by Hew Strachan
The need to shorten shipping routes focused these credit negotiations on the western hemisphere. The extension of foreign borrowing to the Pacific basin was confined to powers that were themselves belligerent. Japan opened credits for Russia, France, and Britain in 1917, primarily to pay for munitions for the first-named. After Russia’s exit from the war, both France and Britain carried on with the combination of selling bonds and retiring existing loans. Japan raised a total of 860 million yen.532
For those historians who see London’s money market and its pre–1914 domination of world finance as evidence of ‘informal’ empire, neither Argentina nor Japan was as independent of Britain’s thrall as their political status nominally suggested. But the biggest burden on the pre-war exchequer was the defence of the ‘formal’ empire. After 1914 that relationship changed in military terms: imperial forces made significant contributions in all theatres of war. But Britain proved less successful in changing the arrangements for funding the empire’s war effort. The Dominions did not become, in net terms, creditors of Britain itself. Outstanding loans to the empire as a whole rose from £39.5 million in 1914/15 to £194.5 million in 1917/18.533 The debate in India was instructive. Formally speaking, India was precluded from paying for military operations carried on by Indian army troops beyond India’s frontiers. Its patriotic contribution was to accept the same financial responsibility for its forces as it would have incurred if the troops had remained on the subcontinent, a total of £26.4 million.534 Britain met the balance.
Given the demands of the war, the Treasury was anxious to restrict the use of British credits for the capital development of the empire during the course of the war itself. At a conference in March 1915 it stipulated that the Dominions should use the London money market to settle maturing obligations, to meet commitments under contracts placed before the war’s outbreak, and to pay for expenditure necessarily incurred in respect of works already in progress. But it was unsuccessful. In Australia the individual states increased their total debt from £387.6 million to £417.3 million during the course of the war, without making any direct contribution to the war’s costs. In 1917 London suggested Australia should shift its borrowing to New York, but the latter resisted on the grounds of imperial loyalty.535
Britain effectively funded a war-related boom in each of Canada, Australia; and New Zealand. Demands for commodities—wheat from Canada, meat and wool from the Antipodes—ensured that the current accounts of all three moved into surplus on the back of customs and excise receipts. Britain’s subsidy extended to the provision of a guaranteed market at prices in excess of those prevailing within the United Kingdom or within the Dominions’ domestic markets. Beginning in 1916/17, London bought the entire wool clip of Australia and New Zealand at a price 55 per cent higher than that pertaining before the war.536 The shipping shortage ensured that Australia and New Zealand revenues fell after 1917, but not to the point where their public accounts went into deficit. New Zealand had accumulated £11.5 million by the war’s end, but none of it was used to pay off the public debt, which had doubled from £92 million in 1914 to £201 million by March 1920. Instead, it was retained as a reserve fund and invested in British government securities.537 Canada, whose greater proximity to Britain meant that its boom coincided with the shipping shortage, and therefore began later and lasted longer than those of Australia and New Zealand, retired $113 million of its eventual public debt of $1,200 million by March 1918.538
The change that the war did accelerate was the domestication of this debt. Australia borrowed £43.4 million from Britain but £188 million through seven domestic war loans; New Zealand raised £26 million from Britain but £54 million internally; and $700 million of Canada’s debt of $1,200 million represented Canadian investment in Canadian war loans.539 To that extent, therefore, the Dominions were funding their own military costs. The success of war loans, however, also shows the growing wealth of the Dominions’ farmers and rentiers. Tax regimes were light, justified in the cases of Canada and Australia by the argument that the power of direct taxation lay with the individual provinces or states. Canada introduced a business profits tax in 1916, but reduced the liability of individuals for income tax, which was adopted in September 1917, in proportion. Australia was braver, embracing estate duty in 1914, income tax in 1915, and a war profits tax in 1917, with the result that by 1920 revenue had covered £71 million of the total £333.6 million which the war had cost. New Zealand increased taxes on land and income in 1915, and added an excess profits tax in 1916. It was abandoned in 1917, although higher incomes now became subject to tax rates of up to a third. By putting the weight less on tax than on war loans offered at very attractive rates of interest, the Dominions enabled those who had already profited from the war to do even better.540
