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this same financial year about $35,000,000 in new construc-
tion, France about $46,000,000, Russia, $50,000,000. The
total estimates in Italy and Japan were about $50,000,000
each.

And what were these armaments to do? Great Britain
had, sometime before the war, by arrangement with France,



The Naval Forces of the Belligerents 387

largely withdrawn from the Mediterranean and had con-
centrated her fleet at home. There were in the North Sea
and the English Channel, 43 battleships and 25 battle and
armored cruisers under 7 admirals. The Germans had in
the North Sea 24 battleships and 4 battle-cruisers under 5
admirals. The French had in commission in the Mediter-
ranean (where there were then but 4 British battleships
and 4 light cruisers) 13 battleships and 9 in reserve. Italy
had in commission 7 battleships, a training squadron of 3,
and 6 cruisers. Austria had 4 battleships and 3 in reserve.
The situation as to the naval dispositions of France and
Great Britain had been brought about by frequent consulta-
tions of the army and navy general staffs of these countries,
mentioned by Sir Edward Grey in the enclosure No. 1,
dated November 22, 1912, in No. 105 of the diplomatic
papers published shortly after the beginning of the war,
which showed an understanding, before the war, as to
cooperation in the event of possible contingencies. This is
emphasized by the orders given in May by the British
Admiralty looking to the mobilization in July of the fleet
in home waters. Thus, on July 18th, there were reviewed
by the king, off Portsmouth, about 200 ships of all classes,
stretching out approximately forty miles and carrying be-
tween seventy and eighty thousand officers and men. There
were present 24 big-gun battleships, 35 older battleships,
18 armored cruisers, 31 light cruisers, and 78 destroyers,
along with 23 seaplanes, 10 aeroplanes, and 4 airships. Said
the London Times of May 28: "That this is being tried in
July indicates that what Mr. Churchill calls the test of
mobilization of the Third Fleet is really a mobilization for
war, for this step would only be taken in view of the immi-
nence of hostilities." Such a statement, made nearly two
months before the event, would seem to show that the
war did not take the British cabinet entirely unawares.



388 The Great War

In Eastern waters the British had 1 battleship, the Swift-
sure, 1 battle-cruiser, the Australia (of the Australian navy),
2 armored cruisers, the Minotaur and Hampshire, and 6 light
cruisers, 3 of which were Australian. Germany had 2
armored cruisers, the Gneisenau and Scharnhorst, and 3 light
cruisers, the Leipsic, Emden, and Niirnberg, all of which
were to be heard from. France had 2 armored cruisers,
the Montcalm and Dupleix. The Japanese fleet in com-
mission was made up of 4 battleships, 6 armored cruisers,
and 6 light cruisers. The German battle cruiser Goeben of
ten 11-inch guns and the light cruiser, Breslau, in the
Mediterranean, took refuge at Constantinople and thus,
later, became practically part of the Turkish navy.

The advent of war thus found a number of scattered
ships and, particularly, hundreds of merchant ships to which
the war came as a lightning stroke. Of course, there could
be for the German merchant fleet but disappearance by
internment, return home where possible, or capture. The
German cruisers were to begin a raiding of British com-
merce and actions with British men-of-war in which they
were finally to disappear before superior forces, but not
until they had shown an energy and a resolution which put
them in the first rank of ability and accomplishment.

Moreover, Germany at home could but withdraw her
battle force under the shelter of the North Sea sands which
make her coast unattackable. These are to her a great and
absolutely impregnable fortress. The Kiel Canal was now
available for the transfer of the heaviest ships between the
Baltic and the North Sea. The British fleet took refuge
from the submarines on the west coast of Scotland, thus
creating an impasse so far as battleship action was con-
cerned. And it has so remained.



French submarine Ptiiafois.



1




i ype of Kngllsh Miluiiurine.



