What is loans to belligerents

Some of our clients have been asked to take short time Treasury warrants of the French Government in payment for goods and have, in turn, asked us if we could discount them or purchase warrants direct from the French Government for the purpose of replenishing their cash balances.

We have also been asked by European interests practically the same question as to English Consols and Treasury securities. Some of our German correspondents have approached us with the suggestion that, without naming a particular security, we sell securities to increase their cash account with us, and we have little doubt this is indirectly for the purposes of the German Government. We strongly feel the necessity of aiding the situation by temporary credits of this sort, otherwise the buying power of these foreign purchasers will dry up and the business will go to Australia, Canada, Argentine and elsewhere.

It may in the end come back to us, but the critical time for American finance in our International relations is during the next three or four months and, if we allow these purchases to go elsewhere, we will have neglected our foreign trade at the time of our greatest need and greatest opportunity. It is the desire of the National City Bank to be absolutely in accord with the policies of our own Government, both in its legal position and in the spirit of its operations and, while very anxious to stimulate our foreign trade, we do not wish to, in any respect, act otherwise than in complete accord with the policy of our government.

For the purpose of enabling them to make cash payments for American goods, the Bank is disposed to grant short time banking credits to European governments, both belligerent and neutral, and where necessary or desirable replenish their cash balances on this side by the purchase of short time Treasury warrants. Such purchases would necessarily be limited to the legal capacity of the bank and, as these warrants are bearer warrants without interest, they could not and would not be made the subject of a public issue.

These securities could be sold abroad or be readily available as collateral in our foreign loans and would be paid at maturity in dollars or equivalent in foreign exchange. This business which I have attempted to describe to you, we deem necessary to the general good and we desire to proceed along the lines indicated unless it is objectionable from the Government's standpoint in which case we assume that you will advise us.

Doubtless Secretary McAdoo has discussed with you the necessity of floating government loans for the belligerent nations, which are purchasing such great quantities of goods in this country, in order to avoid a serious financial situation which will not only affect them but this country as well. Briefly, the situation, as I understand it, is this: Since December 1st, , to June 30, , our exports have exceeded our imports by nearly a billion dollars, and it is estimated that the excess will be from July 1st to December 1, , a billion and three quarters.

Thus for the year the excess will be approximately two and [a] half billions of dollars. It is estimated that the European banks have about three and [a] half billions of dollars in gold in their vaults. To withdraw any considerable amount would disastrously affect the credit of the European nations, and the consequence would be a general state of bankruptcy.

If the European countries cannot find means to pay for the excess of goods sold to them over those purchased from them, they will have to stop buying and our present export trade will shrink proportionately. The result would be restriction of outputs, industrial depression, idle capital and idle labor, numerous failures, financial demoralization, and general unrest and suffering among the laboring classes.

Probably a billion and three quarters of the excess of European purchases can be taken care of by the sale of American securities held in Europe and by the transfer of trade balances of oriental countries, but that will leave three quarters of a billion to be met in some other way.

Furthermore even if that is arranged, we will have to face a more serious situation in January, , as the American securities held abroad will have been exhausted. I believe that Secretary McAdoo is convinced and I agree with him that there is only one means of avoiding this situation which would so seriously affect economic conditions in the country, and that is the flotation of large bond issues by the belligerent governments.

Our financial institutions have the money to loan and wish to do so. On account of the great balance of trade in our favor the proceeds of these loans would be expended here.

The result would be a maintenance of the credit of the borrowing nations based on their gold reserve, a continuance of our commerce at its present volume and industrial activity with the consequent employment of capital and labor and national prosperity. The difficulty is -- and this is what Secretary McAdoo came to see me about -- that the Government early in the war announced that it considered "war loans" to be contrary to "the true spirit of neutrality.

The language is as follows: "In the judgment of this Government loans by American bankers to any foreign nation at war is inconsistent with the true spirit of neutrality. In October, , after a conference with you, I gave my "impressions" to certain New York bankers in reference to "credit loans," but the general statement remained unaffected In drafting the letter of January 20, , to Senator Stone I sought to leave out a broad statement and to explain merely the reasons for distinguishing between "general loans and credit loans.

Bryan thought it well to repeat the August declaration and it appears in the first sentence of division 13 of the letter, a copy of which I enclose. On March 31, , another press statement was given out from the Department which read as follows: " The State Department has from time to time received information directly or indirectly to the effect that belligerent nations had arranged with Banks in the United States for credits in various sums.

Britain and the United States , determined to uphold the exchange rate between the pound sterling and the dollar in the interest of easy borrowing, picked the former option.

