Peden G.S. Arms, Economics and British Strategy From Dreadnoughts to Hydrogen Bombs

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maintaining war production.

Discontent over food prices and

shortages was tackled by another new ministry, the Ministry of Food,

which eventually introduced a bread subsidy in the autumn of 1917 and

rationing in 1918. A new Food Production Department of the Board of

Agriculture was given powers in 1917 to requ ire farm ers to plough

grassland so as to increase the output of grains and potatoes. Never-

theless, grain imports continued to be necessary. State control of

international purchases from 1916 and co-ordination of Allied pur-

chases and shipping in 1917–18 helped to keep the rise in world prices

within reasonable bounds .

Munitions orders placed with British ﬁrms diverted output from

exports. Orders placed abroad likewise contributed to a deteriorating

balance between imports and exports of goods (the visible trade bal-

ance). However, invisible exports from services increased in value,

mainly due to increased earnings by shipping comp anies as freight rates

rose. Even taking into account expenditure abroad by the armed forces,

Britain managed an overall surplus on its current external payments

down to 1917 (see table 2.3). Within this broadly satisfactory position,

there was the problem of ﬁnding dollars with which to ﬁnance purchases

in the United States. As table 2.4 show s, the British government

borrowed large sums abroad (mainly from American private investors

Table 2.3. Balance of payments on current account, 1914–18

Visible trade

balance (£m.)

Invisible trade

balance (£m.)

Government payments

abroad (net) (£m.)

Current

balance (£m.)

1914 170 þ315 20 þ125

1915 368 þ395 50 23

1916 345 þ520 50 þ125

1917 467 þ575 80 þ28

1918 784 þ580 0 204

Note:

Expenditure by armed forces in countries where they were operating, plus

expenditure in other countries (mainly the United States) on supplies shipped direct to

armies and therefore not included in the trade returns, minus gifts from abroad from 1914,

minus expenditure of American troops in Britain in 1917–18.

Source: Morgan, British Financial Policy, p. 341. ª Palgrave Macmillan.

In the event the simultaneous creation by Lloyd George of a Ministry of Labour and a

Ministry of National Service confused manpower and industrial relations policy; see

Rodney Lowe, ‘The Ministry of Labour, 1916–1919: a still, small voice?’, in Burk (ed.),

War and the State, pp. 108–34.

Kathleen Burk, ‘Wheat and the state during the First World War’, in Dockrill and

French (eds.), Strategy and Intelligence, pp. 119–38.

The First World War 75

down to the United States’ entry into the war, and then from the

American government). Dollar securities held by British subjects were

requisitioned and sold or used as security for loans, and some gold was

shipped across the Atlantic. Even so, the Tre asury was able in

November 1915 to predict, accurately, that Britain would exhaust her

gold and dollar reserves early in 1917.

The strai n on the sterling:dollar exchange rate reﬂected not only

Britain’s requirements for imports (themselves largely the result of the

enlargement of the army) but also the fact that she carried out her

traditional function of paymaster of the coalition. Britain’s ﬁnancial

strength meant that she could raise loans in New York on more

favourable terms than Russia or her other allies, apart from France, and

even France had exhausted her credit in New York by May 1916.

Britain therefore borrowed in New York, and then extended credits to

her allies to enable them to obtain American supplies.

As table 2.4

shows, Britain’s loans and subsidies to her allies exceeded her borrowing

abroad except in 1918, after Russia had withdrawn from the war and

when the United States had taken over responsibility for lending all

dollars required for purchases in America. These transactions weakened

Britain’s ﬁnancial strength after the war: Britain received no repayment

at all from Russia and very little from France and the other Allies, but

the United States expected war debts to be repaid in full.

Financial relations with the United States were crucial to the Allied

war effort. The ﬁrst British orders were placed in October 1914; the ﬁrst

Table 2.4. Balance of payments on capital account, 1914–18

Government

loans to

allies,

etc. (£m.)

Government

borrowing

abroad

(£m.)

Net decrease (þ)

or increase ()

in private

investment

abroad (£m.)

