" 
 
WAR AND LOMBARD STREET 
 
BY THE SAME AUTHOR 
 
 THE MEANING OF MONEY 
 
 Manchester Guardian (leading article). " No common measure of 
 literary accomplishment, a lucid, forceful, and pointed style, and a great 
 store of material for apt and often amusing illustration have lent both grace 
 and charm to a work of quite exceptional utility." 
 
 STOCKS AND SHARES 
 
 Daily News. " Should be of the greatest value to investors and all who 
 take an interest in City matters. ... It is eminently readable, and the 
 description of a typical flotation, ' Hygienic Toothpowder, Ltd./ is a literary 
 gem." 
 
 MONEY-CHANGING 
 
 AN INTRODUCTION TO FOREIGN EXCHANGE 
 
 Prof. H. S. FOXWELL, in the Economic Journal. ' ' The work is vivid 
 with actuality, always perfectly lucid, often fascinating. There have been 
 many able and a few clear works on exchange : this is perhaps the first 
 which could be called positively attractive. . . . Mr. Withers is the sworn 
 foe of all jargon. He has a special gift for stripping it off, and getting as 
 directly as may be at the realities which the jargon had obscured. For this 
 his works will live, and deserve to live." 
 
 POVERTY AND WASTE 
 
 Nation (New York)." In Mr. Hartley Withers we discover something 
 the world is always looking for and so seldom finding a perfect conjunction 
 of economics and ethics." 
 
 LONDON: SMITH, ELDER & CO. 
 15, WATERLOO PLACE, S.W. 
 
WAR AND 
 LOMBARD STREET 
 
 BY 
 
 HARTLEY WITHERS 
 
 " Wise Venturing is the most commendable Part of human 
 Prudence. 
 
 It is the upper Story of Prudence, whereas perpetual caution 
 is a kind of underground Wisdom that doth not care to see 
 the Light." 
 
 GEORGE SAVILE, Marquess of Halifax. 
 
 SECOND IMPRESSION. 
 
 LONDON 
 
 SMITH, ELDER & CO., 15, WATERLOO PLACE 
 1915 
 
 (All rights reserved) 
 

 PRINTED BV 
 
 WILLIAM CLOWES AND SONS, LIMITED 
 LONDON AND BECCLHS 
 
PREFACE 
 
 To give a full account of all that happened in 
 the City last July and August, is a task for 
 some one who is plentifully endowed with leisure. 
 I only produce this brief outline, because there 
 is one good reason for trying to make the mean- 
 ing of these events clear at once. This is, that 
 they gave a wonderful proof of the enormous 
 strength of England's monetary power, and a 
 full recognition of this strength may be useful 
 now. 
 
 I have to thank my old friend and former 
 colleague, Mr. J. F. Stone, for valuable help with 
 tables of prices and bullion movements. 
 
 HARTLEY WITHERS. 
 
 6, LINDEN GARDENS, 
 Dec., 1914. 
 
CONTENTS 
 
 CHAPTER I 
 
 THE MORATORIUM 
 
 PAGE 
 
 Suddenness of the crisis Its severity increased by the strength of 
 
 London's position Credit and civilization Moratorium defined i 
 
 CHAPTER II 
 
 THE INTERNAL PROBLEM 
 
 Effect of war on public mind Hoarding Jump in Bank rate 
 Action of joint stock banks Their uncomfortable position 
 Closing of the Stock Exchange Breakdown of exchange 
 Position of bill brokers New notes issued Was banking mora- 
 torium required ? ......... 
 
 CHAPTER III 
 
 THE EXTERNAL PROBLEM 
 
 P'ear of gold exports Why improbable Foreign debts and foreign 
 exchange England's huge receipts of gold Inability of foreign 
 debtors to pay Relief consequently given to acceptors of bills 
 Its stages And effects ....... 38 
 
 CHAPTER IV 
 
 FINANCE BILLS AND TRADE 
 
 Exaggerated outcry against finance billsTheir abuse Their effect 
 on freedom of Exchange market Effect of their reduction on 
 our export trade ......... 75 
 
viii CONTENTS 
 
 CHAPTER V 
 
 AFTERTHOUGHTS 
 
 PAGE 
 
 Striking evidence of London's strength given by the crisis Her 
 rivals New York's chance The internal lessons Government 
 note issue Its dangers Bank Act and Bank rate Banks and 
 Stock Exchange Banks and cash reserves Relief to Stock 
 Exchange and traders The taxpayer's liabilities Government 
 and finance Bank of England's varied activities . . .98 
 
