1916 was a pivotal year for the British Empire and for the world. In 1916 Britain suffered the humiliating surrender at Kut, a serious revolt in Dublin, the naval reverse at Jutland and the massive blood sacrifice at the Somme. It was no nearer winning the Great War it had begun two years earlier against Germany and Ottoman Turkey. It was expending a great deal of blood and treasure in Germania Delenda Est. Something changed in the world that was not perceptible at the time but is now – this was the start of the British Empire giving way to the United States. Now let us see why 1916 marked this pivot of history.

The shield of the Royal Navy meant that Britain could develop increasing military forces during the war, whereas the continental Powers were compelled to put their whole strength into the field at once. This gave the island nation a great advantage – it could deploy and redeploy its forces as it chose fit, as fluctuations in the War and ambitions changed. It could increase its influence as the War proceeded and decide where influence should be increased, in France or Mesopotamia or elsewhere.

It could also maintain its industrial production, avoiding its crippling by military conscription when the whole of a country’s manhood needed to be put into the field. And when industry had to be sacrificed to military necessity by the continental powers and they were forced to pay for the War with gold and not exports Britain was in the handy position of keeping the sinews of war in continuous supply without having to draw on its gold supply.

British Sea power meant mostly business as usual for England during the Great War. Alone among the combatants Britain pursued its usual commercial course, enjoying the bulk of its normal trade income whereas the continental combatants were forced to fight on their previous accumulations that the War used up at a frightening rate. Lloyd George once said that Britain’s enemies could find the first hundred millions needed for warfare as easily as England but not the last. But what would happen if England also could not find the last hundred million?

Britain financed the War on the Allied side. With the strongest credit rating Britain took charge of Dollar financing and borrowed for both France and Russia. John Maynard Keynes was paymaster to the Allies. He gave a talk to the Admiralty in March 1916 in which he told them: “We bribe whole populations. It is our money that keeps the Allies sweet.”

In October 1916 Keynes issued an important memo from the British Treasury entitled ‘The Financial Dependence of the United Kingdom on the United States of America’. It noted that up until that point Britain had been funding its Great War 3/5 by selling its gold and securities and 2/5 by obtaining loans on the international market.

The problem emerging was that the gold and securities accumulated by the Empire over the previous 200 years were running out. Decades of capital accumulation gained by British Imperialist expansion in the 19th Century was undone by 3 years of War from 1914. Britain’s financial standing in the world was fundamentally undermined by its exhaustion of its accumulated overseas assets in fighting the Great War and its indebtedness to the U.S. to finance its expansion during 1915-6.

During the following 6 months if the War was to be waged as vigorously as it had, Keynes calculated that the gold and securities available to the Treasury would only fund 1/5 of the War, leaving 4/5 to be funded by loans. And then it would be nearly 5/5 through loans, by the end of 1917. This financial exhaustion was going to make Britain highly dependent on the goodwill of the U.S. in continuing its War.

Britain and its allies needed Dollars to finance purchases in the U.S. Most of the Dollar needs were met through the British government’s agent in New Work, J.P. Morgan which raised large Dollar-based loans to wage the War. Keynes warned the British government that of the 5 million Pounds that was being required every day to finance the War, 2 million Pounds had to be Dollars, which was mostly borrowed. If the U.S. government moved to restrict British borrowing on its money markets, the Allied War effort would collapse. In November 1916 when the U.S. Federal Reserve warned U.S. investors to be wary of further exposure to the over-extended British government such an eventuality became possible.

As Keynes noted:

“A statement from the United States Executive deprecating or disapproving of such loans would render their floatation in sufficient volume a practical impossibility, and thus lead to a situation of the utmost gravity… Any feeling of irritation or lack of sympathy with this country or with its policy in the minds of the American public… would render it exceedingly difficult, if not impossible, to carry through financial operations on a scale adequate to her needs. The sums which this country will require to borrow in the U.S.A. in the next six or nine months, are so enormous, amounting to several times the entire national debt of that country, that it will be necessary to appeal to every class and section of the investing public.