Net export (þ)

or import ()

of gold and

silver (£m.)

Net decrease (þ)

or increase ()

in short-term

credits (£m.)

1914 0 0 144 51 þ70

1915 298 þ53 17 þ11 þ274

1916 530 þ319 þ104 þ10 28

1917 563 þ532 þ57 þ3 57

1918 297 þ381 þ13 9 þ116

Source: Morgan, British Financial Policy, p. 341. ª Palgrave Macmillan.

Peden, Treasury and British Public Policy, p. 106.

Kathleen Burk, Britain, America and the Sinews of War, 1914–1918 (London: Allen and

Unwin, 1985).

Arms, economics and British strategy76

loan was raised from private sources through the New York bank of

Morgan’s, which acted as the British government’s agent, in July 1915.

In the autumn of 1916 the Brit ish blockade, involving as it did the

blacklisting of American ﬁrms trading with Germany, led to Congress

threatening reprisals. The Foreign Ofﬁce convened an interdepart-

mental committee to consider how far Britain was dependent com-

mercially and ﬁnanciall y on the United States. Keynes told the

committee in October that of the £5 million which had to be found daily

for the prosecution of the war, about £2 million had to be found in

North America (chieﬂy the United States, but also Canada) and that in

future about four- ﬁfths of this sum would have to be borrowed. He

warned that a statement from the American government disapproving

such loans would make it impossible to raise the necessary dollars, and

advised that ‘the policy of this country towards the USA should be so

directed as not only to avoid any form of reprisal or active irritation but

also to conciliate and to please’.

As it happened, following a statement

by Morgan’s that short-term British Treasury bills would be issued to

American banks without limit, the Federal Reserve Board warned

American investors in November to be careful about buying British

government bonds. The Board had consulted President Wilson, who

had stiffened the warning, as a means of bringing diplomatic pressure to

bear on the Allies at a time when he was seeking to mediate between

them and the Central Powers. The warning led to a temporary fall in the

British government’s credit in New York, and a sterling crisis.

Fortunately for the British, the Federal Reserve Board was persuaded

to modify its warning after the American government had broken off

diplomatic relations with Germany on 3 February 1917 on acc ount of

the latter’s submarine campaign. Even so, by mid-March the Treasury

had little more than a month’s reserves of gold and dollars in New York

with which to meet its commitments. After the United States declared

war on Germany on 2 April the American government took over the

responsibility for ﬁnancing purchases for the Allies, but was only per-

suaded to lend money to support the sterling:dollar exchange rate after a

further sterling crisis in July 1917. Niall Ferguson believes that the

importance of American money to the Allied war effort has been

exaggerated, given that Britain lent more to its allies than the United

States lent to Britain, but he does not explain how Britain’s ﬁnancial

strength would have enabled her to purchase supplies in North America

J. M. Keynes, ‘The ﬁnancial dependence of the United Kingdom on the United States

of America’, 10 Oct. 1916, reprinted in Collected Writings of John Maynard Keynes, vol.

XVI, pp. 197–8.

The First World War 77

without borrowing dollars, especially once the balance of payments on

current account moved into deﬁcit in 1918.

Britain became wholly

dependent on the United States government for dollars in the course of

1917–18. In the absence of American loans, the sterling:dollar exchange

rate would have depreciated, making imports of munitions, food and oil

from dollar sources more expensive, and forcing Britain to exhaust her

limited dollar resources more quickly or to employ scarce shipping to

import from more distant sources, such as Australia or India, where

sterling would be accepted. Either way, Britain’s war effort would have

fallen below the level achieved in 1917–18, although by how much it is

impossible to say.

Naval strategy

In the circumstances, a blockade had to be app lied with discretion,

notwithstanding the Royal Navy’s command of the sea. American tol-

erance of British interference with neutral shipping was initially linked to

the provisions of the Declaration of London (see pp. 44–5), but became

greater once American business proﬁted from Allied orders and

Germany alienated American opinion by resorting to submarine war-

fare. It is best, therefore, to follow British naval strategy as interaction

between command of the sea, protection of British shipping, and the

waging of economic warfare on Germany.

