In a previous video, we went over the various reasons why the United States entered WWI.
Yet for perhaps the most key reason of all, we barely scratched the surface:
the influence of the all mighty dollar. In 1934, the US Senate formed a committee to investigate
the financial and banking interests that underlay the United States’ involvement in WWI,
which begets the question: how large a role did finance play in the events,
players, and overall outcome of the Great War? Join us as we explore why it was money that
led the US in 1918 to cross the Atlantic and dive into the trenches of Europe.
If things had been a little different,
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The global financial system of the early 20th century
was based on the gold standard, a hybrid public-private system,
and by the end of 1913, had reached its very peak . But, when WWI broke out, most of the belligerent
nations suspended their ties to the gold standard so they could print enough money to pay for their
military involvement . In general, a country had various methods to finance their wars,
the most traditional one being taxation . Yet for Europes’ great powers, borrowing money, whether
it be domestic or foreign institutions, would be the main method of financing the war effort.
The Franco-Russian alliance was the military core of the Entente
and both nations came into WWI with the largest gold reserves in Europe , but despite this,
both nations were cash-strapped and as a result, could only maintain the war effort
through severe state intervention . Let us examine the financial state of both nations,
beginning with France. Just before the war, French debt constituted more than 70 percent of its GDP,
one of the highest burdens amongst all the belligerents. To compound matters, the nation
had only introduced income tax in 1914, and when Germany invaded, it captured 40% of French heavy
industry . France also had a lot of long-term capital investments in Central and Eastern Europe,
but they could not be liquidated quickly. All of this resulted in France having to borrow around
84% of its wartime expenditure . Consequently, France became a debtor to the US and UK.
Inversely, however, it became a creditor to Russia, Belgium, Greece and Serbia.
We now move on to Russia, whose economy was very backwards compared to the other belligerents.
It suffered from poor administration, inadequate war materials and inefficient production. However,
the massive nation was the key to tying down Germany, and as such, France had invested
heavily in it since the 1880s . Russia required enormous amounts of credit to mobilize and sustain
it’s war against the Central powers, causing its lackluster economic development to significantly
cost the Entente lenders as the war went on. Over the course of the war Russia would come
to owe Britain 5.1 billion rubles, France 1.34 billion, and the US and Italy another 2 billion .
Of all the belligerent nations, Britain had the most favorable geopolitical standing at
the offset of WWI as it was an island nation and not under direct threat of invasion.
As such, the United Kingdom entered the frontlines on the continent
while intending to maintain a normal civil society with relative economic freedoms back home .
Across the Atlantic, America had underwent a recession in 1913 , but with the outbreak of
the war, it’s munition plants began to fill with orders for war materials , principally
shipped to Great Britain. As a result, an economic recovery proceeded. American production went up
32% by 1917, coinciding with a 20% uptick in its gross national production . One of the hardest
hit industries by the 1913 recession was the American steel industry, but because of the war,
demand for U.S. metal skyrocketed . The naval blockade however meant all of these goods were
going to the Entente Powers. Unlike Britain or Germany, the United States did not have government
run central banks. In response, congress enacted the Federal Reserve Act of 1913 creating the
Federal Reserve Bank. This new system was intended to remedy the defect of a lack of a central bank,
but would not be operational until 1915 . While the majority of the belligerent nations
suspended the gold standard during WWI, they all assumed it would be reinstated after the war and
thus sought to maintain their gold reserves. Both France and Russia had reserves dwarfing Britains,
but were nevertheless cash strapped and required British goods to keep them in the war. Thus,
before long, Britain began demanding shipments of gold from its allies in order to give them credit.
The French and Russians strongly resisted this, both suspecting Britain was engaging in a ploy
to hold a financial hegemony after the war. Ultimately, this led to financial stagnation .
It was apparent from the offset of the war Britain could not supply its allies alone leading the
Entente to look towards America. They all required US goods and loans to keep them in the war, but
Britain feared the US would use the situation to displace it as the leading global financial power.
Britain's goal was to preserve its hegemony over the world's finances, maintain the gold
standard while simultaneously receiving the much needed goods and loans from the United States.
On the other hand, France and Russia, whose territories were facing direct invasion, did
not have the same luxuries Britain did to worry as much about their postwar economic situation.