 APPENDIX I 
 
 THE GENERAL MORATORIUM 
 
 (A) Postponement of Payments Act (B) Proclamation of August 6 
 (C) Proclamation of August 12 (D) Proclamation of Sep- 
 tember 3 (E) Proclamation of September 30 . . . 133 
 
 APPENDIX II 
 
 MEASURES FOR DEALING WITH BILLS OF EXCHANGE 
 
 (A) Proclamation of August 2 (B) Notice published August 13 
 
 (C) Treasury Statement published September 5 . . .148 
 
 APPENDIX III 
 
 MEASURES FOR PROVIDING PAPER CURRENCY 
 (A) Currency and Bank Notes Act (B) Treasury Memorandum . 154 
 
 APPENDIX IV 
 
 COURTS EMERGENCY POWERS ACT . .162 
 
 APPENDIX V 
 
 BANK OF ENGLAND'S GOLD STOCK 168 
 
 INDEX . 169 
 
WAR AND LOMBARD 
 STREET 
 
 CHAPTER I 
 
 THE MORATORIUM 
 
 IT came upon us like a thunderbolt from a clear 
 sky. At the end of July, 1914, any citizen of 
 London who was asked what a moratorium 
 meant would probably have answered that 
 there was not such a word. Possibly he might 
 have said that it was a large extinct woolly 
 beast with big tusks. If he was exceptionally 
 well-informed in matters of finance he would 
 have replied that it was some sort of device 
 used in economically backward countries for 
 blurring the distinction between meum and 
 tuum. On the second of August we had a 
 moratorium on bills of exchange. On the 
 sixth of August we had a general moratorium. 
 The preceding events were as follows. On 
 1 B 
 
2. '/''WAR AND LOMBARD STREET 
 
 Friday, July 24, Austria sent its ultimatum to 
 Servia. On Saturday, July 25, there was some- 
 thing very like panic on the London Stock 
 Exchange and the Continental Bourses. At the 
 beginning of the next week the foreign exchanges 
 began a series of erratic and unprecedented 
 movements which ended in breakdown. On 
 Thursday, July 30, the Bank of England's rate 
 was raised from 3 per cent, to 4 per cent., and 
 on July 31 it was multiplied by 2, jumping 
 from 4 per cent, to 8 per cent. On that day, 
 July 31, some of the other banks were refusing 
 to pay out gold to their customers, and making 
 them take payment in Bank of England notes. 
 Consequently there was a long string of people, 
 wanting money for the holidays, waiting to 
 cash notes at the Bank of England. On 
 Saturday, August i, the Bank rate went up 
 to 10 per cent., and the string of people waiting 
 to cash notes at the Bank of England was still 
 watched by an amused crowd from the steps 
 of the Royal Exchange. All this happened 
 before a shot had been fired on the Continent, 
 and before it was even certain that England 
 would go to war at all. Then came Sunday 
 
THE MORATORIUM 3 
 
 and Bank Holiday, and war, and then three 
 more days of Bank Holiday and then the general 
 moratorium. 
 
 It was an unpleasant string of surprises, 
 but it was not brought about by any internal 
 weakness in the English banking system. The 
 fury of the tempest was such that no credit 
 system could possibly have stood up against it. 
 In fact, as will be shown, the chief reason for 
 the suddenness and fulness of the blow that 
 fell on London was nothing else but her own 
 overwhelming strength. She was so strong 
 and so lonely in her strength that her strength 
 overcame her. She held the rest of the world 
 in fee with so mighty a grip that when she said 
 to the rest of the world, " Please pay what 
 you owe me/* the world could only gasp out, 
 " But how can I pay you if you don't lend me 
 the wherewithal ? " If there had been any 
 rival who could have taken London's mantle 
 from her shoulders, and come forward as the 
 provider of credit, London could then have 
 called in her debts. But there was none. The 
 machinery of credit broke down in both hemi- 
 spheres, and London, as its centre, had to be 
 
4 WAR AND LOMBARD STREET 
 
 given time to arrange matters under the new 
 conditions. 
 