German hopes that the Royal Navy’s superiority in numbers over the

High Seas Fleet could be eroded by a war of attrition, usi ng mines,

submarines and surface torpedo-craft, were disappointed by the British

strategy of a distant blockade. British light cruisers and battle-cruisers

did appear in force in the Heligoland Bight on 28 August 1914, when

they sank three German light cruisers and a destroyer without loss.

However, thereafter Jellicoe, the commander of the Grand Fleet, kept

his capital ships well clear of the German coast. Signals intelligence

enabled him to respond to sorties by the High Seas Fleet. An attempted

raid by three German battle-cruisers and an armoured cruiser in the

Dogger Bank area on 24 January 1915 was intercepted by British battle-

cruisers for this reason and the armoured cruiser Bluecher was sunk. The

only major ﬂeet action was the Battle of Jutland on 31 May 1916, when

Admiral Reinhold von Scheer attempted to inﬂict losses on Admiral

David Beatty’s force of battle-cruisers and fast battleships by luring it

into a pursuit of German battle-c ruisers until it ran into a line of U-boats

Niall Ferguson, ‘How (not) to pay for the war: traditional ﬁnance and ‘‘total’’ war’, in

Chickering and Fo

rster (eds.), Great War, Total War, pp. 409–34, at p. 423.

Arms, economics and British strategy78

supported by the High Seas Fleet. The U-boats played no part in the

action and, while in pursuit of Beatty’s ships, von Scheer ran into the

Grand Fleet and escaped only because Jellicoe chose not to risk a night

action when the danger from torpedoes would be greatest. Jellicoe’s

caution was reasonable because he was, as Churchill remarked, ‘the only

man on either side who could lose the war in an afternoon’.

The

British suffered heavier losses than the Germans – three battle-cruisers,

three armoured cruisers and ei ght destroyers, compared with one battle-

cruiser, one pre-dreadnought battleship, four light cruisers and ﬁve

destroyers – but retained a numerical superiority that ensured the

Germans could not break the distant blockade. The battle illustrated the

shortcomings of Fisher’s concept of the battle-cruiser as a lightly

armoured, big-gun vessel. As Beatty memorably remarked after two of

his six battle-cruisers had been sunk early in the action, ‘something is

wrong with our bloody ships today’.

British ships were vulnerable to

explosions because cordite was handled in bags, whereas the Germans

used canisters and cartridge cases. However, after Jutland it was decided

to increase substantially the armour provided for the battle-cruiser

Hood, then under construction.

The threat to British trade from German surface ships was quickly

dealt with, there being no German cruisers left on the high seas within

eight months of the outbreak of war. In August 1914 in the Medi-

terranean the battle-cruiser Goeben and the light cruiser Breslau, evaded

British warships and took refuge in Turk ish waters. The next most

powerful German force overseas was Vice-Admiral Graf von Spee’s

squadron of two armou red and three light cruisers in the Far East. Von

Spee prudently evaded the Japanese navy and crossed the Paciﬁc to

operate against British shipping off South America, while dispatching

one of his light cruisers, the Emden, to the Indian Ocean. As a result of

the Royal Navy’s strategy of concentrating its best warships in home

waters, the British South American squadron under Rear-Admiral

Christopher Craddock had only two old armoured cruisers, a light

cruiser, an armed merchantman, and a slow pre-dreadnought battles hip.

Craddock chose to attack von Spee with his cruisers, and lost both

armoured cruisers and his life at the Battle of Coronel on 1 November

1914. This blow to British prestige was speedily revenged by the

dispatch of two battle-cruisers under Vice-Admiral Sturdee to the

Falkland Islands, where they were joined by other British cruisers. At

Churchill, World Crisis: 1916–1918, part 1, p. 112.

Andrew Gordon, The Rules of the Game: Jutland and British Naval Command (London:

John Murray, 1996), p. 120.

The First World War 79

the Battle of the Falklands on 8 December, von Spee was outgunned

and all of his squadron was sunk, except the light cruiser Dresden, which

was subsequently scuttled. If Jutland exposed the limitations of the

battle-cruiser concept, the Falklands illustrated its strength as a fast

capital ship capable of protecting distant intere sts.