THE MOBILIZATIONS



CHAPTER XIII
The Mobilization of the Financial Resources

The "sinews of w-ar." Suncy of the financial resources of the belliger-
ents. The situation in the leading financial nations. United Kingdom:
London as banking center ; the Bank of England ; bills of exchange ; Lon-
don as the world's clearing-house. The crisis, Mr. Lloyd George and the
government's measures; moratorium, £t and lOshilling notes, maritime-
iasurance. France: the French as investors; the French banking system ;
the Bank of France and its currency ; moratorium. Germany: exceptional
features of the German situation ; great development of credit ; financial
preparation; Imperial Bank; the financial measures in 1913; the finan-
cial war plan; the war-loan. Austria-Hungary: war-loan banks; supple-
mentary currency. Russia : financial preparedness ; reserve and circulation
of the l$ank of Russia ; treasury notes ; prohibition of sale of vodka ; taxes
in lieu of the abandoned revenue from spirits. Italy: recent great com-
mercial gain; stability of the public credit ; banks of issue ; treasury notes ;
expansion of bank currency in 1914 ; issues of government notes and loans.

The material requirements for sustaining warfare have
undergone an evolution during recent centuries no less
fundamental than the development in the methods of
fighting. The financial problem scarcely existed in the
Middle Ages, when money was so scarce that public con-
tributions were reckoned on the basis of services to be
rendered and payments to be made in specific products.
The performance of military service was an obligation
attached to the tenure of land, and it comprised the duty
of providing the necessary equipment, and frequently the
necessary supply of food. The origin of a special problem
of military finance was due to the creation of mercenary
and standing armies which had to be paid, clothed, fed,
and equipped with armor and weapons at the expense of

the community.

391



392 The Great War

The financial side of warfare increased enormously in
importance with the tremendous growth in the size of
armies, the remarkable progress in means of transportation,
and the unparalleled development in fortifications, naval
units, and engines of destruction since the beginning of
the nineteenth century. Financial resources are univer-
sally regarded by civilized nations as the "sinews of war."
Mr. Lloyd George proudly declared that victory in the
world-war would rest with the possessor of the last hun-
dred million. Financial management takes rank to-day by
the side of strategic administration.

Germany was found to be financially unprepared to bear
the strain of war in 1911; but in 1914 her financial readi-
ness and alacrity have excited universal surprise. Evidently
financial mobilization is required by highly-organized states
no less than military mobilization as an initial process in a
great conflict. Every industry in a belligerent nation feels
the recoil, experiences with varying intensity the agitation
of anticipatory anxiety and the transmitted shock of the
collision of mighty forces, and must nerve itself to resist
the impact or to bend without breaking before it. Wars
of such tremendous dimensions as that of the Great Powers
of to-day are waged with the whole economic strength of
the states involved. Financial mobilization is the supreme
test of efficiency in organization, of adaptability of character,
and of economic soundness. The most essential, and at the
same time most difficult, functions in such critical periods
must be performed by the department of government
finance and by the banking system. Financial mobilization
has the twofold duty of reinforcing the business organization
and procuring the necessary funds for military operations.

Before we consider the financial mobilization of the dif-
ferent countries, we should briefly survey their economic
resources.



Mobilization of Financial Rfsources 393

For convenience in tabulation the estimated wealth and
the national debts of the six Great Powers have been
brought together, as follows:

Estimated wealth. National debt.

Austria-Hungary . . $25,000,000,000 $3,799,000,000

United Kingdom . . 85,000,000,000 3,305,000.000

France 60,000,000,000 6,575,000,000

Germany 80,000,000,000 4,999,000,000

Italy 20,000,000,000 2,864,000,000

Russia 40,000,000,000 4,450,000,000

The debt of Austria-Hungary as given above is the sum
of the public indebtedness of Austria and Hungary indi-
vidually and of their joint debt; that of Germany, the
aggregate of the imperial and state debts. All estimates
of national wealth are subject to a very wide range of
variation, and are apt to be misleading. For even the
physical valuation of a country is liable to considerable
fluctuation without any corresponding change in the actual
state of its material possessions. A more satisfactory basis
for comparison is afforded by the national income, the
aggregate total of individual incomes, which can be esti-
mated with a tolerable degree of approximation in coun-
tries where there is a national income tax. Mr. Lloyd
George places the national income of the United Kingdom
at about $11,000,000,000 annually, while Dr. Helfferich,
director of the Deutsche Bank calculates Germany's at
about $10,500,000,000.