 After all, you cannot have credit without 
 civilization, and at the beginning of last August 
 civilization went into the hands of a Receiver, 
 the God of Battles, who will, in due course, 
 bring forth his scheme of reconstruction. When 
 the five chief nations of Europe turn their 
 attention from production to destruction, it is 
 idle to expect any system of credit to go un- 
 scathed. ^Credit depends on the assumpti#fi 
 that goods produced will come to market and 
 be sold and that securities that are based on 
 the earning power of production will fetch a 
 price on the exchanges of the world. War, 
 on the smallest scale, weakens this assumption 
 with respect to certain goods and certain 
 securities ; if its scale is big enough it makes the 
 assumption so precarious that credit is shaken 
 to, its base.^S 
 
 (/A moratorium may be defined as an arrange- 
 nent under which it is legally enacted that 
 creditors cannot for a certain specified time 
 claim payment of what is due to them. It 
 postpones the dates on which debts have to be 
 
THE MORATORIUM 5 
 
 met. It may be general orrspecial. If special 
 it applies only to certain classes of debts. If 
 general, it applies ,^o all debts, except such as 
 are specially exempted from its provisions .y A 
 general morat^pttm,. w.as decreed in England. 
 
 Before vwe jean hazard any opinion as to 
 wf^jPK this w ( as necessary we shall have to 
 see wh'at happeneoTto credit in England owing 
 to the*; war. In order to do so we shall have 
 to go through a good deal of explanation of the 
 manner/in w^iich the machinery of credit works 
 in normal times. Much of this exposition will 
 seem unnecessary and tedious to those who 
 already know all about it. But as it is very 
 important that the effects of war on finance 
 should be brought home to many who would 
 never have troubled about our credit system 
 if the war had not happened to upset it, this 
 elementary explanation is an unavoidable evil. 
 
 Not long ago I was asked to address a society 
 in Cambridge on the subject of what would 
 happen to our credit system if we were engaged 
 in a Continental war. I began by saying that 
 the only thing that one could be sure about was 
 that what happened would be something that 
 
6 WAR AND LOMBARD STREET 
 
 nobody had foreseen. With this proviso I 
 ventured to prophesy that it ought to be possible 
 for England to go into such a war without 
 any very serious upset of our credit system, 
 because any internal trouble we could deal with 
 in the good old-fashioned way by suspending 
 the Bank Act, and external trouble, in the shape 
 of heavy demands on our store of gold, was not 
 likely to occur, because, owing to the strength 
 of our position as a great creditor country, we 
 should only have to call on the rest of the world 
 to pay what it owed, and all the exchanges 
 would at once move in our favour. This latter 
 estimate was, as events proved, so aggressively 
 true that it falsified itself. The exchanges went 
 in our favour with such a mighty rush that the 
 machinery of exchange broke down, and nobody 
 could buy a bill on London. 
 
 These mysterious sayings about suspending 
 the Bank Act and turning the exchanges in our 
 favour will be explained later on. First of all 
 let us get the internal question clear, that is, 
 the effect of war on our own dealings with one 
 another and our bankers. 
 
CHAPTER II 
 
 THE INTERNAL PROBLEM 
 
 WHEN war comes, or is expected, the public 
 is apt to lose its head and do things that are 
 stupid and even wicked, under the influence 
 of unreasoning fear, and because they think 
 that something dreadful is going to happen. 
 And on this occasion the portents that preceded 
 the war were startling enough to excuse a good 
 deal. The only really vicious thing that the 
 British public did was to rush to its provision 
 dealers and buy vast supplies of food, just as if 
 there was no such thing as the British Fleet, 
 and as if famine were an inevitable item in the 
 programme. This disease did not last long, 
 and was largely confined to a small section 
 of the well-to-do classes, who ought to have 
 known better. It caused an ugly upward rush 
 in food prices which would have inflicted great 
 hardship on the poor if it had continued, but 
 luckily the evil was stayed. 
 
