BRITISH WAR FINANCE. 1

" THE financial position to-day is serious." This
declaration of the Prime Minister, made in circum-
stances of more than usual formality, on November
2nd, 1915, suggests that a brief survey of the war
finance, and of the financial problems that now con-
front us, may not be altogether untimely. Three
weeks earlier the Financial Secretary, in a remarkable
speech on the Finance Bill, had given what to the
public generally was the first official intimation of
the real nature of the situation, and of the uncom-
promising transformation of our ordinary economic
life which it demands. It is further convenient for

1 An article contributed to the Economic Journal for December, 1915.
F.C.F. A



2 PAPE&S ON CURRENT FINANCE

a review of the whole position that we have in the
Chancellor's recent Budget speech authoritative
figures and estimates which bring the necessary data
for discussion nearly up to date.

Many similar reviews have already appeared, and
anyone writing on the subject must, in particular,
be under obligation to the works of Mr. Lawson and
Mr. Withers mentioned at the head of this page, as
well as to the admirable compendium of war legis-
lation, edited by Mr. Pulling, the financial volume
especially. Mr. Lawson and Mr. Withers both deal
with the past rather than with the future : with the
war crisis rather than with the fundamental finance
problems caused by the war expenditure. But the
history they have sketched so admirably, and the
acute criticisms with which the books abound, are
full of instruction for fuller inquiry. Their work will
serve as a text for a good deal of what can here be
said.

Mr. Withers's book may be first noticed as the
earlier of the two. It seems to have been written
in December, 1914, and naturally is almost exclu-
sively concerned with the war crisis and the various
emergency measures by which it was met. It is an
oft-told tale, now pretty familiar to the public ;
but Mr. Withers's account, especially the part that
deals with the bill market, will have permanent
value. The position at the eve of the declaration
of war was tersely summed up by Mr. Asquith last



BRITISH WAR FINANCE 3

March. 1 " We were confronted at that moment with
the double risk the risk of a shortage of internal,
and of a general discredit of international, currency. "
The shortage of internal currency was more or less
universally experienced, by neutrals as well as belli-
gerents. But international currency means, for the
most part, the London bill : and the discredit of this
currency, involving as it did a mass of paper estimated
at 350 millions sterling, was a special danger of the
gravest kind for the London market.

The shortage of internal currency was met in most
countries by an expansion of the note circulation,
sometimes of regular, sometimes of emergency issues.
There seems generally to have been a run on the
banks, as well as a remarkable scarcity of small
change. On the Continent we find Governments,
Banks, Municipalities, and even Chambers of Com-
merce issuing small notes ; in some cases for values
as low as a mark or a krona or a franc ; even
quarter franc notes were issued in France. 2 This
scarcity of small change, it is said, was due partly
to mobilisation needs, but mainly to hoarding. It
does not seem to have been seriously felt in this
country. Nor was there, so far as can be judged,
any appreciable run on the banks, 3 apart from the

1 The whole statement will be found in Lawson, pp. 11, 12.

2 M. Thery tells us (12th Nov., 1915), that the scarcity of small change
continues in France, in spite of issues of 1 and 2 franc notes to the
amount of 43,567,500 francs by sixty-six Chambers of Commerce.

8 " Not even on a savings bank." Lawson, p. 103.



4 PAPERS ON CURRENT FINANCE

inevitable demands of an August Bank Holiday,
though contrary statements have been made. There
is, at any rate, no trace of any such movement in the
Monthly Bank Keturns. The proportion of " cash "
shown for the month of August was 20*1 against
15 '2 for July; and the amount 125 millions as
against 91j millions. The July figures were quite
normal, showing exactly the same proportion of
cash as the previous year. Too much must not
be made of these figures. Our bank returns are
deplorably inadequate, concealing precisely what it
is most important to know : " dim candles, lit to
make darkness visible," as Mr. Withers aptly puts
it. 1 Keturns apart, however, it seems that so far
as can be discovered by inquiry, there was nothing
deserving to be called a public fortunately had entire confidence in them.
It was the bankers, not the public, who were panic-
stricken, and who, like the United States banks in
1907, did most of the hoarding. Some of them seem
to have obliged their customers to take notes instead
of gold, and so caused pressure on the Bank of Eng-
land which might have had serious effects. The
old tradition against direct re-discount with the Bank
seems to have been thrown over. Mr. Lawson speaks
euphemistically of the " extreme prudence " of " some
of the clearing banks, who joined in the rush to the

1 Even these meagre returns have been suspended since June last.
Nothing could be more calculated to destroy public confidence.



BRITISH WAR FINANCE 5

Bank of England, and dumped their own bills upon
it " (p. 19).