The estimate of the foreign investments of the three
greatest lending nations, as presented in the second chapter
of the first volume, is an extremely conservative one. For
many authorities place the aggregate value of British over-
seas investments as high as $20,000,000,000, French foreign
investments at $9,000,000,000, and German at $7,500,000,000,



394 The Great War

all yielding an average return of about 5%. The well-
known economic authority, Sir George Paish, editor of the
London Statist, estimates that Great Britain ordinarily in-
creases her overseas investments by about $1,000,000,000
annually ; in other words, that she applies the entire volume
of interest derived from abroad to increasing the amount
of her capital invested abroad.

What a disheartening situation for the lingering adhe-
rents of the worn-out, threadbare theory of mercantilism,
which maintains that the nation that buys more than it
sells is becoming progressively poorer. The balance of
trade against Great Britain ought to drain any nation in
the world of its specie in less than three years according to
this view. But Great Britain is the only nation where the
paper money has been uninterruptedly redeemable in
gold since May 1, 1821. The balance of trade against the
United Kingdom ought to bankrupt any nation in the world
in less than a generation. But in normal years the United
Kingdom does not even require the $1,000,000,000 coming
in as interest from investments abroad. It turns back this
entire sum to augment the volume of these investments.
The continuation of such a process would involve bewild-
ering possibilities. Let the reader pause to calculate the
growth of a capital of $20,000,000,000 at 5% compound
interest for a generation, or for periods of fifty or one
hundred years, and its capacity for absorbing the wealth
of the globe! He will be surprised that in proclaiming
the dangers of a British hegemony the Germans have failed
to discover in British capitalism as formidable a menace to
the independence of nations as in British navalism.

The British government was in a very favorable finan-
cial situation at the outbreak of the war because it had be-
hind it a tradition of soundness extending back more than
a century. The most distinguished British statesmen had



Mobilization of Financial Resources 395

very often combined unusual economic talent with political
sagacity. Successive cabinets, resisting inertia and ephem-
eral temptations, had maintained with admirable constancy
the practice of providing an annual excess of revenue so
that sums could be regularly set aside in the sinking fund
for reducing the national indebtedness. Great Britain was
the only power whose debt was actually smaller in 1914
than it had been a hundred years before. During the
twelve years preceding the present struggle, when many
of the continental budgets were registering deficits, and
while the German Empire increased its public debt from
$650,577,000 to $1,142,873,000, Great Britain discharged
the entire addition to her indebtedness incurred during the
Boer War. The financial record of the Asquith ministry,
in spite of adverse criticism, is proof that democracy and
economic stability are not incompatible. The tradition of
financial prudence was a foundation of strength for the
British government when the tempest broke.

Comparisons of the percentage of revenues derived from
investment in government funds are a partial test of the
relative confidence inspired by the British exchequer. In
the period just preceding the war, when German imperial
A% bonds were selling at par, British consols bearing 2/^^
interest were quoted at seventy, returning a revenue, in
other words, of approximately ?>%% on the investment.
The investor in British consols accepted a smaller return
than the purchaser of German obligations apparently in
consideration of the greater security.

In the financial situation created by the war Great Britain
and Germany have individually assumed unique positions,
in that Great Britain alone of all the belligerent nations and
many neutral countries did not suspend specie payments,
while Germany quite as exceptionally did not declare a
moratorium.



396 The Great War

London has quite commonly been regarded as the
world's banking center; but London's preeminence does
not by any means extend to all forms of financial activity.
For instance, Paris exhibits greater capacity for absorbing
the public loans of foreign states, and the cash reserves of
several continental central depositories make those of the
Bank of England seem diminutive by comparison. Lon-
don, moreover, is usually not the cheapest money, — or
credit, — market. For the discount rate is usually lower,
and certainly more stable, in Paris.

An appreciation of the characteristic specialty of British
banking requires a brief analysis of the system itself. In it
the Bank of England occupies a peculiar position. It is the
principal depository for the precious metals, the only bank
in England whose notes are legal tender, and the leading
institution in the United Kingdom issuing bank-notes, or
paper currency. We can safely disregard the circulation of
paper of all the other note-issuing banks of the kingdom.