Each of the Dominions made a significantly greater financial contribution to military expenditure than it had before 1914. But their own healthy balances of payments did not affect the imperial relationship as radically as they might have done: Britain still felt beholden to subsidize their efforts despite the self-sufficiency of their economies. India offered £100 million towards the cost of the war, £78 million of which was raised by the issue of a war loan within India and the balance by taking on the interest payments on an equivalent sum in British war loans. Such devices simply enabled Indian princes to widen their investment portfolios.541 Canada alone used its position on the Atlantic trade route and its adjacency to the United States to change the imperial relationship from that of debtor to creditor. In 1918/19 its debt to Britain stood at £72.4 million, but Britain’s to Canada at £135.4 million (£91.8 million of which was lent by the government, and the balance by bankers for the purchase of wheat and munitions).542 This was a process commenced in November 1915: ‘Canada the borrower’, McKenna then declared, ‘has become Canada the lender.’543
Entente yields from credit operations in neutral or non-North American markets were small. Of 43,585 million francs borrowed overseas by France between 1914 and 1919, 40,839 million were derived from Britain and America.544 Britain’s external debt at the end of the financial year 1918/19 stood at £1,364.8 million: of this £1,162.7 million was owed in the United States and Canada.545 But neutral credits were symbols—first, of the diversification of the international money market which the war set in train, and secondly—but paradoxically—of the increasing leverage which the Entente came to exercise within that market.
The fact that the United States did not opt to maximize its opportunities for full financial leadership in 1917–18 left the initiative with the allied purchasing agencies, themselves based in Europe and more the product of British shipping dominance and of the British-led blockade than of McAdoo’s policies in 1917. Thus, the picture remained more variegated than a crude shift in the balance of power from London to New York. Moreover, through the alliance machinery London was able to continue to exercise more influence than the real strength of sterling suggested was probable.
Part of this resilience was itself a product of Britain’s and France’s success in exporting their debt. Britain funded about 25 per cent of the gross increase in its national debt through foreign borrowing, and France 19 per cent of its total war costs.54 They thereby reduced domestic inflation in two ways. First, such debt did not enter their secondary reserves and so was not monetized. Secondly, they reduced the interest and maturity payments due on loans extracted from their own citizens. At the same time they pegged their exchange rates, and so made overseas purchases artificially cheap; this boosted the demand for imports, but once again exported and diffused excessive liquidity. These operations sustained their presence in the international market during the war, and so limited the consequences of its revitalization after the war. Germany was, therefore, doubly disadvantaged. During the war its debt was concentrated at home, with the attendant implications that followed from that. After the war the reopening of trade and the accessibility of foreign credit became key factors—in the view of some historians—i
n creating the excessive liquidity which spawned hyperinflation in the early 1920s.547
Foreign borrowing in wartime was by its nature short-term. In this it contrasted starkly with peacetime debt, which was intended to pay for capital investment and thus generate income for the borrower (as well as for the lender) over the long term. However, the choice in the war lay not between those two sorts of overseas credit, but between short-term and relatively unproductive foreign debt and the spending of domestic capital. All the Entente powers had in varying degrees to employ the latter as well as the former. The Central Powers had no choice. The Entente’s readier access to foreign credits is crucial to explaining the proposition that the war cost twice as much to win as to lose, $147,000 million as against $61,500 million.548 Those figures focus on direct fiscal input—taxation and borrowing; they leave disinvestment and potential investment foregone out of the account. Effectively denied access to overseas money markets, Germany and Austria-Hungary— having taxed their populations and having borrowed from them—could do no more than spend their accumulated assets. National wealth in Germany in 1913 totalled 350,000 million marks; 220,000 million was invested in buildings and land, which could not be realized; 50,000 million represented machinery and plant; 75,000 million was liquid. The latter having been spent, the residue of war expenditure was funded through disinvestment. This traded not only on the future, through a failure to reinvest, but also on the past, through the consumption of existing wealth. It was manifested in two ways, falling real incomes and declining output.549
The relative availability of foreign borrowing was not in itself decisive for the war’s outcome. Overseas credits, although possessed of signal fiscal benefits, remained means to an end—the procurement of materials with which to wage the war. Ultimately, the war was paid for not through money or credit but through the goods and services which they could command. The long-term significance of disinvestment lay in the houses that were not built and the plant for peacetime production that was not renewed. The short-term significance lay in defeat on the battlefield, the result of the Central Powers’ inability to match the Entente in a strategy determined by the application of superior resources.