When we consider the absolute inadequacy of our
reserve position, even for ordinary emergencies, the
bankers' panic is intelligible enough. They were well
aware that if the public generally had demanded in
gold 5 per cent, of the sums standing to their credit,
whether for purposes of export or hoarding, or even
for extra pocket-money, the whole system would
have collapsed. It would have been impossible at
that time to obtain assistance from the Bank of
France, as on three recent occasions. Again, we
stand alone among the great commercial countries
in having no provision for emergency issues of legal
tender money. In other countries the National
Bank can make such issues. The absurd Act of
1844 makes this impossible in England, and thus
deprives our note of that elasticity which is the
special virtue and raison d'etre of this form of currency.
In France, Germany, and the United States further
provisions had been made. In the United States
the Aldrich-Vreeland notes were ready, and were
issued to the amount of over 75 millions, besides a
Treasury issue of nearly 25 millions, and the usual
Clearing House certificates. In Germany notes which
could replace gold coin had been introduced before
the war. As early as 1912, 15 millions worth of
50- and 20-mark notes had been issued. In France,
they were ready for the emergency. Notes of 20



6 PAPERS ON CURRENT FINANCE

francs and 5 francs had been prepared in advance
and sent out in good time ; the actual issue began
on July 31st. Nothing of the kind existed here,
though it had long been foreseen that it would be
required. We were as unprepared financially as in
a military sense.

The abler bankers had constantly protested that
more substantial reserves were necessary. It was con-
sidered enough to say in reply that the Bank of Eng-
land, in virtue of its peculiar position in the market,
could always create credits amply sufficient to meet
internal requirements, and that England, as a creditor
country, could always command gold from abroad.
But it is obvious that the Bank of England credits
could not meet a run on the banks for gold. No
doubt a great creditor country can always meet a
sudden strain by withdrawing accommodation from
those whom it has taught to expect it. But this is
not usually considered good banking. It is certainly
bad business. Here it is hard to agree with Mr.
Withers. He assumes that our banks acted in this
way, and finds in the deadlock thus produced the
best proof of London's supremacy in finance (p. 78).
To others it will seem a proof of weakness. Nothing
is more likely to endanger that supremacy than action
of this kind : two or three such financial victories
would be fatal. We may be fairly sure that nothing
but extreme necessity would have driven English
bankers to such a shift. Even creditor countries



BRITISH WAR FINANCE 7

require strong reserves if their banking reputation
is to be maintained. There was a smart set of city
writers who went still further in their opposition to
larger reserves. If prudent banking, they said, meant
sitting on a heap of gold, then any fool could be a
banker. The real art of banking consisted in the
economy of gold. There seems confusion here. By
all means economise gold in the circulation and in
the outlying banks. The last place for such economy
is the central reserve. But these were the views
which have prevailed in the City. 1

Thus the outbreak of war found us with a banking
reserve so cleverly " economised " that, as just stated,
a 5 per cent, run on their huge deposits would have
broken the banks. The situation would have been
an anxious one in any case. But it was made in-
comparably more serious by the complete collapse
of the great markets which are so intimately con-
nected with the banks, and which, as Mr. Conant so
justly maintains, it is a primary function of the
banking reserve to support. Next to their " cash,"
the banks rely chiefly on three lines of resources.
There is the money at call, their holdings of bills,

1 It is only fair to mention that leading bankers are believed to have
agreed on a scheme, a few weeks before war broke out, which if it
had been adopted would have distinctly improved the position, though
not perhaps in quite the best way. But this scheme, of course, required
the assent of the Bank of England, and the reform of the Act of 1844.
Nor would it have been really effective until it had been in operation
for two years or so, nor unless more adequate banking returns had
been set up. It was too late.



8 PAPERS ON CURRENT FINANCE

and their securities. As to their securities, the
London Stock Exchange closed on July 31st. Wall
Street " did not open." Most other bourses were
already closed. It was clearly impossible to realise
securities. The bill market too was paralysed. The
Bank of England acted with its customary public
spirit, but could obviously only deal with a fraction
of the bills current. As for the call money, it has
always been an open secret that the short loan market
is the danger point in times of general crisis. 1 The
system is only possible on the assumption that what
one bank calls, either another bank or the Bank of
England will be ready to lend. It must inevitably
break down whenever there is general pressure.
Thus the bankers found that what they usually re-
gard as their liquid assets were now, in Sir Edward
Holden's phrase, frozen.

