain, as obstinate and stupid. But Pallain also represented an alternative approach to war finance: by abandoning peacetime norms, France was confident of its ability to restore them once the war was over. In the interim finance would be the servant of war, not an objective in itself. France’s only concession was to agree to spend the loan exclusively in Britain.37
Keynes had little truck with the French or Russian attitudes. In a memorandum prepared for a meeting of the three powers’ financial ministers in February 1915, he came back to his arguments of August 1914. Gold was to be used, not hoarded. ‘They think that we want their gold for the same sort of reason that influences them in retaining it namely to strengthen the Bank of England’s position on paper. And our real reason, namely the possibility of our having actually to export their gold and so use it, they look on as little better than a pretext.’38 Increasingly the British aim was less the gold standard per se, and more a gold-exchange standard.39 The French were nonetheless right to observe the long-term intention, the maintenance of British international credit in the post-war world. Octave Homberg, advising the French government before the same conference, reported that the British aim was to increase their gold stock, and that they intended to remain the clearing house for the world, not just during the war but after it as well40.
The French saw a potential symmetry, rather than clash, of interests. The French had the gold, the British had the international credit. Therefore when the representatives of the three powers met in Paris on 2 February 1915, Alexandre Ribot, the French finance minister, proposed the issue of a joint allied loan of perhaps £800 million. The British opposed, arguing in part that the total sum would be so large that the issue would fail. Privately they felt that such an arrangement would suit the French and Russians, who would get the loan more cheaply than they would on their own, but that British credit would be undermined by its association with its allies. The outcome was that Britain and France supported Russia, the former to the tune of £25 million and the latter with 625 million francs. In exchange, Britain’s allies agreed that if the Bank of England’s reserves fell by more than £10 million in the next six months—in other words, below £80 million—the Banque de France and the Russian State Bank would each advance in equal proportions £6 million in gold, to be reimbursed within a year. The French reserved the right to use American dollars for this purpose41.
Mutual mistrust persisted. The Anglo-French exchange rate, although now approaching par, had been in France’s favour thus far in the war. Ribot was sure the Bank of England was withholding credit with the aim of getting the pound to rise against the franc, and so oblige France to consign gold to Britain.42 This would have happened anyway. In the first quarter of 1915 the French deficit in Anglo-French trade rose to 400 million francs per month, and Ribot reckoned he needed a credit of up to £12 million per month to cover French purchases in the United States and Britain. The French could not obtain credits in America. So, at the end of April Ribot asked Lloyd George for £62 million to cover French orders over the next six months. The French agreed that two-fifths of their American expenses payable in sterling would be backed by gold sent to the Bank of England.43
France remained a reluctant and obstructive disgorger of its gold. It stuck to the principle established in February, that it would not grant the gold but lend to the Bank of England in exchange for British credits to the French government. By the end of the war France’s gold reserves had nominally increased 56 per cent, but the reserves actually held in France had fallen by 2 per cent.44 The gold was effectively being used twice over, by the French to support their currency, and by the British to support their interpretation of the gold standard.
The Treasury did two things with the gold. First, it prepared the US stock market for eventual allied borrowing by flushing American business with cash and keeping American interest rates low. Secondly, and relatedly, it exported gold to hold the sterling-dollar exchange steady. The French pooh-poohed the first objective, recognizing that the scale of allied credit operations was likely to outstrip the ameliorative effects of comparatively small consignments of gold. By 1916 their expectations were proved well founded. But the export of gold did fulfil the Treasury’s second aim, albeit in desperate circumstances.