France , Russia , Germany , and Austria-Hungary chose to abandon the gold standard, either to obtain the flexibility to fight the war more effectively or because they were economically too weak to mobilize militarily while remaining on gold.

London was the linchpin of the global financial system. The architecture of the gold standard and the reach of British imperial power were important prerequisites for this.

But it was the scale, power, and international reach of its private financial sector that made London preeminent. The City of London possessed a global empire of its own, with a geography even more diverse than the Commonwealth.

They were involved in all the most daring and profitable investment ventures worldwide. It rested on a formidable commercial and industrial base and was boosted by British direct or indirect control over the physical infrastructure of world trade.

The hierarchical division of labor found in the City of London was the most developed financial system in the world, but the pattern was replicated at a smaller scale in national financial sectors across Europe. Generally, a few specialized and extremely international investment banks would operate at the apex of the financial hierarchy, below which a core group of large joint-stock or universal banks combined capital and money market functions; these market-makers, who brought together suppliers and buyers of credit, would in turn be connected to a larger nation-wide network of regional savings banks and trusts, and would also draw on the services of a diverse array of moneylenders, stockbrokers, discount and acceptance houses, and insurers.

In the United States, the financial system was similarly vast and regionalized. Within national war efforts, one can distinguish between the fiscal, debt-related, and monetary aspects of war finance. Taxation was the most direct and traditional way to pay for increased expenditures on war.

However, it played a subordinate role for almost every country involved. Taxes paid for at most a quarter of the actual expenses of fighting in Britain and the United States. In Germany and Italy between 6 and 15 percent of war spending in real terms was financed from taxes.

Its served to control inflation and to uphold the creditworthiness of governments in the eyes of their creditors. By removing excess money supply from the civilian economy, taxation would reduce the strong upward pressure on prices caused by increased spending and money issuance.

In addition, new taxes created new income streams for the government that would reassure lenders that a cash flow would be available to service the financial assets that they acquired by lending to the sovereign. Borrowing was therefore the main method of financing the war. There are two dimensions of borrowing that are important to understanding the dynamics of war finance in the First World War.

The first is the temporal dimension that distinguishes short-term and long-term government borrowing. War loans were large credits to the government to which private individuals and entities could subscribe by putting in their own money. In the hope that they would mobilize large sums of money from the public, governments publicized the war loans as patriotic contributions to the war effort—a financial substitute for serving in the field. War loans were the most high-profile form of government borrowing, but they usually contributed to the war effort only temporarily and their issuance was often timed to coincide with battlefield successes or the anticipation of military victories, all to solicit maximum subscriptions from citizens.

Long-term debt was more secure because it could be repaid after the war and—if raised through war loans—rested on a fundamental, if contested, social compact between the government and its citizens. Short-term debt was easier to mobilize, but its liquidity also meant that its price was more volatile and that it would circulate as a means of payment.

These instruments were also often used as collateral for further borrowing and money creation. Short-term borrowing thus tended to spur large credit expansion and inflation, both of which would eventually become sources of serious economic instability if they were left unaddressed.

In addition, short-term debt was generally not spent on constructive investments that increased production; and it was overwhelmingly provided by the financial sector, which meant that popular influence over public finance and government policy, insofar as it existed, was further reduced.

The second dimension of borrowing that mattered was whether credit came from domestic individuals and businesses or from lenders abroad. Unlike the large volumes of international borrowing before the war—most of which was long-term capital invested in railways, canals, factories, and other real assets—external borrowing in wartime was almost always short-term and meant to cover ongoing expenditures.

Most belligerents used a combination of these three methods. The composition of the war financing mix depended on the domestic distribution of political and economic power as well as strategic capabilities and considerations. Most financial mobilization plans were premised on the strategic scenario of a few months of conflict—at most a year. There was a discrepancy between expectations of a short war and the realities of long-term war finance, however.

The Franco-Russian alliance, which in terms of fighting power was the military core of the Entente, was particularly hamstrung by a short strategic horizon.

They were right to assume that states rarely stop fighting because of insufficient funds. Britain entered the war intending to maintain a more normal civil society and economic freedom; this included relative freedom for business and no conscription unless necessary. The orthodox economic view was therefore that war was like any other expenditure—without the money to pay for it, it could not be done.

Britain had traditionally funded its wars one third by tax increases and two thirds by borrowing. The UK benefited enormously from the pre-war reform of its fiscal system, which had introduced a permanent income tax and an efficient collection apparatus. Yet as we shall see, Britain also needed this margin of financial strength, since it would be forced to assume growing responsibilities for the conduct of a global war as chief conductor of the Entente until , and thereafter as partner to Washington.

