Erik Sass is covering the events of the war exactly 100 years after they happened. This is the 252nd installment in the series.
October 4, 1916: Brits Fear Growing Dependence On U.S.
The unprecedented material demands of modern warfare, exemplified by the huge number of shells expended in the Allied offensive on the Somme (with British artillery firing 1.7 million in the opening bombardment alone) required the financial and industrial resources of whole empires to sustain – and even these proved insufficient. By the fall of 1916 Britain, France, and Russia found themselves relying more and more on the world’s biggest neutral nation, the United States, for loans as well as supplies of munitions, food, fuel, and other necessities.
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After initially steering clear of financial entanglements with the belligerents, starting in 1915 American banks – led by J.P. Morgan – opened lines of credit for the Allies, encouraged by a change of heart in the White House, as President Woodrow Wilson was angered by German intransigence over unrestricted submarine warfare. The Allies promptly turned around and spent the money on everything from explosives, oil and steel to wheat, beef and horses, fueling an economic boom across the U.S.
This one-sided arrangement, with American goods increasingly paid for by American loans, was obviously bad news for both Britain’s balance sheet and its balance of trade, but there was no alternative as long as the war continued. More alarming was the possibility that Britain’s own wartime policies might alienate the U.S., jeopardizing London’s ability to raise loans and make vital purchases across the Atlantic Ocean. Of particular concern were the British blockade of the Central Powers, which hurt some U.S. business interests (even as others prospered selling goods to the Allies); British censorship of mail and telegrams; and finally a “blacklist” of firms still doing business with German counterparts via other neutral countries.
Introduced in July 1916, the blacklist immediately became major point of contention with the U.S. business community, and therefore the U.S. government too. After diplomatic protests failed to obtain concessions from London, in early September the U.S. Congress passed a series of laws setting the stage for tit-for-tat measures including the bluntly named Retaliatory Revenue Act, threatening to ban British imports and detain British merchant ships in U.S. ports.
While these threats proved to be mostly bluster, they set alarm bells ringing in the British government, in part because they might prompt demands from British business interests for further restrictions on American commerce (in other words, retaliation for the retaliation) when a trade war was the last thing the Allies needed. Faced with this awkward and complicated situation, on October 4, 1916 the British cabinet convened the first meeting of a new advisory group, the “Interdepartmental Committee on the Dependence of the British Empire on the United States,” to assess the likely impacts of any escalation in the diplomatic and commercial dispute between the countries.
The committee’s conclusions, delivered on October 10, were painfully clear: further disturbance in the Anglo-American relationship could easily cause the British war effort to collapse, leaving the British virtually no leverage over their American cousin. As one member, Lord Eustace Percy, recorded in the minutes:
… it developed at once… that there was really nothing to deliberate dabout because our dependence was so vital and complete in every possible respect that it was folly even to consider reprisals. In munitions… all previous estimates of our being able to fill our own needs by a certain time have been entirely destroyed… In steel… we have been obliged to buy up the whole of the United States’ steel output; in foodstuffs and especially in wheat…, in all industrial raw materials and above all in cotton and lubricants American supplies are so necessary to us that reprisals, while they would produce tremendous distress in America, would also practically stop the war.
This judgment was based, among other things, on a quick analysis of British and Allied finances by the economist and Treasury official John Maynard Keynes, who noted that Britain alone had spent $1 billion in America from May to September 1916, of which two-fifths had come from American loans. The terms were only going to get more lopsided, Keynes added, predicting that from October 1916 to March 1917 Britain would have to spend another $1.5 billion on American goods, with five-sixths of this financed by American loans.
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In case anyone failed to understand the central role American production played in the British war effort, another response to the committee’s inquiry from the Board of Trade stated bluntly:
To sum up, it is quite evident that any failure to obtain imports from the United States would at once affect this country irremediably from the point of view of our food supplies, of military necessities, and of raw materials for industry. For numerous articles important from one or other of these points of view, America is an absolutely irreplaceable source of supply.
Not only was there currently no possibility of retribution in case of a trade war; to keep the munitions flowing from U.S. factories to British guns, Keynes warned that the scope of British borrowing in America would have to expand even further with bond offerings to regular American citizens. He added that this would require a careful public relations strategy:
Any feeling of irritation or lack of sympathy with this country or with its policy in the minds of the American public (and equally any lack of confidence in the military situation as interpreted by this public) would render it exceedingly difficult, if not impossible, to carry through financial operations on a scale adequate to our needs. The sums which this country will require to borrow in the U.S.A. in the next six or nine months are so enormous, amounting to several times the national debt of that country, that it will be necessary to appeal to every class and section of the investing public.
The unpleasant but unavoidable conclusion to be drawn from all this was that the United States, having surpassed Britain as an industrial power in the late 19th century, would soon surpass it as the world’s dominant financial power too, if it hadn’t done so already. Of course, this would bring with it any number of uncomfortable changes, as America’s growing financial power translated into enhanced diplomatic influence and a bigger say in international relations – including, presumably, the eventual peace settlement and shape of postwar Europe.
In that vein Reginald McKenna, the Chancellor of the Exchequer (comparable to a minister of finance) wrote in a memo to the cabinet on October 16: “If things go on as at present, I venture to say with certainty that by next June or earlier the President of the American Republic will be in a position, if he wishes, to dictate his own terms to us.” With a presidential election coming up in November 1916, and Democratic President Woodrow Wilson and his Republican opponent Charles Evan Hughes both emphasizing their commitment to American neutrality, there was plenty of reason for the British to be nervous about the outcome.
Indeed, not long after the election the British would get another scare: on November 26, 1916 the newly-formed Federal Reserve warned American bankers that loans to the Allies were increasingly risky in light of the continuing deadlock and the growing possibility of a Central Powers victory.
Fortunately for the Allies, they had some help from an unexpected quarter – Germany itself. While the British fretted about maintaining access to American loans and goods, America’s supplying munitions to the Allies convinced hardliners in Berlin that the United States was for all intents and purposes already at war with Germany, even if it was too cowardly and venal to actually engage in hostilities. In their view U.S. complaints about German U-boats sinking ships with American citizens on board was hypocritical and unreasonable, as a message sent by the U.S. ambassador to Berlin, James Gerard, to Secretary of State Robert Lansing on September 14, 1916, clearly conveyed:
In general conversation with [foreign minister] Von Jagow recently he said that the offensive in the Somme could not continue without the great supply of shells from America. He also said that recently a German submarine submerged in the Channel had to allow 41 ships to pass and that he was sure that each ship was full of ammunition and soldiers but probably had some American… also on board and therefore the submarine did not torpedo without warning. He seemed quite bitter.
Convinced that the U.S. wouldn’t fight, or would declare war in name only, the militarist faction led by chief of the general staff Paul von Hindenburg and Erich Ludendorff were pushing Kaiser Wilhelm II and Chancellor Bethmann Hollweg to take the gloves off and resume unrestricted U-boat warfare for the third time. It would prove to be a disastrous miscalculation.