 7 
 
8 WAR AND LOMBARD STREET 
 
 (t> Another thing that is likely to happen when 
 the public is disturbed by a threat of war is that 
 folk take it into their heads to withdraw money 
 from their banks, and if only enough people 
 follow this stupid practice, of taking money 
 home and hoarding it, the strongest banks come 
 to the end of their supply of cash, and then it 
 becomes necessary to lend them a fresh stock. 
 To provide a fresh stock of cash for bankers, the 
 old-fashioned device was a suspension of the 
 Bank Act, The Bank Act is the Act which 
 restricted the right of the Bank of England to 
 issue notes beyond a certain amount (which is 
 now, 18,450,000) except against gold held in 
 its vaults. Above that limit every 5 note 
 must have 5 worth of gold behind it. In 
 ordinary times the number of Bank of England 
 notes that can be issued is in these days a 
 matter of rather secondary importance, since 
 they are little used as currency (except, I am 
 told, by bookmakers on racecourses), and are 
 held chiefly by the other banks as a cash reserve. 
 But when times are not ordinary it becomes 
 necessary to increase the number of Bank notes, 
 in the first place because they are wanted to take 
 
THE INTERNAL PROBLEM 9 
 
 the place of the cash that the frightened public 
 has taken out and hoarded, and in the second 
 because in times of panic many people refuse 
 to accept payment in cheques, which are now 
 the usual currency of internal commerce. They 
 refuse cheques because they begin to doubt 
 the solvency of the men who draw them and 
 of the banks on which they are drawn. If my 
 neighbour owes me 10 and gives me a piece 
 of paper signed by himself telling a bank to pay 
 me 10, I run two risks by accepting it in 
 payment. There is the risk that my neighbour 
 may have no money at the bank, and that his 
 cheque may be returned to me with an in- 
 scription on it, signifying that there are no 
 funds to his credit, or it is possible that by the 
 time his cheque is presented the bank which 
 it orders to pay me 10 may have closed its 
 doors. 
 
 In ordinary times we take these risks with 
 cheerful confidence because these uncomfort- 
 able things do not happen. But when war 
 is in the air some of us begin to fear that they 
 may happen, and so there is always the chance 
 that the Bank Act may have to be suspended 
 
io WAR AND LOMBARD STREET 
 
 to provide money for all the transactions that 
 used to be settled by cheque. For the Bank of 
 England note is " legal tender," and so no one 
 can refuse to accept it in payment of a debt. 
 
 This possibility, that the Bank Act might 
 have to be suspended, had a most unfortunate 
 effect. It was an indirect cause of the advance 
 in the Bank rate, already referred to as one of 
 the startling events that heralded the morato- 
 rium, from 3 to io per cent, in three days. It 
 should be explained that the Bank's official rate 
 of discount, commonly called " Bank rate/' 
 is the rate at which it will buy bills of exchange 
 (an expression which will have to be made clear 
 later), and is a standard rate which has an im- 
 portant effect, especially in bad times, on the 
 charge that all other lenders make to borrowers 
 for the use of money. It is very unusual for 
 Bank rate to be raised by more than i per cent, 
 at a time, or on any day but Thursday. A rise 
 in Bank rate is always a danger signal, showing 
 that money is dearer, and all the people who 
 work with borrowed funds will have to pay more 
 for them. And a skyrocket signal like a jump 
 from 4 per cent, to 8 per cent, in one day, 
 
THE INTERNAL PROBLEM n 
 
 and that day a Friday, was quite unheard of 
 and was a most untimely shock to the public's 
 nerves. Next day, of course, the papers were 
 all full of this new and strange portent. Bank 
 rate became first-class " copy/' Instead of its 
 movements being hidden in the dark mysteries 
 of the City page, it came right into the middle 
 of the paper with thunder-claps of head-lines 
 to herald it, and many members of the public, 
 who had never heard of Bank rate before, 
 became aware that something unprecedented 
 and dire had happened in the world of finance. 
 
