The arms sales sure, but could the USA forbid the loans?
Forbidding the loans was in fact the initial US policy but was reversed fairly soon. An arms embargo had wide support in Congress and might well have passed but for the opposition of the administration (even Bryan opposed it).
The point is, that if you had an administration that was pro-German enough, the ban on loans could have continued (though it would have been harmful to the US economy) and a ban on arms sales could have been enacted.
The best short discussion I know of these issues is by Richard Leopold in
The Growth of American Foreign Policy: A History, pp. 298-301
. (I quote him a lot both because I was a student of his and because he makes a real attempt to analyze the dilemmas facing US foreign policy makers during the First World War instead of glibly condemning Wilson as so many people here do.)
***
With respect to loans, international law distinguished between money lent by neutral governments and by citizens of a neutral state. It did not forbid, nor did American domestic statutes so forbid, individuals to float loans or to extend short-term credits for facilating trade. Such a prohibition was not needed in the Napoleonic era when the young republic lacked financial reserves. During the Civil War, the Union borrowed extensively from Prussian bankers; during the Russo-Japanese struggle. New York investment houses aided Japan. Although the Hague Conferences had taken no stand on the matter, many Americans — Bryan among them — came to believe by 1914 that unless some curbs were imposed, the operations of private financial institutions might undermine American neutrality.
Actually, the administration's first pronouncement was a surprise. On August 15, 1914, Bryan, with respect to a French plan to float a bond issue of $100 million with J. P. Morgan & Company, declared that loans to belligerents by American bankers "were inconsistent with the true spirit of neutrality." Money, he had told Wilson five days earlier, was "the worst of all contrabands because it commands everything else." The Secretary argued that public subscriptions intensified emotions and would destroy the very impartiality the President sought, and on that point Bryan may have been right. But there were much sounder reasons why huge loans to combatants should be discouraged in August, 1914. The war had unsettled the entire American economy. The security markets were disorganized and the gold reserves endangered. To ban loans as unneutral merely confused the problem. If the export of dollars was to be forbidden as contraband, why should not the outflow of other contraband items also be stopped? Bryan did not go that far, and it is not clear whether his concept was designed to keep the country out of war, to offset the advantage held by the Allies, or to promote the material well-being of the United States. If persisted in, however, his policy would have led to serious economic dislocation, since within a few months British sea power made a prosperous foreign trade possible with only England and France.
Because it was commercially unsound and strategically unwise, this opposition to loans was gradually relaxed and ultimately abandoned. But to save Bryan's pride and to avoid offending German sympathizers, the return to tradition was not candidly explained, with the result that many joeople at the time and in later years regarded it as a conspiracy against the Secretary and proof of the pro-Allied bias of the administration. On October 15, 1914, the Department privately conceded that loans stood on the same ground as the shipment of other contraband and did not violate American neutrality. On October 23 Lansing secretly assured two investment houses that it was proper to extend commercial credits to the belligerents. Bryan assented, but he insisted on maintaining a distinction between credits — which banks could grant quietly to promote trade that was valuable to the whole country — and loans — whose bond rallies might arouse popular passions and divide the American people. By March 31, 191 5, it was pubhcly acknowledged that short-term credits were not barred by the statement of August 15, 1914. The statement itself was never openly repudiated; but the President tacitly renounced it on September 7, 1915, when he agreed to permit a group of New York bankers to float a $500 million bond issue which England and France desperately required if they were to continue their substantial war purchases in this country.
Thus ended in failure the first attempt by the United States to include among neutral duties a proscription on loans by its citizens to belligerent governments. It failed because it seemed inconsistent to halt the export of dollars as contraband and not to halt the shipment of other kinds. It failed because it seemed unfair to deny the Allies access to American banks to carry on a mutually profitable commerce just because Germany had no comparable trade to finance. But it failed primarily because such a ban, while beneficial to the nation's economy in August, 1914, had the opposite effect a year later. The influence of Wall Street or fear of a German victory had nothing to do with the reversal. There was no expectation in September, 1915, that the Allies would be defeated or that the United States would enter the struggle.
The sale of munitions posed a more difficult problem. Again, there was nothing in international or domestic law to stop American manufacturers from selling guns and shells to belligerent governments. Secretary of State Jefferson admitted as much on May 15, 1793, while forty-four nations declared at The Hague on October 18, 1907, that a neutral was not obliged to prevent the export of weapons. The only limiting factor was that, as contraband, those materials could be confiscated by the belligerents wherever found. In theory, then, the United States had no authority to halt the arms traffic, and Germany had no grounds to protest. But in practice, many Americans were disturbed by the deaths which the products of their factories inflicted almost wholly on the Central Powers. The Germans, caught in the grip of the British navy, had to rely on propaganda and their kinsmen in the New World to try to check that trade in the name of humanity and fair play.
Once again Wilson faced a dilemma. To stop the flow of munitions would penalize the Entente for its command of the sea at the very moment when its foes had shown themselves more powerful on land. To permit the traffic to go unimpeded would antagonize Germany and perhaps invite retaliation. Neither traditional neutrality nor a new interpretation of its duties fully protected the national interest. Hence, the President refused to interdict the sale of guns and shells, arguing that it would be more unneutral to alter the rules after hostilities had commenced, especially to compensate one side for its inferiority, than it would be to adhere to precedent. But because the arms traffic obviously helped the Allies more than it did their rivals, because it aroused humanitarian sentiment, and because it seemed easier to eliminate by legislative fiat, the administration met with a stiffer challenge than on the loan issue. Resolutions empowering the executive to impose an arms embargo were introduced into both houses and found strong support among idealists, pacifists, Anglophobes, and German sympathizers. Bryan agreed with Wilson on this matter and tried to stem the agitation on January 25, 1915, by a public defense of the President's policy. On February 18 the Senate tabled by a margin of 51 to 36 an embargo contained in an amendment to another bill. Although the campaign for a ban on arms shipments was renewed in the next session, no other vote was taken.
For a second time a move to widen the duties of a neutral lost. Once again it failed early in the war, before relations with Germany were embittered by the submarine controversy and before it was felt imperative to save the world from Prussian autocracy. Once again it failed because it ran counter to Wilson's definition of the national interest. Superficially, of course, an arms embargo seemed to insure greater impartiality; actually, it would have been an attempt to offset an advantage possessed by one belligerent. Superficially, too, it looked as if the continuation of the munitions traffic was dictated by economic considerations; actually, Wilson did not make up his mind on that ground.
https://archive.org/details/growthofamerican00inleop/page/298