Germany pursued an idiosyncratic approach to war finance due to political constraints. The German economy was fast-growing and wealthy, but the Reich lacked a federal fiscal structure capable of levying direct taxes to fund its war expenditures.

Berlin remained dependent on the individual German states for most of its revenues other than customs duties and a one-off wealth tax passed in The establishment of a localized system of regional loan banks Darlehenskassen overcame the fiscal weakness of the Reich by enabling enormous decentralized liquidity creation and monetizing of the government debt. These Darlehenskassen were local institutions created to surmount the liquidity shortage of the initial mobilization process.

They were maintained thereafter, taking in short-term deposits of between three and six months and making short-term loans. Unable to fund rising expenditures through long-term debt taken out by the imperial government , the governments of German states and communes borrowed heavily from the Darlehenskassen.

By , three quarters of their 7. By the end of the war this enormous uncontrolled surge in liquidity had created the preconditions for later hyperinflation, although increased hoarding kept a lid on runaway prices for the time being. The ability of the Central Powers to act as a global financial player was much constrained by the Allied blockade. The loss of export earnings and shipping income caused by the blockade was reinforced by the ejection of German and Austro-Hungarian firms and businesses from the London and Paris markets and the confiscation of private and business assets through British, French, and Russian legislation that prohibited trading with the enemy.

Expropriation at the hands of its opponents was much more painful for Germany than the Entente. At least half of the billion marks worth of foreign investment that the Reich held around the world in was in enemy territories, whereas just percent of the French and a mere 1.

On Wall Street, US banks were not enthusiastic to lend to Germany, partly because of inherent pro-Entente sympathies, partly because of discouragement from the Wilson Administration.

City bankers assisted the British Ministry of Blockade in identifying suspicious international transactions that might hide German attempts to sell foreign assets or repatriate overseas profits via countries like Spain , Norway , or the Netherlands. Threats to blacklist banks and firms transacting with Germany were effective in closing off Wall Street as a source of funds for the Reich by the end of the year.

In this sense, German external war finance was more directly subordinated to war production. Despite the strictures imposed on its global position by its enemies, the Reich found itself in the position of a dominant partner among the four Central Powers. At the start of the war, three quarters of public debt was held domestically, but over the course of the war Germany became more and more crucial to the creditworthiness and external funding of Vienna and Budapest.

German banks enabled the Austro-Hungarian army to stay in the field. By early , Germany owned 71 percent of the external Austro-Hungarian debt. During the war, however, Constantinople managed its financial relations with Germany cleverly by exploiting its position as an essential partner. In return for deploying their armies against the British Empire in the Middle East and Russia in the Caucasus, the Turks received gold shipments and mark loans, rather than exporting gold to Berlin as the Austro-Hungarians did.

In a roundabout way, Austria-Hungary was therefore supplying the Ottomans with gold. Ottoman foreign debt rose from million Turkish pounds in to million Turkish pounds by Due to price inflation, the real value of the debt was relatively low, and because only one war loan was launched, Ottoman society remained remarkably untouched in fiscal terms. As a relatively undeveloped country in the early 20 th century, Bulgaria had to be willing to accept credits from whomever would offer them on good terms.

Great Power interest in the Balkans endowed the Bulgarians with the occasional ability to negotiate more favorable terms. However, after its defeat in the Second Balkan War , the country was left with a large debt burden which it owed to French, Russian, and Austro-Hungarian banks and desired to consolidate on a more secure footing. Attempts by the French to woo Bulgaria into joining the Entente by promising to buy its entire harvest were tempting but insufficient, and in September Sofia joined the Central Powers—a decision immediately rewarded with a monthly revolving credit from Disconto backed by the Reich.

The Entente achieved much better coordination in its international financial assistance than the Central Powers. In the first year of the war, the Franco-Russian military alliance bore the brunt of the fighting while Britain arranged the logistics and the money. As the war entered its second year, London increased its direct military participation and became increasingly reliant on Wall Street as an ultimate backstop.

As the alliance expanded, its financial center of gravity moved westward. The telegram proposed that Mexico ally with Germany in the event that the United States entered the war against Germany.

In return, Germany promised to help Mexico recover the territory it had lost to the U. The Zimmerman Note and German attacks on three U. Wilson decided to enter the war so that he could help design the peace settlement. Wilson viewed the war as an opportunity to destroy German militarism. Only 6 Senators and 50 Representatives voted against the war declaration.