Wilson broke off diplomatic relations with Germany but began new peace efforts via Austria-Hungary. The new Austro-Hungarian Emperor Karl shared Wilson's desperation to open general peace negotiations. With the British down to their final tranche of American assets and yet refusing to cut their American spending, the Allies steadily grew more vulnerable to US pressure. Wilson pursued peace possibilities with Austria-Hungary, beginning indirect negotiations with the British leadership, who thought that an Austro-Hungarian separate peace might be on offer. These indirect negotiations led Lloyd George to make a reckless confession to the US Ambassador to London, Walter Page: Lloyd George confessed that he had secretly been reading Page's instructions from Washington. Page magnanimously kept this confession a secret. At the same time, British intelligence manouevred to make the best use of the Zimmermann Telegram. When Wilson received it, it had a dramatic effect on his diplomacy. Before, Wilson had consistently moved speedily and creatively to promote negotiations between London and Vienna. Afterward, he took a very hard line towards the Austro-Hungarians and broke off these peace negotiations despite large Austro-Hungarian concessions. Soon thereafter, the United States joined the First World War and provided massive financing to the Allies.

Britain's great gamble began with the launch of the Somme Offensive. To extend their American assets, Asquith dislodged the spendthrift Lloyd George from the Ministry of Munitions by promoting him to War Secretary, replacing him with the more economy-minded Edwin Montagu. Startling talk of peace came from French President Raymond Poincaré, which British hardliners moved rapidly to bury. Otherwise, the question of American mediation only rumbled very quietly beneath the surface. British intelligence opened a new source of information with the discovery of the "Swedish Roundabout", unlocking the communications of the German Ambassador to the United States. The British military leadership continually reassured the government that the Somme Offensive was making great headway. As Romania moved to enter the war on the Allied side in August, the government was taken to unfamiliar heights of optimism: it finally seemed as if the Allies might be able to win the war on schedule.

In the aftermath of German-American diplomatic crisis over submarines, House conceived a new, more ambitious strategy of trying to use US power to end the war and prevent an Allied defeat. Although House initially struggled to find a receptive audience amongst the British leadership, anxiety within the British government was on the rise. Efforts to reconcile Britain's economic and military strategies settled on a plan to win the war with a great 1916 offensive – a strategy that provoked serious disquiet amongst a number of key British leaders. By February 1916, a number of British leaders, including Foreign Secretary Sir Edward Grey, encouraged House towards a still more ambitious conception of American mediation: not only would the United States play a key role in setting up the negotiations, but it would also chair them. House and Grey agreed the 'House-Grey Memorandum', in which House promised that the United States would guarantee a set of limited Allied war aims at a peace conference. All the while, British intelligence was decrypting House's telegrams and attempting to undermine his negotiations.