The Entente powers economic decisions were based on the idea that WWI was going to be a
“short war”. Between 1914-1915 Britain attempted to restrict France from entering its markets
unless they shipped gold. This pushed France to seek short term loans from the US.
The short-war assumption died a lingering death as the Entente militaries continuously
forecast that the next offensive or set of offensives would end the war .
By 1915 the Entente powers realized it was going to be a long war, resulting in a growing French
trade with Britain, and a British and French trade deficit with the United States. In 1915 Edwin
Montagu argued the war had become one of endurance and that finance was ultimately playing a larger
role in its outcome than military machinations. This was true in several ways, for one, Britain
could not continue expanding its army while financing its allies simultaneously. Furthermore,
men were required for the labor to generate the dollars to pay for the American goods. Overall,
not only Britain, but also France and Russia were facing financial collapse and likely surrender.
While the Entente powers struggled economically, the American economy had just come out of a
recession, and while President Wilson sought to remain neutral, he could not afford to alienate
the European belligerents whose wartime trade was generating his nation’s economic recovery.
While political and financial interests had been united in opposing war loans in August, by October
1914–1915 the situation had changed. American exports were growing, the exchange rate had
stabilized, and the threat now was that a ban on foreign credit might shut off the export-led boom.
It is here that John Pierpont “Jack” Morgan Jr and the J.P Morgan & Co enters the story.
In November of 1914, Henry P. Davison began talks with British officials proposing an
“Entente loan.” At the onset of the war, the federal reserve system was not yet functioning,
thus dealings with the US were done through countless small banks. This led to uncoordinated
purchasing amongst the Entente powers and inflated prices because of competition,
thus the British sought a single agent purchaser. As a result, Cecil Spring Rice began to secure the
most influential American financier, Morgan, who also happened to be his personal friend.
Britain tasked Rice with finding a way to end American neutrality and bring her to the
Entente side, and was aided by the likes of multiple Atlanticist American friends
who all put pressure on President Woodrow Wilson to abandon neutrality. Rice needed to ensure the
continuous supply of American goods and further tying America’s finances to the allied cause
and made sure J.P Morgan & Co received generous commission to keep it so .
This led to the appointment of J.P. Morgan & Co as the British government purchasing agent
on January 15th of 1915 . By early 1915, the French trade deficit with Britain had grown
enormous . The loss of France’s industrial regions to German occupation meant that she had to rely
upon Britain for many crucial products. To stymie this dependence, France began trying to pave a way
for American loans, but this yielded little progress. Thus, France began negotiations with
J.P Morgan & Co, but at the time this happened, American investors were not enthusiastic about the
chances of an Entente victory. General Joffre’s offensive in Artois and Champagne had failed to
dislodge the Germans and the British offensive at Neuve Chapelle in March had met a similar fate.
On the Eastern Front, the Russian success in repulsing the Austrians in Galicia
only partially offset the German victory in the battle of the Second Masurian Lakes.
France desperately needed to bind J.P Morgan & Co firmly to the French cause,
as it was the dominant financial power in Wall Street. To that end, easing French credit
shortages in the United States was imperative, thus Alexandre Ribot approached Morgan,
asking if he would be willing to become the purchasing agent between France and the US. Russia
by proxy also picked Morgan as the intermediary for its borrowings on the American market.
Through these events, the House of Morgan thus became the credit-broker to the entire Entente .
In February of 1915, the first joint financial conference of WWI was held between France,
Russia and Britain. They agreed to cooperate financially and to dispatch an Anglo-French
loan mission to the US headed by Reading and a syndicate of American bankers led by J.P
Morgan & Co. The Americans were not confident in the Entente success as the German summer offensive
on the eastern front had expelled the Russians from Warsaw, Brest-Litovsk, Grodno before Vilna
fell on September 19th of 1915. Likewise on the western front, the outcome of the Second Battle
of Champagne did not reassure the Americans. The Entente delegation asked for a loan of 1 billion
but it was deemed impossible. Over the course of a few weeks the commission had meetings with over
100 prominent American bankers and financiers. By September the 28th, the syndicate announced
they would loan 500 million, at that point the largest single loan in financial history.
After the loan, French and British purchasing agents in the US became increasingly influential.