The argument that finance played a role in the immediate outcome of the war commensurate with pre-war expectations has to proceed counterfactually. If the United States had not been propelled into the war by Germany’s decision to adopt unrestricted U–boat warfare, would it have left Britain, and with Britain the whole of the Entente, to confront its effective bankruptcy? The American ambassador in London, Walter H. Page, cabled the president on 5 March 1917 to point out the implications for the United States of not sustaining Franco-American and Anglo-American exchange.
The inevitable consequence will be that orders by all the Allied Governments will be reduced to the lowest possible amount and that trans-Atlantic trade will practically come to an end. The result of such a stoppage will be a panic in the United States. The world will therefore be divided into two hemispheres, one of them, our own, will have the gold and the commodities: the other, Great Britain and Europe, will need those commodities, but it will have no money with which to pay for them. Moreover, it will have practially no commodities of its own to exchange for them. The financial and commercial result will be almost as bad for the United States as for Europe.550
The financial collapse of the Entente would have triggered economic crisis in the United States. The corollary of continued American neutrality, therefore, might not have been a cessation of American credits and an end to American warlike supplies. American self-interest alone suggested that the reverse was more likely. Indeed, for all the long-term implications for sterling in such an outcome, it could be argued that in the short-term American neutrality might have proved as beneficial to the Entente as American belligerence. Its own military preparations would not have competed with the needs of the Entente in the American domestic money market and in the productive capacity of American industry, while at the same time the financial commitment to the Entente would have bound the United States to its survival and even victory, whatever America’s formal position in relation to hostilities.
The fact that the Balfour mission emphasized Britain’s financial peril in April 1917 as greater than the submarine threat551 reflected Britain’s sense of how America could best contribute to the war effort in the short term. The creation of a sizeable American army seemed two years distant; credits to procure munitions for the existing allied armies would have more immediate effect. But in venting such views Balfour revealed how powerful in British strategy pre-war fiscal orthodoxies remained. Indeed, they became stronger in 1917–18 as the Treasury, through its negotiations in the United States, reasserted its suzerainty not only over the spending departments of Britain but also over the extravagance of Britain’s allies. McKenna’s values may have been routed in a political sense with Lloyd George’s triumph in December 1916, but they remained enmeshed in the counsels of Keynes and others. Britain’s gloom about its financial position in 1918 was less a realistic response to the current position than a continuing coda on the prevalence of pre-war views on the limits of war finance.