Meanwhile, the Emden had been highly successful, sinking sixteen

British merchant ships and also, in a raid on the British port of Penang, a

Russian cru iser and a French destroyer, before being sunk by the Aus-

tralian cruiser Sydney. The Emden had some inﬂuence on Admiralty

thinking on cruiser warfare as late as the 1930s. However, the other

isolated German raiders were much less successful. The totals of mer-

chant ships sunk in 1914 by the light cruisers Karlsruhe and Koenigsberg

were ﬁfteen and one respectively, and those of the armed liners Kaiser

Wilhelm der Grosse and Cap Trafalgar were two and nil respectively. The

Karlsruhe sank after an internal explosion and the Koenigsberg was

blockaded in the Ruﬁji River in German East Africa, where it was

destroyed by British monitors in the following year. The armed liners

were intercepted and sunk while coaling, suggesting that the la ck of

secure bases was the fundamental reason why German surface raiders

had little impact on British trade. The Germans had some success

between December 1915 and February 1918 with cruises undertaken by

small converted merchant ships; three of them, the Moewe, the Wolf and

the Seeadler accounted for ﬁfty-six Allied ships between them, besides

those sunk by mines laid by them. However, two other such raiders

achieved no success before being sunk, and the Germans did not persist

with these operations. Nevertheless, the Admiralty devote d many ships

to the search for surface raiders. Indeed the Admiralty’s strategy of

patrolling trade routes and stationing additional cruisers at focal points,

rather than organising convoys with escorts, probably accounts for the

cruiser shortage that Marder attributed to Fisher’s pre-war policy of

scrapping ships that were too old to ﬁght and too slow to run away. The

sinking of the British cruiser Pegasus (completed 1898) when it con-

fronted the Koenigsberg (1907) in September 1914, and the losses of

Craddock’s Good Hope (1902) and Monmouth (1903) at Coronel to von

Spee’s Scharnhorst and Gneisenau (both 1907), could be attributed to a

number of causes, but a common factor was rapid obsolescence brought

about by international competition in warship design. Retention of even

older cruisers would have expos ed the Royal Navy to further such losses.

Cruisers were requ ired to impose the blockade of Germany, although

much of the work of boarding and checking merchant ships in northern

waters was done by auxiliary armed boarding vessels. Indeed, the Tenth

Cruiser Squadron patrolling the waters between Scotland and Norway

Arms, economics and British strategy80

provides another example of the limitations of older ships retained by

the Admiralty. The squadron’s eight ‘Edgar’-class cruisers (completed

in 1893 or 1894) were not up to the strain of working in the heavy seas

encountered in the area and were withdrawn after less than four months,

to be replaced by armed m erchant cruisers. German merchant ships

quickly disappeared from the high seas, but the political problems of

regulating neutral trade with Germany remained.

Although the British government had not ratiﬁed the Declaration of

London, it hesitated to impose an unrestricted blockade, for fear of

neutral, and particularly American, opinion.

Policy was devised jointly

by the Foreign Ofﬁce, the Board of Trade and the Admiralty until the

creation of a Ministry of Blockade in February 1916. An order in

council on 20 August 1914 stated that the Declaration of London would

be observed with certain exceptions, notably that conditional contra-

band (food and clothing) int ended for the use of the enemy would be

liable to capture, regardless of the port to which a neutral was bound.

Ships’ papers were to be examined for evidence of the cargo’s ultimate

destination and the cargo could be detained until the neutral govern-

ment concerned gave an assurance that the goods would not be

re-exported to an enemy power. Using the spurious pretext that all food

supplies in Germany were under government control, the British were

able to impose the beginnings of the ‘hunger blockade’. However,

according to the terms of the Declaration of London, Germany was still

free to import non-contraband raw materials, such as cotton, which was

used for smokeless explosives, provided they were carried by neutral

ships. A large part of the American cotton crop of 1914 went to Ger-

many, but hostilities were not then expected to last long and the British

authorities felt that the trouble that would be caused in the United

States by declaring cotton to be contraband was not worthwhile. It was

not until October 1914 that copper, iron ore and rubber were declared

to be contraband, and cotton was not added to the list until August

1915, by which time Al lied munitions contracts ensured that the loss of

the German market would not be felt in America.