Munition exports exploded and J.P Morgan & Co financed an enormous propaganda machine
using 12 influential publishers and over 197 newspapers to persuade the American
public towards the Entente cause. Between 1916-1917 various devices were employed,
including offering guaranteed British government loans. Several smaller Entente powers would also
receive credits from Britain and France, but the money was ultimately coming from the US.
To sustain auxiliary campaigns against the Central powers the Entente loaned money to Portugal in
March of 1916 when it entered the war. Greece took loans from both the Entente and Central powers
before siding with the Entente in June of 1917 . Loans were also made to Belgium and Serbia which
were overrun and occupied by the central Powers and thus the Entente had the financial burden
of maintaining their governments-in-exile. The US government was not too pleased by the proceedings.
By late 1916, a plan was championed by J.P Morgan & Co to issue short-term treasury bills in the US,
but it was rebuffed by the Federal Reserve Board at the command of President Wilson.
Wilson hoped by doing so he could force the Entente to
head his personal mediation proposal to end the war, but his gambit failed.
Besides loans another source of money for the Entente was the purchase and sale of American
stock which the Entente powers could surrender in turn to buy more munitions from the US.
It is estimated that in the course of the war some 2 billion dollars passed through
J.P Morgan & Co hands and the commission on such ventures were very profitable.
Yet by 1917 the Entente were running out of credit and had little more to offer than IOU’s.
Between 1914-1917, 21 U-boats between had sunk 5700 surface ships, while 300,000 tons of shipping
was sinking every week, and 1 out 4 steamers leaving Britain never returned home. As Arthur
Balfour wrote: "At that time, it certainly looked as though we were going to lose the war". In mid
April of 1917, Walter Page told President Wilson that Britain only had enough food to feed its
population for 6 more weeks. J.P Morgan & Co could not find any new buyers for Entente war bonds,
nor fresh funding to replenish old bonds which were coming due and facing default. If bond sales
came to halt, there would be no more money for the Entente to purchase war materials. America’s
export industry was in full swing and would come to an abrupt halt if the Entente surrendered with
a ton of commissions lost at both ends. If Britain and France were forced to surrender, all the sold
bonds would go into default and the investors would sustain catastrophic losses. On March 15th,
1917 Ambassador Page sent a telegram to the US stating the new capital had all dried up,
the only way to keep the war going was to make direct grants from the US Treasury, but this
would violate neutrality treaties. The US would have to abandon its neutrality and enter the war .
Colonel Edward Mandell House was a personal advisor to President Wilson , later to FDR
and a close contact of Morgan and adamant supporter of Britain . House began a series
of secret talks with Sir William Wiseman who was working for the Secret Intelligence Service . It
is alleged that these talks were dealings on the means whereby the US could be brought into
the war. George Sylvester Viereck alleges 10 months before the 1916 election, Colonel House
negotiated a secret agreement between President Wilson and the Entente which pledged the US would
intervene on their side. The supposed plan was to submit a peaceful settlement for the war,
but for the terms to be carefully drafted in such a way that it was impossible for Germany
to accept them. If either side refused to accept the proposal, the US would enter into the war
on the side that accepted. Despite all the secret talks and agreements, the issue of the American
public still loomed. Luckily for Wilson, by 1917 multiple events had occurred that had swung the
public consensus towards the Entente cause and war was declared against Germany on April 2, 1917.
In 1934 US Senator Gerald Nye headed the Nye Committee to investigate the financial and
banking interests that underlay the United States’ involvement in WWI. The Nye Committee conducted 93
hearings and questioned more than 200 witnesses, including J.P Morgan based on 4 topics . Their
findings indicated the bankers had pressured President Wilson to intervene in the war in order
to protect their loans to the Entente powers and that the arms industry was significantly
influencing US foreign policy during the lead up to US entry into the war. The committee reported
that between 1915-1917 the US lent Germany 27 million while it lent the Entente powers
2.3 billion and that the US banks and investors had a significant amount to lose if the Entente
surrendered. The investigation came to an abrupt halt in early 1936 when the US Senate cut off the
committee’s funding due to Nye attacking the late democratic president Woodrow Wilson. Nye suggested
Wilson had withheld essential information from Congress as it considered a declaration of war.
Gerald P. Nye “When the Senate investigation is over, we shall see that war and preparation for
war is not a matter of national honor and national defense, but a matter of profit for the few.”
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