In November 1915, after the pound had fallen to $4.56, the chancellor of the exchequer appointed an exchange committee formed of representatives of the Treasury and the Bank of England. Using an account in New York in the name of the Bank of England, underwritten by the Treasury, the committee purchased sterling for dollars in order to peg the exchange rate. Between 1915/16 and 1918/19 this account disbursed $2,021 million on exchange, compared with $5,932 million on supplies.45 Furthermore, although the French never fought as hard to control their exchange rate, they derived benefit from the stability imparted to the sterling-dollar rate. If France had bought abroad without credit from Britain, French exchange on London would have been weakened, without any effects on the sterling-dollar or franc-dollar exchanges. The opportunity for profit through the sale of francs for dollars, dollars for pounds, and pounds for francs would have further depreciated the franc.46 By the end of March 1916 the franc, for which par was 25.22, stood at 28.50 to the pound. Negotiations initiated by the central banks of the two powers, designed to get credit for French companies to buoy French exchange, and to secure gold for Britain, concluded that Britain should provide a credit of £120 million, a third of which was to be secured in gold. Ribot wanted more; Reginald McKenna, Lloyd George’s successor in London, much less. He feared that fresh advances to France would hit the British exchange in the United States. The outcome of their meeting was that France received only £60 million, with a third still secured in gold. But, most importantly, the agreement was to be suspended if the pound fell below
27 francs. The effect, therefore, was not only to stabilize the sterling-franc exchange, but also to hitch France to the Anglo-American financial nexus.47
Overtly, the surprising aspect of this reconstruction of foreign exchanges was the co-operation of the United States. The European currencies did not depreciate against the dollar as fast as European wartime inflation exceeded American inflation. In other words, it was cheaper to buy goods in the United States than to produce them in Europe, because the European exchange rates were pegged at levels that overvalued the pound by 10 per cent (by 1918) and the franc by 35 per cent.48 The effect was to pass on the price inflation of the belligerents to the neutrals, and so distribute the war’s costs.
Voices in the United States objecting to the rise in domestic prices as a consequence of the belligerents’ demands made little headway, because by the time the effects were felt the United States was already too deeply implicated. Entente orders had pulled American industry out of recession, and what worried W. B. McAdoo, the US secretary of the Treasury, in August 1915 was that further depreciation of sterling would undermine Britain’s ability to pay for its purchases.49
McAdoo was not a financier but (in the words of a British Treasury report of June 1917) ‘a Wall Street failure with designs on the Presidency’.50 His political ambitions aside, his long-term objective was to use Europe’s indebtedness to the United States to enable the expansion of American business. Outwardly similar were the priorities of Benjamin Strong, governor of the Federal Reserve Bank in New York. Strong was anxious to use the opportunity which the war provided for the United States to prise from London’s grasp control of foreign (and especially American) debt, and to establish an acceptance market in dollars, not in sterling. But his policy for doing this was to keep ‘our rates as ... the lowest in the world, [and] as... the steadiest in the world, and make the New York market so attractive that the business will come willingly’51. America had only established a centralized banking structure, the Federal Reserve System, in December 1913, as a consequence of the 1907 crisis. Its purpose, and one which Britain strongly endorsed, was the creation of an agency which would avert or minimize future domestic panics by greater international financial integration. Its sympathies were Republican, and its determination was to establish an identity independent of the US Treasury. In the early part of 1916 Strong toured Europe in order to give the Federal Reserve System a clear profile overseas. His discussions in March with the governor of the Bank of England, Lord Cunliffe, resulted in a memorandum of agreement and Britain’s acceptance of the principle of Anglo-American financial equality. The declared aim was joint action to ensure stability in the post-war period; its necessary corollary during the war was America’s collusion in the maintenance of British (and French) exchange.
The crunch for America, whether it was to follow McAdoo or Strong, and indeed the crunch for Britain came after the United States’s entry to the war, in the summer of 1917. Britain was anxious that the United States should take over its role as Entente financier, but it did not want at the same time to forfeit its international position. McAdoo had to seek the approval of Congress for the legislation which would enable the American government to purchase Entente bonds. Some Congressmen disliked New York bankers as much as the British; furthermore, McAdoo needed Congress’s support if he was to advance his political career. He objected to Britain using funds derived from the United States to pay off debts incurred in New York and to sustain sterling on the foreign exchanges. He was prepared to see Britain sell its remaining gold and suspend convertibility. Forced to choose, Keynes was prepared to overturn his previous policy: £305 million in gold had been sent to the United States since the war began in order to peg the rate of exchange, and Keynes now advised that convertibility be suspended before the Bank of England’s gold was exhausted. Throughout June 1917 the crisis for Britain’s wartime finances deepened, and a suspension of convertibility seemed imminent. Then, on 3 July the US president, Woodrow Wilson, agreed to new American advances, not without conditions but accepting the principle of American support for sterling. Because the American loans were short term, the Treasury continued on a knife-edge for the rest of the war. But the cardinal point was that the United States did not take the opportunity to force Britain off the gold standard.52
Strong’s commitment to international financial stability did not, however, extend to a British approach to the hoarding of gold. By 1916 many American pundits, observing the neutrals’ accumulation of gold as a result of the belligerents’ adverse trade balances, favoured not the acquisition of gold but its repulsion. America could have allowed the free export of gold without undermining either the gold cover for its currency or the redeemability of credits based upon gold. However, Strong feared that after the war the gold acquired from Europe during it would be withdrawn, so causing the deflation of domestic credit. On 16 November 1914 the Federal Reserve act, by reducing the reserve requirements of the member banks, had created excess reserves of $465 million. Strong’s policy was to promote this trend through the issue of Federal Reserve notes and the withdrawal of gold from public use and from the member banks. He also opposed the Treasury’s accumulation of gold, as he felt the government could never redeem paper currency without deepening what would already be a crisis.53 In 1916 the system held 28 per cent of the nation’s gold. By the end of 1918 it controlled 74 per cent. Strong’s policy was therefore adopted—albeit not for his reasons. It followed from American belligerency. The export of gold was banned in September 1917, partly so that there was no danger of its falling into German hands, but principally so that it could be a basis for the government’s own domestic borrowings to fund its war effort.