 It was most unfortunate, but gossip in the 
 City says that it was not the Bank's fault. The 
 story goes that when it became evident that 
 the suspension of the Bank Act might have to 
 be asked for, the Bank inquired from the 
 Treasury whether it was ready to go through 
 the usual form of giving the Bank a letter of 
 indemnity, promising that Parliament would be 
 asked to condone the Bank's breach of the law 
 by issuing more notes than it is allowed to by 
 the restrictions of the Act ; and that it was 
 thereupon informed that the Bank Act had 
 never before been suspended except when Bank 
 
12 WAR AND LOMBARD STREET 
 
 rate stood at 10 per cent. Thus in effect the 
 Treasury, merely for the sake of blindly following 
 a mouldy old precedent, practically told the 
 Bank that the Act could not be suspended 
 until Bank rate stood at 10 per cent. And so, 
 if this story be correct, the Bank was forced to 
 raise its rate from 4 per cent, to 8 per cent, on 
 the Friday, and from 8 per cent, to 10 per cent, 
 on the Saturday : it need hardly be said that 
 such a movement, at that time, was quite 
 ineffective for all the purposes for which Bank 
 rate is usually raised, while its evil effects have 
 already been described. 
 
 At the same time some of the ordinary joint 
 stock banks, with which the public keeps its 
 money, ignored or forgot the old banking maxim 
 that the only way in which to stop a run is to 
 meet it fearlessly, and that the only thing that 
 it is safe to say to the public when it comes and 
 asks for its money is, " How will you take it 
 notes or gold ? " On Friday, July 31, the 
 public was asking for more cash from its 
 bankers than its genuine need for currency 
 made necessary. It was just before the August 
 Bank Holiday, a time when nearly all the world 
 
 
THE INTERNAL PROBLEM 13 
 
 of bank depositors is going into the country 
 for a day or two, and a very large number of 
 people are going away for weeks with their 
 families. Hence it follows that a big demand 
 for cash for holiday purposes is then a normal 
 event, and it is difficult to tell how much of the 
 demand was abnormal that day. My own ex- 
 perience was that I went to my bank and took 
 out a few sovereigns to pay domestic wages, and 
 go away over the Bank Holiday, and found 
 no unusual crowd at the paying desks, and got 
 my sovereigns without question or difficulty. 
 But some of the banks were refusing to cash 
 their customers* cheques in gold, and were 
 only parting with notes and silver, and telling 
 their customers to take the notes to the Bank of 
 England, and there change them into sovereigns. 
 By so doing they were acting entirely within 
 their rights. Bank of England notes (and silver 
 up to 2) being legal tender, any debtor who is 
 asked for money can give Bank notes and silver 
 up to 2 in payment. But the effect produced 
 by this action on the part of the banks was 
 extremely unfortunate. The banks kept back 
 gold just when the public needed it for holiday 
 
14 WAR AND LOMBARD STREET 
 
 purposes, and so actually demonstrated to the 
 public that hoarding gold was a policy adopted 
 by its bankers, who ought to know what they 
 were doing in such matters, and so to be imitated 
 by the public. It was asking for trouble, and 
 it could not do the banks any good. They 
 could not refuse to part with cash, and whether 
 they parted with Bank notes or with gold could 
 not make the smallest difference to them, as 
 long as the convertibility of the Bank note 
 that is, the power to cash notes at the Bank of 
 England remained. It is incredible that even 
 before the run, such as it was, had lasted a day, 
 they could have been actually short of gold. 
 Their gold they held as a reserve to be used in 
 the day of trouble, not to be sat on just when 
 it was wanted. After all that we had heard 
 in recent years about the increased reserves 
 that the banks were holding in their own tills, 
 their refusal to part with gold was a melancholy 
 surprise. The immediate result was a crowd 
 of people at the Bank of England, naturally 
 wanting gold for the holidays, since notes are 
 not always easy to change in out of the way 
 places, and waiting to get sovereigns for the 
 
THE INTERNAL PROBLEM 15 
 
 notes which were all that their banks would 
 give them. The crowd at the Bank of England 
 was soon bruited abroad as a novel spectacle, 
 and it was watched on that dreary afternoon by 
 a throng of amused onlookers, mostly straw- 
 hatted and in holiday attire, gathered on the 
 steps of the Royal Exchange. 
 
 It need not be said that the Bank of England 
 shovelled out sovereigns as fast as it could, as 
 in law and duty bound ; but it was unfortunate 
 that structural alterations added to its diffi- 
 culty in dealing with its crowd of applicants for 
 gold. Next day some of the papers gave a good 
 deal of space to Friday's events in the City, and 
 by this time the public was naturally frightened, 
 and was unmistakably showing an abnormal 
 appetite for cash. But there were only a few 
 short hours of business, and then we all went 
 away for our holidays, to come back to a new 
 strange world, in which many of the old lights 
 that guided us had been put out and the red 
 glare of war had taken their place. 
 