Meanwhile, the Allies had been given the opportunity to tighten the

blockade by invoking their right of reprisal against German submarine

attacks. The ﬁrst British merchant ships had been sunk by U-boats in

October 1914. At ﬁrst there were few incidents and U-boat captains

gave crews warning to take to their lifeboats. However, on 4 February

What follows is based largely on A. C. Bell, The Blockade of the Central Powers 1914–1918

(London: HMSO, 1961), originally printed in 1937 for ofﬁcial purposes only; and Eric

Osborne, Britain’s Economic Blockade of Germany 1914–1919 (London: Frank Cass,

2004).

The First World War 81

1915 the German government gave notice that the waters around the

British Isles would be treated as a war zone in which every mercha nt

ship encountered would be sunk, without it always being possible to

ensure the safety of passengers and crew. The effect on neutral opinion

was adverse, for whereas Allied blockade measures involved property

and could be contested in prize courts, a submarine block ade frequently

led to the loss of life. The British felt able to issue an order in council on

11 March 1915 prohibiting any merchant ship from sailing to or from

any German port, and claiming the right to conﬁscate any enemy goods

even if a merchant ship had left a neutral port. It was not possible to

enforce this prohibition in the Baltic, but a series of agreements were

negotiated with neutral countries adjacent to Germany whereby they

promised not to re-export imported contraband goods.

When the Germans undertook what is usually called the ﬁrst

‘unrestricted submarine warfare’ campaign in the spring of 1915 they

had only about twenty-ﬁve U-boats available to enforce their blockade,

or an average of six at sea each day. Mo reover, the campaign was not in

fact unrestricte d. In response to a warn ing from the United States that

Germany would be held accountable for any American ships or lives

lost, the German government announced that submarine commanders

would be ordered not to attack neutral ships, provided that they could

be recognised as such. After American lives were lost when a U-boat

sank the British liner Lusitania on 7 May, the Germans undertook not to

attack passenger ships. The arming of merchant ships and the use of

Q-ships, decoys disguised to look like harmless tramp steamers but

carrying concealed guns, made it hazardous for U-boat commanders to

surface to sink smaller ships with their guns and forced them to use their

limited supply of torpedoes, which they would have preferred to keep for

bigger targets. As it happened, for twelve months from September 1915,

apart from a brief period in the spring of 1916, the Germans restricted

operations to avoid incidents involving Americans. An attempt to

tighten the submarine blockade in the spring of 1916 resulted in the loss

of more American lives when the French cross-Channel steamer Sussex

was torpedoed on 24 March 1916, and a month later the submarine

campaign against British trade was suspended.

Nevertheless the increase in U-boat activity in 1916 made it easier for

the British to stiffen their blockade. An order in council on 30 March

made contraband liable to capture if found on a neutral vessel bound for

a neutral port but destined for the enemy; another order on 7 July

Paul G. Halpern, Naval History of World War I (London: UCL Press, 1994), pp. 291–

308.

Arms, economics and British strategy82

removed the remainder of the restrictions imposed by the Declaration of

London. Hostile destination of contraband cargoes was presumed to

exist until the contrary was shown. A vessel carrying contraband was

liable to capture if the contraband formed over half the cargo. Moreover,

at the end of February the leading German and Austro-Hungarian

agents in Scandinavia, Holland, Portugal, Spain and Greece were put on

blacklists, and all consignments to these persons or ﬁrms were liable to

capture. Finally, in July, the British published a blacklist of neutral ﬁrms

(including certain American companies) that were suspected of dealing

with the Central Powers and with wh om they forbade British ﬁrms to do

business, denying them access to British coal and shipping. As noted

above (p. 77), this step led to a deterioration in Anglo-American rela-

tions that was healed only after the United States broke off diplomatic

relations with Germany. By July 1916 the blockade had probably been

tightened as much as neutral opinion would tolerate, and was beginning

to inﬂict real damage on the German economy at a time when it was

strained by harvest failure, high expenditure on armaments, and inﬂa-

tion. The ﬁnal tightening of the screw came with America’s declaration

of war in April 1917, after which the only major gap in the blockade was

the import of iron ore from Sweden.