It was a desperate position, and it was not eased
from the bankers' point of view by the fact that
Government had conceded a Bill Moratorium. This
Bill Moratorium was probably an inevitable measure.
It seems in some form or degree to have been every-
where adopted. But it did not improve the banking
situation, except in so far as the banks were acceptors.
The bankers not unnaturally came to Government
for relief. What their demands were we can only
conjecture. The concessions they obtained were

1 Lord Goschen insisted upon this in his speeches on the Baring
difficulty in 1891.



BRITISH WAR FINANCE 9

stupendous. First the Government very wisely ex-
tended the August Bank Holiday by three days :
a period not so long as to cause alarm, and yet long
enough to give time for consideration. It then pro-
ceeded to provide emergency currency on a scale never
before dreamt of. The Treasury were to issue full
legal tender notes for l and 10s., payable in gold
at the Bank ; and the bankers might obtain advances
of these notes, at Bank rate, up to an amount not
exceeding 20 per cent, of their deposit liabilities
say a total sum of 225 millions. The same Act
empowered the Bank " so far as temporarily autho-
rised by the Treasury ... to issue notes in excess
of any limit fixed by law." Postal orders were put
on the same basis as to legal tender and redemption
at the Bank as the currency notes. Further, Scottish
and Irish notes were made full legal tender, and banks
in Scotland and Ireland were not under obligation
to pay their notes except at their head offices, and
might pay, if they thought fit, in the currency
notes.

These provisions might have been thought amply
sufficient to maintain cash payments. But on the
same date (August 6th) as they were enacted, the
moratorium already granted in regard to bills was made
with certain exceptions general. Thus cash payment
became optional, not only from banks, but generally ;
the only important exception from the banking point
of view being that notes were still payable in cash.



10 PAPERS ON CURRENT FINANCE

'' The flag was lowered," as Mr. Withers has it : " for
the first time since the Eestoration," Mr. Lawson
says, " the collection of current debts was interfered
with." The general moratorium was undoubtedly
the most unfortunate of our emergency measures,
and in all probability we shall not be allowed to forget
it. 1 In comparison with it, the suspension of cash
payments by the Bank in 1797 seems a comparatively
modest precaution. It may, of course, have been ne-
cessary : but the necessity is not apparent to observers
who have only the ordinary means of information.
Mr. Lawson (on p. Ill) states very fairly the argu-
ments for and against the measure. Though he
abstains from passing a final judgment, it is pretty
clear what his judgment would be.

It can hardly be doubted that the relief measures
erred by excess rather than defect. Out of the 225
millions offered to the banks, the banks actually
borrowed less than 13 millions, which was soon
repaid. Some of the greatest banks made no use
of the moratorium. Mr. Lawson says : " Without
declaring a moratorium the Americans gave them-
selves the benefit of it. On the other hand, we de-
clared a moratorium, but most of us paid our debts
all the same." There is a good deal of truth in this.

1 Cf. Mr. A. D. Noyes's article in the Yale Review for October, 1915.
He speaks of the " stupendous loss in economic prestige which London
has already suffered." The language is somewhat over-coloured, and
perhaps reflects the known aspirations of New York to displace London
as the world's financial centre : but it deserves note.



BRITISH WAR FINANCE 11

But why did the New York exchange rise to $7, if
Americans were not trying to pay their debts ?

But whether the relief measures were or were not
excessive, the huge scale on which they were granted
is some indication of the kind of provision the banks
thought necessary for the situation created by a
European war. Why had no approach to an ade-
quate provision been made ? The war could have
been no surprise to bankers. It had long been
expected and prepared for in the great European
centres ; and after the experience of the summer
of 1911 our bankers could have been under no
illusions. Innumerable warnings had been given :
the very date of the declaration of war had been
foretold by well-placed observers. By Mr. Lawson,
at any rate, war was seen to be inevitable two years
before the actual outbreak. Writing in 1912, he
said : "It is no longer any secret that we are drift-
ing into a trial of strength with the most powerful
of European States." 1 But here a question has been
raised which seems to deserve more consideration
than has been given to it by either Mr. Lawson or
Mr. Withers. Would any reserve provision that
could reasonably have been made in advance have
appreciably strengthened our position in view of a
war crisis ? There are some who think it would.
They think that reasonable reserve and emergency
provision would have made a general moratorium

1 Modern War and War Taxes, p. 138.



12 PAPERS ON CURRENT FINANCE

unnecessary. Granting that a bill moratorium was
inevitable, they think it open to question whether
it would have been necessary to suspend all the
usual finance and acceptance business, or even to
make a prolonged suspension of the stock market
(subject, of course, to the necessary restrictions on
trading with the enemy). The question is bound up
with another. Did the collapse of the great markets
paralyse the action of the banks, or was it the with-
drawal of adequate banking accommodation that
paralysed the markets ? x The absolute suspension of
the markets was a heavy blow, not only to the banks,
but to the general business of the country. Might
they not have been kept alive, though with their
functions restricted, if due and timely preparation
had been made ? It is a difficult question on which
no one could be anxious to dogmatise. One thing
may fairly be said. The object was so vitally im-
portant that it was worth while to have made a
determined effort to secure it. No such effort was
made.