11
INDUSTRIAL MOBILIZATION
SHELL SHORTAGE
On 24 September 1914 Joffre’s headquarters signalled to all army commanders: ‘rear now exhausted. If consumption continues at the same rate, impossible to continue fighting for lack of munitions within fifteen days.’1 Three days later each 75 mm field gun was limited to a supply of 300 rounds. For the batteries in static positions this allocation was to last until 26 October. By the end of the month the combined stocks of front and rear averaged 400 rounds per 75 mm, and the allowance issued to the armies was clipped to 200 rounds per gun. The balance was constituted as a reserve under the control of the commander-in-chief. Joffre used it to supplement the batteries on the French left, manoeuvring northwards towards Flanders. Attacks without clear objectives were proscribed; if the French army had ever been gripped by ‘the spirit of the offensive’, it was now formally renounced. Material considerations had triumphed over moral.2
France’s shell shortage was deeper, more dramatic and, above all, earlier than those of the armies of other powers. But the phenomenon was universal. The Germans became aware of the problem in September, and it deepened in October. Some batteries were limited to five rounds a day (or less than one round per gun). At the beginning of November the field guns of the German 4th army, fighting at Ypres, were cut to a daily allowance of half a train of shells (13,440) and the field howitzers to a third of a train (4,000). On 14 November Falkenhayn reckoned that there were enough shells for four more days’ fighting in Flanders.3 On the same day Alfred Knox, serving with the Russian 9th army in Poland, reported that, on the assumption that each gun would fire an average of fifty rounds per day, his corps had sufficient shells for seven more days.4 In fact the Russian allocation per gun was set at 300 rounds for the month.5 In the spring of 1915 Russian allowances were down to four rounds per gun per day,6 and in one case five rounds per battery.7 On some fronts and sectors the British were in as parlous a position. In February 1915 allowances of one round per gun per day were reported;8 at Gallipoli in May 1915 each howitzer was limited to two rounds and each field gun to four.9 The origins of Britain’s difficulties, like those of Germany, lay in the first battle of Ypres. On 29 October 1914 the field guns were restricted to firing nine shells for the day, and two days later Sir John French reckoned his stocks to be 837 rounds of all calibres.10
Even as the shell crisis bit, a palliative was at hand. The shorter days and limited visibility of Europe’s winter months curtailed the opportunities to fire. Throughout the war high shell consumption was seasonal. In 1915 Germany’s monthly expenditure of field gun ammunition was five times greater at its highest point (2.5 million shells) than its lowest (584,640).”11 If the war had broken out later in the year the shell crisis might have taken longer to develop and the available stocks come nearer to mee
ting the six-month expectations of the general staffs and the pace of conversion of civilian industry.
Longer days and better weather apart, the common precipitant of crisis was the first big battle of positional warfare. The French suffered soonest because of the battle of the Marne. Indeed their shell shortage is further indirect evidence that for most of the French armies, from Foch and the 9th army eastwards, the battle was not one of manoeuvre but of dogged resistance. For the French heavy artillery, because of the fighting around the fortified positions on the eastern frontier, the situation was already acute by 4 September, before the drama on the left around Paris had begun to unfold. For the 75 mm field guns the next five days were pivotal. Between mobilization and 5 September the reserves of 75 mm shells fell from 530,000 rounds to 465,000; by 10 September they had slumped to 33,000. In August the average consumption of 75 mm shells was 200 rounds per gun; in September it was more than double that.12
Shell shortage was not the result of pre-war neglect. In 1906 Messimy, then chairman of the commission on the French army’s budget, secured an agreement that the reserve of shells should be increased from 700 rounds per 75 mm gun to 1,200 by the end of 1912. When Joffre became chief of the general staff in 1911 Messimy’s target was close to realization: 940 shells per gun were assembled, and the components of 200 more were ready in case of mobilization. In the wake of Agadir, and with Messimy now minister, the target was again revised upwards, to 1,500 rounds per gun. When war broke out France had in hand 1,397 rounds for each 75 mm gun, 1,212 of them assembled and ready to fire.13
What Joffre did not know was how much would be enough. Partly this was a reflection of the French army’s reliance on the 75 mm. In theory it could dispatch fifteen shells a minute. Sustained combat at that rate would quickly outstrip both existing stocks and current productive capacity. The French lacked sufficient battlefield experience with quick-firing artillery to know what would happen in practice. However, they did realize that, with decisions on divisional heavy artillery still pending, they would be forced to use their field guns more frequently and across a wider spectrum of tactical roles than would the Germans. Therefore, the only obvious objective criterion was comparability with the Germans. But herein lay two difficulties. First, the Germans too lacked recent battlefield experience, and were therefore also groping in the dark as to the effects of quick-firing artillery. Secondly, French intelligence projected onto the Germans its own preoccupations, those of rapid mobilization and of the first clash of arms. The focus was on a standing start: what was at issue was the size of current German shell stocks. In this respect the information available to the French, while patchy, was reassuring.14