By the Banking Act of 1844, its present charter, the
Bank of England has authority to issue notes to the value of
/18,450,000 ($89,786,925) against securities and its invest-
ment in the public funds; but it must keep coin or bullion
in reserve to cover every note that it issvies in excess of this
amount. In consequence of this restriction bank-notes
are used for only a very small fraction of the commercial
transactions of the country. Strangers in the United
Kingdom are usually surprised at the infrequency of paper-
money. All the bank-notes in the country do not repre-
sent as large a sum as a single day's clearings in the London
clearing-house. But on the other hand, foreigners from the
continent are often astonished at the very common employ-
ment of checks to facilitate payments. Checks have, in fact,
been substituted largely for metal and bank-notes, and really
constitute the most important part of the currency.



Mobilization of Financial Resources 397

In spite of the precautions for safeguarding the issue of
bank-notes, British banking has displayed noteworthy bold-
ness and skill in its economy in the use of the precious
metals. The joint-stock banks employ a high percentage
of their funds in current operations, such as loans and dis-
counts, so that their licjuid reserve is usually less than 20%
of their deposits. Further than this, about one-half of
their liquid reserve consists of funds deposited in the Bank
of England, and only about one-third of the deposits of the
Bank of England are really covered by its metal reserve. It
follows, therefore, that the joint-stock banks of the United
Kingdom really conduct their affairs on a metal reserve
amounting usually to less than 13^% of their deposits.

Although the amount of gold in the United Kingdom is
actually less than that in the United States, France, or
Russia, and very much less per capita than in the United
States and France, British notions of banking are more
intimately associated with gold than those of any other
country. The readiness to discharge liabilities in gold,
promptly and unreservedl)% is regarded in Great Britain
as the most essential part of a banker's business. Sound-
ness and reliability are the features imprinted upon the
countenance of British finance, both public and private;
and the reputation for stability has been patiently acquired
by unswerving allegiance to the gold standard. An English
bank-note is payable at all times in gold upon demand, but
a French bank-note is convertible into either gold or silver
at the discretion of the Bank of France.

Banking, in a more particular sense, is the process of
furnishing credit for facilitating the current operations of
commerce and industry. The performance of this func-
tion is chiefly effected through the discounting, acceptance,
or purchase, of bills of exchange. A bill of exchange is an
order, based upon a consignment of merchandise, drawn



398 The Great War

by the seller against the purchaser, instructing the latter to
pay the stipulated price at the termination of a certain
interval after presentation to the bearer or a specified third
party. Acceptance houses and bill brokers are the princi-
pal agencies in London for the negotiation of bills of ex-
change. In discounting, the potential value of the bill is
converted into as much cash as a promise to pay at the
future date is actually worth at the current rate of interest.
The capital for these transactions is mainly derived from
advances by the joint-stock banks, and most of the bills find
their way eventually into the portfolios of these institvitions.

London as a banking center does not confine itself to the
negotiation of credit for British commerce. Probably the
stimulus derived from financing the world's greatest import
trade was the principal agency in directing the attention of
British banking to the field of international exchanges.
Lombard St. finances a large part of the international trade
of the world, and this has made London the great clearing-
house of the world's exchanges. The credits and debits of
all the countries meet and are balanced in London. A very
attractive feature of bills drawn on London is the certainty
that they will be converted into gold, the one universally
acceptable standard of value.

A large part of the deposits of the British joint-stock
banks, which amount altogether to about ^1,000,000,000
(about $5,000,000,000), is employed in dealing in bills of
exchange, and a notion of the volume of these transactions
may be gained from the estimate of ^^300,000,000 (about
$1,500,000,000) as the aggregate value at maturity of the bills
held at any one time before the war by London houses.

The system of banking and exchange, with its delicate
adjustments, its intricacies and ramifications penetrating
every corner of the earth, — the nervous system of the com-
mercial organism, — was naturally most sensitive to the



Mobilization of Financial Resources 399

disturbances of war. The progress of the political crisis in
the last week of July, 1914, was automatically reflected in the
financial situation, and the economic crisis developed with
such rapidity as to portend the immediate stagnation of the
whole machinery of credit.