“It will be hardly an exaggeration to say that in a few months time the American executive and the American public will be in a position to dictate to this country on matters that affect us more nearly than them. It is, therefore, the view of the Treasury, having regard to their special responsibilities, that the policy of this country towards the U.S.A. should be so directed as not only to avoid any form of reprisal or active irritation, but also to conciliate and to please.” (10.10.16)

At this point the U.S. was also supplying 50% of Britain’s large guns, 30% of its large shells and components and over 1 million rifles were on order from American suppliers, according to a Ministry of Munitions memo prompted by the Keynes warning.

By March 1917, Britain’s stock of Dollars was down to around one month’s worth of purchases on the U.S. markets. Only U.S. entry into the War on the Allied side and the U.S. government taking over Dollar financing of the War would prevent a great crisis and the need to settle with Germany.

This all raised the issue of War aims, since the possibility of having to conclude a peace was now having to be considered. Lord Lansdowne, in a memo to the cabinet on 13 November, on the subject of what terms peace might be dictated to the enemy on emphasized the cost of the Great War and how it might affect the peace if the War continued into 1917 and beyond:

“Shall we even then be strong enough to ‘dictate’ terms?… We have obtained within the last few days from the different Departments of the Government a good deal of information as to the situation, naval, military, and economic. It is far from reassuring. What does the prolongation of the war mean?

“Our own casualties already amount to over 1,100,000. We have had 15,000 officers killed, not including those who are missing. There is no reason to suppose that, as the force at the front in the different theatres of war increases, the casualties will increase at a slower rate. We are slowly but surely killing off the best of the male population of these islands. The figures representing the casualties our Allies are not before me. The total must be appalling.

“The financial burden which we have already accumulated is almost incalculable. We are adding to it at a rate of over £5,000,000 per day. Generations will have to come and go before the country recovers from the loss which it has sustained in human beings, and from the financial ruin and the destruction of the means of production which are taking place.

“All this is, no doubt, our duty to bear, but only if it can be shown that the sacrifice will have its reward. If it is to be made in vain, if the additional year, or two years, or three years, finds us still unable to dictate terms, the war with its nameless horrors will have been needlessly prolonged, and the responsibility of those who needlessly prolong such a war is not less than that of those who needlessly provoked it.

“Many of us, however, must of late have asked ourselves how this war is ever to be brought to an end. If we are told that the deliberate conclusion of the Government is that it must be fought until Germany has been beaten to the ground and sues for peace on any terms on which we are pleased to accord to her, my only observation would be that we ought to know something of the data upon which this conclusion has been reached.” (Cab 37/159/32, 13.11.16)

This must surely have been a bombshell to those attending the Cabinet. Edward Grey in his reply said that it would be “premature” to look for peace and a “betrayal of the interests of this country” to advocate it as long as there was a belief Germany could be defeated; or the military situation was likely to improve in the Allies favour; or that Germany was injured internally more so than England, making recovery more difficult for her. It was only if the situation was predicted to deteriorate for the Allies over the following months that it would be justified to “wind up the war at once on the best terms achievable.” (Cab 37/160/20)

Shortly after this Asquith resigned as Prime Minister, giving way to Lloyd George.

The reasoning above was the reason why the British continued to reject German peace offers and the Pope’s initiative of 1917 because it was felt that peace would be a defeat if it left Germany stronger, which it would do if Britain had not the ability to dictate peace terms to her. But by the same count Britain had to change the character of its Great War in deference to the fact that it was in hock to the U.S. And that meant it would need to do things that would have great implications for the world it would inherit, but would be too weak to assert itself upon.

The other important development in the Great War was how it developed from a Balance of Power war planned by the secret departments of the State into a middle class war of the democracy. In previous conflicts the gentry, lower classes and mercenaries had done the fighting whilst the middle classes picked up the economic benefits of the Royal Navy’s actions. However, the great propaganda effort of the Liberal War combined with Kitchener’s desire for mass armies meant the Great War became a middle class war with it doing the fighting and dying for good over evil.

The Middle class in engaging in war for the first time on a mass scale and changing the character of that war as a result – from a traditional limited Balance of Power war led by the Royal Navy to a mass sacrifice of the good to see off the evil in great attritional land battles – altered its previous relationship to war. It was not there to prosper at the end as it had been in the past. It left its guts in Flanders and traumatised itself to a great degree.