Mr. Lawson's book throws valuable light on these
matters. The position of the great bill and stock
markets during the crisis, and under the emergency

X A competent observer, Mr. Spalding, says, "The consensus of
opinion, outside banking circles, seems to be that the action by the
banks, in calling up all their loans from the discount brokers and other
similar borrowers, to some extent precipitated the crisis." Foreign
Exchanges, p. 98.

The main purpose of a banking reserve is to make such pressure
unnecessary.



BRITISH WAR FINANCE 13

measures, is very fully treated by him. His book is
much wider in scope and more fully documented
than Mr. Withers's sketch, and brings the history
down to a later date. What that date is does not
always clearly appear. The impression one gets is
that the book is to some extent a collection of articles
written at different times. But the whole is well
arranged and forms by far the most important con-
tribution to the critical history of the war crisis
which is at present available. The bill market is
not so prominent in his pages as in those of Mr.
Withers : but Mr. Lawson gives a useful account of
the estimates that have been made of the bills in
circulation at various times. Both writers accept
the general opinion that at the time of the crisis
something like 350 millions of bills were current
in the London market. Both writers, again, find
that the value of the earlier forms of relief was over-
rated. Mr. Withers endorses the very general view
that the banks might have " shown greater readiness
to assist in the task of reorganising exchange "
(p. 74). Mr. Lawson is less inclined to criticise the
banks, but justly lays stress on the supreme services
rendered by the Bank of England. It was, as he
truly says, the mainspring of all the emergency
measures. ' Without it there could have been no
heroic bill-discounting, no conjuring with Treasury
guarantees for all sorts of financial and commercial
debtors. The Bank of England furnished the



14 PAPERS ON CURRENT FINANCE

talisman, and the Chancellor of the Exchequer
applied it " (p. 13).

The services rendered by the Bank were certainly
remarkable. The White Paper recently issued shows
that in the five days ending July 1st the Bank had
made general advances to the amount of 27 millions ;
while its total advances to bill-brokers are estimated
at 30 millions. In the week ending August 5th
its gold reserve declined 17 millions, notwithstand-
ing a receipt of 5j millions, leaving the amount
as low as 11 millions. The proportion dropped in
a fortnight from 52 per cent, to 15 per cent. The
Bank state that they had refused no legitimate
applications for assistance. The whole mass of
liability on account of relief measures, nominally
assumed by Government, of course fell in the first
instance on the Bank. Some idea of the amount
of this liability may be gathered from the statement
in the Eevenue returns that 160 millions had already
been repaid. It is clear that the Bank Directors
showed their usual courage and did all that could
possibly have been expected of them.

Passing to the Stock Exchange position, we find
Mr. Lawson here at his best. He is not satisfied
that this market need have been closed. Securities
had been depreciating for a long time before the war,
and in the ten days before the House closed there
was a further fall of no less than 188 millions (or
6 per cent.) in the representative securities scheduled



BRITISH WAR FINANCE 15

by the Bankers' Magazine. The open account, too,
was small. So Mr. Withers (p. 121) : " It was gener-
ally agreed by most active stock-brokers in the
middle of July that they had never seen the Stock
Exchange account so small." Subsequent returns
showed it to be about 80 millions for London
and 12 millions for the country ; hardly one-
quarter of the liability in the bill-market. Mr.
Lawson thinks that the banks had much more
at stake than the members of the Exchange, 1 and
that they exerted their influence in favour of closing,
a step which he does not believe the Committee
would have taken on their own responsibility. But
he admits that direct pressure was put upon the Com-
mittee by a section of the members. " The Stock
Exchange was made the scapegoat of the more
powerful and higher-placed offenders. . . . After
hours on July 30th, forty large firms are said to have
notified the Committee that if the House re- opened
they would have to hammer themselves " (p. 54).
There we must leave the matter. Of the provisions
made .for immediate relief to the Exchange, and for
facilitating the postponed settlement of November
18th, Mr. Lawson seems to approve. The under-
taking of the " banks to which currency facilities
are open" not to press for repayment of loans until after the war seems, as lie says, to have been of
the nature of a quid pro quo.

1 " It is estimated that the banks had lent 250 millions to their
customers against stock exchange securities as collateral." Withers,
p. 122.