The most urgent problem in all the countries was due to
the same causes, the feverish desire to withdraw coin from
the banks and the tendency to hoard it. Consequently, at
precisely the time when mobilization was making unusual
demands on the circulating medium, the volume of avail-
able cash was greatly restricted. The increasing intensit)'
of the stringency in London may be measured by the
movement of the bank rate, which had to be raised very
rapidly to protect the reserves of the Bank of England
against the unusual inroads. The bank rate, which had
stood at 3% since January 29, 1914, was raised to 4% on
July 30th, to 8% on the 31st, and finally to 10% on August
1st, the highest level reached since 1866.

The stock exchange closed its doors on July 31st, when
continental dealers were demoralizing the market by un-
loading securities in a frantic effort to liquidate some of
their assets. As soon as the situation became threatening
the joint-stock banks ceased purchasing bills of exchange
and began calling in their call and short term loans from
the discount houses and bill-brokers. The latter, finding
it practically impossible to dispose of the bills of exchange
which they had discounted or raise money in any other
way to meet their liabilities, ceased buying bills, withdraw-
ing in this way their financial support from the funda-
mental transactions of international trade. Consequently,
the commercial activity upon which the British nation de-
pends for a large part of its food and raw materials was
threatened with sudden paralysis. Imagine the outlook for
the accepting houses, the maturing within three months of



400 The Great War

bills for the aggregate amount of X300,000,000, for the
payment of which they had made themselves responsible,
with the sources of cash and credit running dry on all
sides ! To make their situation seem more hopeless, a con-
siderable fraction of these bills, representing probably about
/120,000,000 (say $600,000,000), were drawn on German
and Austrian houses.

The assistance of the government was indispensable to
stem the rising tide of panic which threatened to submerge
the whole financial organization. Mr. Lloyd George, the
Chancellor of the Exchequer, called about him an im-
promptu committee of the ablest financiers of the kingdom
to devise appropriate measures of relief. Guided by the
resourceful finance minister the government exhibited re-
markable decision and promptitude. It undertook at the
same time to relieve the financial stringency and guarantee
the regularity of shipments of commodities from abroad.

First of all among the government's provisions, the
moratorium — the legal postponement in the payment of
obligations falling due — demands our attention. Mr. Lloyd
George introduced on August 3d a "Bill to authorize His
Majesty by Proclamation to suspend temporarily the pay-
ment of Bills of Exchange and payments in pursuance of
obligations," which directly passed all stages in the House
of Commons, and is known as the Postponement of Pay-
ments Act, 1914. A royal proclamation issued August 6th
in conformity with this law postponed for the period of
one month all payments in pursuance of contracts anterior
to August 4th, and ordered that the sums involved should
bear interest for the profit of the creditor from the day
when he should offer the debtor an opportunity to pay.

The moratorium did not apply to wages and salaries,
obligations arising under the Workingmens' Compensation
Act, liabilities not exceeding ^5, local rates and taxes, old




TIr- Hritisli Foreign Ortice, Loiulnn.




1 Ik- Ixiiik ot Kngliiml.



Mobilization of Financial Resources 401

age pensions, maritime freights, and some other classes of
liabilities. On the afternoon of August 3d an Order in
Council extended the Bank Holiday for three days, Tues-
day, Wednesday, and Thursday, November 4-6, so as to
afford an opportunity of taking the necessary measures for
relieving the currency supply.

On the 5th Mr. Lloyd George submitted a review of his
action in the crisis to the House of Commons. He ex-
plained that the leading bankers, merchants, and manufac-
turers, with whom he had conferred, had assured him that
it was not necessary to suspend specie payments. In com-
menting upon this determination he said:

"In this tremendous struggle finance is going to play a
great part. It will be one of the most formidable weapons
in this exhausting war, and anyone who, from selfish
motives of greed or from excessive caution or cowardice,
goes out of his way to attempt to withdraw sums of gold



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