The impact of the blockade could only be expected to be severe from

the winter of 1916–17. Earlier, even when Germ an war production was

affected by lack of raw materials, German science could ﬁnd solut ions.

For example, the blockade denied Germany imports from Chi le of

nitrates, but the nitrogen required for explosives m anufacture could be

obtained from the atmosphere using the Haber/Bosch process. Likewise

wood or other cellulose material could be used as a substitute for cotton

in the manufacture of smokeless powder. These processes tended to be

slower than those with the original raw material but, as in Britain,

munitions production was given priority over civilian consumption. The

impact of the blockade was greatest in its effects on the diet of the

German population. The absence of imported fertilisers and the loss of

manpower and horses to the army led to a 30 per cent fall in harvests of

all grains in 1917.

There were serious food shortages in the so-called

‘turnip winter’ of 1916–17, and during 1917 and 1918 ofﬁcial rations

were inadequate to meet minimal nutritional requirements and people

had to resort to black markets. The Germa n people did not starve, but

they were hungry, and morale suffered. The spirit of national resistance

was reduced by the blockade: food shortages led to strikes and

Roger Chickering, Imperial Germany and the Great War, 1914–1918 (Cambridge

University Press, 1998), p. 142.

The First World War 83

discontent with the regime, and helped to undermine military and naval

discipline in 1918. However, the blockade alone would not have been

sufﬁcient to defeat Germany. Germany was vulnerable to blockade

because of the strain of war on her economy. Had nitrogen been

available for fertilisers instead of for explosives, or had horses been

available for ploughing instead of for military transport, the population

could have been fed satisfactorily, even though a quarter of pre-war

German food consumption had been imported.

Britain was more dependent than Germany on imports of food and

raw materials, and therefore was more vulnerable to blockade. A suc-

cessful anti-submarine strategy was crucial to the maintenance of the

British war effort. Between the beginning of August 1914 and the end

of September 1915 the amount of merchant shipping available to

Britain actually increased, from 16,842,000 tons to 17,016,000 tons,

partly on account of the addition of enemy ships captured at the

outbreak of war. However, in October 1916 the Board of Trade

warned that British shipbuilding was no longer keeping up with losses

and that the merchant tonnage had fallen between 30 September 1915

and 30 September 1916 to 16,255,000 tons.

British losses rose from

September 1916 when improved coa stal U-boats were based in Flan-

ders, and in the following month the Germans launched a new sub-

marine campaign in the Atlantic. At this stage, 80 per cent of ships

sunk had ﬁrst received a warning from the U-boat captai n but the

Germans decided to resume unrestricted submarine warfare with effect

from 1 February 1917. The German High Command was willing to

risk American intervention because it believed that Germany, with

fewer resources than the Allies, would lose a long war and must

therefore resort to what seemed to be the only way to achieve rap id

victory. The German naval staff believed that unrestricted submarine

warfare could increas e Allied losses by 50 per cent – a forecast fulﬁlled

in the ﬁrst six months of the campaign. Much less accurate was their

belief that six months of the higher rate of losses would cut British

imports of grain by 40 per cent, creating bread shortages that would

force Britain to make peace. As Offer has commented, the calculations

that produced these ﬁgures were based on fallacies and showed the

shortcomings of intuitive reasoning as opposed to rigorous economic

analysis; in the event British reserves of gra in rose as it was giv en higher

priority than other imports.

The Germans also underestimated the

Bell, Blockade, pp. 671–91; Offer, First World War, pp. 23–77.

‘Merchant shipping’, memorandum by the President of the Board of Trade, 26 Oct.

1916, CAB 42/22/6, TNA.

Offer, First World War, pp. 357–66.

Arms, economics and British strategy84