 Having seen that the action of the banks in 
 withholding gold was ill-timed and unfortunate, 
 let us now try to see why certain members of 
 
16 WAR AND LOMBARD STREET 
 
 a very level-headed body should have been led 
 into it. Before any one casts stones of criti- 
 cism at the banks, let him remember that a 
 chain of circumstances had produced the one 
 result that is most terrifying to bankers, that 
 is to say, had locked up their assets and made 
 them unrealizable. 
 
 If you look at any bank balance-sheet,* you 
 will see on the left-hand side an item, current 
 and deposit accounts, representing the sum 
 (in the case of some banks running into 
 more than 100 millions) that it owes to 
 its customers and has to pay on demand, 
 
 * Here is a specimen, founded on an actual example, 
 but slightly simplified : 
 
 Assets 
 
 Cash in hand and 
 at Bank of Eng- 
 land 
 
 Do. at call and 
 short notice ... 
 
 Bills discounted 
 
 Investments 
 
 Advances 
 
 Liability of Custo- 
 mers for Accep- 
 tances 
 
 Bank Premises .. 
 
 Liabilities 
 Paid-up Capital ... 
 Reserves... 
 Current and De- 
 
 i 
 
 3,500,000 
 
 4,250,000 
 
 posit a/c 
 Circular Notes, 
 
 85,250,000 
 
 etc 
 
 Acceptances ... 
 Profit and Loss 
 
 3,000,000 
 7,000,000 
 500,000 
 
 14,000,000 
 
 12,000,000 
 
 16,000,000 
 
 9,000,000 
 
 44,000,000 
 
 7,000,000 
 1,500,000 
 
 103,500,000 
 
 103/500,000 
 
THE INTERNAL PROBLEM 17 
 
 in the case of current accounts, or at a few 
 days* notice (as a rule) in the case of deposit 
 accounts. This is the chief liability of the 
 banks, the immediate meeting of which is 
 essential to their existence. To meet it they 
 hold the assets set out on the right-hand side 
 cash in hand and at the Bank of England, cash 
 at call or short notice, loans and advances, bills 
 discounted, and investments. All these are in 
 normal times more or less liquid assets, that is, 
 assets that are either cash or can be turned 
 into cash, or in the case of loans are payable 
 at a more or less near date by customers who 
 are believed to be good for their engagements. 
 But in the week that preceded those two evil 
 days before the holiday, things had happened 
 which made a large part of the assets of the 
 banks unrealizable or of doubtful value. This 
 being so, the very worst possible horror that a 
 banker can dream in his very worst possible 
 nightmare then actually stared the banks in the 
 face. There were their liabilities just as usual, 
 which had to be met if the banks were to stand 
 upright. If the public asked for its money it 
 had to be paid, and the public was already 
 
 c 
 
i8 WAR AND LOMBARD STREET 
 
 showing signs of wanting its money. And on 
 the other side of the balance-sheet was a large 
 proportion of assets which in ordinary times a 
 bank was justified in regarding as good, but 
 which at that moment it knew to be for prac- 
 tical purposes useless, while others were of 
 problematical value. Any one who under such 
 circumstances expects a banker to maintain 
 his usual equanimity is asking him to be some- 
 thing rather more than human. 
 
 What happened to turn these liquid assets 
 into unrealizable phantoms was this. In the 
 first place the Stock Exchange, flooded day 
 after day by a stream of sales from the Continent, 
 had been forced to close. The continual fall 
 in prices made the position of stockbrokers who 
 had borrowed from the banks and others money 
 wherewith to carry over securities, highly pre- 
 carious. Because the securities on which these 
 loans were secured dwindled daily in value with 
 alarming rapidity,* and so the brokers were 
 
 * The Bankers' Magazine for September showed that the 
 387 representative securities whose movements it periodically 
 records, marked in the ten days, July 20 to 30, an average 
 fall of 5-6 per cent. 
 
