Thema Wilson Gives the Allies a Financial Heart Attack

Zelikow, Philip. The Road Less Traveled: The Secret Battle to End the Great War

Tagesnotiz vom: 07.09.2022

As he dispatched his letter to pressure the British government (the House-Grey letter being carried
across the Atlantic), and as he also completed his draft peace note, Wilson took another big step.
He showed the British and French that he knew just how financially vulnerable they were. Before his
reelection, Wilson voiced his realization that Americans were now the “creditors of the world.”
They could “determine to a large extent who [was] to be financed and who [was] not to be
financed.” Wilson would now use that leverage.28
As a Morgan executive observed in the company’s internal history prepared right after the war, “The
stupendous financial requirements of the British Government now dominated the whole
situation.”29 Back in September and October, London decided to embark on a huge, desperate
credit scheme built around a novel group of short-term, unsecured government loans, or Treasury
bills, due in as little as thirty to sixty days. As each set of loans came due, fresh short-term loans
would be used to pay off the last set. The British leaders and their American financiers hoped this
plan could get them through the next six months so that their gold and securities could last that
much longer. The scale of the credit scheme was at least $1 billion, then equivalent to about 6
percent of the entire British gross domestic product.
Having seen the Federal Reserve Board already take action to warn banks about some French loans
in October, the key Morgan partner in London, Henry Pomeroy Davison, decided to go back to the
United States and make the pitch in person to convince the Fed board to support the firm’s large
short-term, unsecured Treasury bill plan before it was made public. Davison made his presentation
on November 18. It did not go well. Board members were extremely anxious. Davison pushed
ahead. He announced the planned bond offering on November 22.30
The Federal Reserve Board was worried about the exposure of the large city banks that planned to
buy the T-bills. But politics were also a factor. The vice chairman of the board, Paul Warburg, came
from a German Jewish banking family and had himself been a leading banker in Germany before the
war. His brother ran an important bank in Hamburg. Warburg did not like Prussian militarism, but
he retained sympathy for Germany, and he did not want America to join in the war on the Allied
side.
The board’s chair was an Alabama banker, William Proctor Gould Harding. He too was uneasy about
the politics of this Morgan loan plan. “I cannot escape the conclusion,” he wrote to the powerful
head of the Federal Reserve Bank of New York, then convalescing out west, “that the United States
has in its power to shorten or prolong the war by the attitude it assumes as a banker. If we decide
to finance one group of belligerent powers by giving it unsecured credits, we assume in large part a
burden which another group of belligerents is carrying on its own account [paying on its own], and
the possible complications which may come from this policy are fearful to contemplate.”31
Harding, Warburg, and the rest of the board wanted to issue a public statement, to caution banks
about these new, short-term, unsecured British and French Treasury bills. The issue was so sensitive
that Harding went to see President Wilson about it on Saturday, November 25. He wanted Wilson’s
advice.
As he received Harding in the White House that Saturday, Wilson had his peace move in front of
mind. He had just instructed House to send that tough letter to Grey. He had just finished drafting

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Thema Wilson Gives the Allies a Financial Heart Attack
Zelikow, Philip. The Road Less Traveled: The Secret Battle to End the Great War

Tagesnotiz vom: 07.09.2022

his peace proposal.

Wilson gave Harding a plain message. He gave it to him in person, and he gave it to him in writing.
In person, he told the board chairman that US relations with Great Britain “were more strained”
than with Germany. In writing, he asked that the board’s warning about British and French loans “be
made a little stronger and more pointed and be made to carry rather explicit advice against these
investments.”
The Fed’s warning should not be just a “mere caution,” Wilson went on. Members of the Federal
Reserve Board should not endorse large further loans to Britain without adequate reserves or
security. Such loans, Wilson hinted, “might at any time be radically affected by a change in the
foreign policy of our government.”32
Wilson developed this financial maneuver entirely on his own. No one in his government had
suggested it. When he first learned of the board’s warning, House was entirely uncomprehending.
He did not know of Wilson’s relation to it, and he noted in his diary that such a warning certainly
should not be used to hurt credits to the Allies. Yet this was exactly what Wilson had intended to
do.
The board published its warning on Tuesday, November 28. The effect was instantaneous and
lasting.
There was a general panic related to British and French securities of all kinds and the companies
that relied on them (like Bethlehem Steel). Morgan quickly had to withdraw the entire T-bill offering
for both Britain and France.
The British and French stemmed the panic only by rushing some of their dwindling reserves of gold
to New York to maintain the exchange rate and calm the markets.
If Wilson had wanted to test American financial influence, the test worked. London felt Wilson’s
move as an elderly man, warned repeatedly by his doctors about his heart condition, might if he felt
a sharp, paralyzing pain on the left side of the chest.
The effect did not go away. The board’s action, Davison told his partners, was “the most serious
financial development in [the United States] since the outbreak of the War, and one likely to be of
far reaching consequence.” The outlook for Allied financing efforts was now “very very dark.” The
British and French had to abandon their hope to stretch out their gold and securities with the string
of short-term credits. British financial officials believed the “mischief done was irreparable.” The
sands of the hourglass were now running out for how much longer British and French reserves
could sustain the current level of Allied war effort.
Months earlier, the British had cast about for alternative sources of supply in order to retaliate
against difficult Americans. As they had discovered before, however, “there was really nothing to
deliberate about because our dependence was so vital and complete in every respect that it was
folly even to consider reprisals.” They could not sustain the present war effort for more than
another few months.33
More knowledgeable British leaders had long feared this day. Some British officials (and Jack
Morgan) were inclined to blame German Jews on Wall Street for their trouble. Morgan cabled
Davison, “It may be necessary to come out in public attack on German Jews and their influence with

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Thema Wilson Gives the Allies a Financial Heart Attack
Zelikow, Philip. The Road Less Traveled: The Secret Battle to End the Great War

Tagesnotiz vom: 07.09.2022

Government.” Davison quickly cautioned Morgan against any such anti-Semitic attack, saying it
would be “futile as well as harmful.”
Davison guessed (rightly) that the real issue was policy. He guessed (rightly) that the real source of
the trouble was President Wilson. He sensed “there was something in the air” about “an important
Peace movement.”
At the German embassy in Washington, Bernstorff also correctly surmised, as he cabled Berlin, that
this warning was “the first indication that this Government proposes to exert pressure upon our
enemies in the cause of peace.” To the British ambassador in Washington, the situation was equally
obvious. “The object of course is to force us to accept President’s mediation by cutting off
supplies.”34

Zelikow, Philip. The Road Less Traveled: The Secret Battle to End the Great War, 1916-1917 (S.173).
PublicAffairs. Kindle-Version.

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