This ambivalence about the desirability of gold was evident in the policies of other neutrals. Gold accumulation proved no longer to be a hedge against inflation. The use of gold as a basis for the money supply meant that the latter increased at a greater rate than the stock of purchasable commodities. Even in the United States, whose exports boomed, the growth of business between 1913 and 1918 was only 13 per cent as against a growth of actual money in circulation of 60 per cent and in bank deposits of 94 per cent.54
By 1916 the response of the Swiss and the Swedes was that they wanted no more of the belligerents’ gold. Switzerland, whose gold cover grew from 46.8 per cent in July 1914 to 61.4 in December 1916, reduced it to 41.5 in October 1918. The note issue and the gold supply roughly doubled during the war. Sweden, which enjoyed a gold cover of 45.4 per cent in July 1914, managed to reduce it to 38.2 in April 1918, but still saw its holdings of gold more than double and its note issue triple. The experience of neutrals that were not so firm showed their gold cover increasing to 74 per cent (from 28.1) in the case of Spain and 74.9 (from 38.9) in that of the Netherlands. Both powers, while seeing their gold reserves increase by over 350 per cent, managed to restrict the increase of their note issue—Spain’s grew by a third, Holland’s by a half.55
The neutrals’ implicit rejection of the gold standard did place the whole intellectual edifice in jeopardy at the end of 1916. Exchange rates, having been remarkably stable for most of that year, began to wobble as the Entente’s trade imbalances with the United States multiplied. American entry to the war was therefore vital for the resilience of the idea of the gold standard. As the erstwhile leading neutral, it set a trend in favour of gold rather than of its rejection. Its own purchases in neutral countries and its embargo on gold exports drove up neutral exchanges; to stop lesser powers from hiving off, the United States (and the other Entente allies using American banking) demanded that the neutrals accord them credits.56 And it was prepared to support the pivot of British policy, the maintenance of the sterling-dollar exchange. Therefore, while Britain acted as the mainstay of convertibility, America vindicated its judgement.
In the sense of an overarching international financial system, the gold standard did collapse in 1914 into a series of lesser financial units. But the importance of the Anglo-American nexus, an
d its commitment to a gold exchange system, meant that the basis for the revival of the pre-war gold standard seemed to survive. Pars on the foreign exchanges remained those set before the war, and at the armistice many responded to the expectation that that was the level to which they would return, whatever the financial predicaments of individual countries. The wartime practice changed in order to preserve the peacetime theory; countries went ‘off’ gold in 1914 precisely in order to be able to go ‘on’ it again when normality returned.
FINANCIAL MOBILIZATION
In Berlin on 2 August 1914 Hans Peter Hanssen, a Reichstag deputy, offered a waiter a 100-mark note. It was refused: the waiter complained that all his customers were proffering large bills and he was running out of change. The following day Hanssen tried to pay for a meal with a 20-mark note. On this occasion the waiter grumbled, saying he would prefer silver, and went away to get change. Fifteen minutes later he returned empty-handed. Hanssen’s solution was to ask for an extension of credit57.
In August 1914 such trials were not confined to Reichstag deputies in Berlin; they were commonplace throughout Europe. Only in Britain had cheques begun to replace cash in private transactions (it required the war to popularize them in France and Germany). Two pressures produced a shortage of cash. The first of these was hoarding by private citizens. As in Britain, it was more often the banks or their governments which—by a sudden rise in interest rates or by the threat of a moratorium—created the panic. Thus, a run on the banks was as likely to be a pre-emptive response to pressure not to withdraw money as a considered initiative in the face of international crisis. The second constraint, however, was real enough. As the armies of Europe mobilized, their need for ready money to buy horses and to secure fodder and provisions sapped the liquidity of the states they were defending.