 The following table shows a few of the most striking 
 
 
THE INTERNAL PROBLEM 19 
 
 continually liable to be asked to produce more 
 and more security to maintain the margin on 
 their loans. If they had borrowed, for example, 
 100,000 on the security of stocks worth 
 110,000, showing a margin of 10 per cent., and 
 there was an all-round fall of 3 points in these 
 stocks, they might have to find 3000 worth 
 more securities so as to keep the margin un- 
 impaired. So many brokers found themselves 
 embarrassed by the headlong nature of the fall 
 in prices during the week before the House 
 
 movements that happened in the last week in which Stock 
 Exchange business was possible : 
 
 
 July 23. 
 
 July 36. 
 
 Fall. 
 
 Consols (Money) 
 
 75iV 
 
 69i 
 
 5 is 
 
 Sth. Eastern Ry. Dfd. ... 
 
 40 1 
 
 3 x i 
 
 9f 
 
 Canadian Pacific Ry. 
 
 i88| 
 
 157^ 
 
 3*1 
 
 G. Trunk Ry. 3rd Pref. ... 
 
 33 
 
 26 
 
 7 
 
 Union Pacific Railroad ... 
 
 i6o| 
 
 "4f* 
 
 IS* 
 
 Brazil Ry. Common 
 
 24 
 
 20 
 
 4 
 
 Mexican Ry. Ord. 
 
 34 
 
 30 
 
 4 
 
 Brazil 5 per cent. 1913 ... 
 
 83i 
 
 72 
 
 ni 
 
 Peru. Corp. Pref 
 
 37* 
 
 28 
 
 9i 
 
 Austrian Notes 
 
 95 
 
 82* 
 
 i 
 
 Hungary 4 per cent. 
 
 78 
 
 73* 
 
 4^ 
 
 Royal Dutch Oil 
 
 46 
 
 41 
 
 5 
 
 Rand Mines 
 
 5* 
 
 4rl 
 
 I i 1 d 
 
 De Beers Diamond Dfd. ... 
 
 15! 
 
 13^ 
 
 2i 
 
 Rio Tinto Copper ... 
 
 67* 
 
 53i 
 
 I3l 
 
 * Ex " rights " valued at 
 
20 WAR AND LOMBARD STREET 
 
 closed, that, it is said, the Committee was obliged 
 to close lest an even worse thing should happen. 
 Such a thing had never been knowji since the 
 Stock Exchange was estafblished ; Throughout 
 the Napoleonic war there was a market* fir which 
 securities could be sold at a price. But then, 
 of course, .there was no telegraphic communica- 
 tion with the Continent and the Stock Exchange 
 was a v domestic affair in which Englishmen 
 dea\t in a few securities, chiefly British Govern- 
 ment funds. There was no international market 
 
 % 
 
 in Canadian Pacifies, and American shares and 
 foreign bonds and South African shares, and no 
 crowd of Continental holders to throw them at 
 Capel Court to be sold at any price that they 
 would fetch. This time there were all these 
 new features in the situation, and the Stock 
 Exchange was forced to close. So, it may be 
 added, was New York, though New York had 
 no threat before it of being involved in the war, 
 and though New York deals only in its own 
 securities, American railroads, industrials, etc.* 
 
 * A few foreign securities are quoted in New York, but 
 dealings in them are comparatively rare, business, being 
 practically confined to domestic investments. 
 
THE INTERNAL PROBLEM 21 
 
 Yet the flood of these that was poured on it 
 from the Continent and England was more than 
 it could swallow and it closed as soon as it heard 
 that London had done so. 
 
 The effect of the closing of the Stock 
 Exchange on the banks was twofold. In the 
 first place it locked up all their investments 
 and made them unsaleable. For the purposes 
 of providing cash if depositors wanted it, the 
 banks' investments were, to a great extent, 
 waste paper for the time being. Their British 
 Government securities might perhaps have been 
 used to borrow on from the Bank oi England, 
 but borrowing from the Bank of England is a 
 process that the other banks avoicl until the 
 last possible moment, and, moreover, they 
 nowadays hold a large number of investments 
 which are not British Government securities. 
 In the second place, it prevented the banks 
 from selling the stocks and bonds that they 
 held as " collateral security " against loans 
 to stockbrokers and other customers. When 
 stock is held as collateral security against a 
 loan, and the borrower cannot pay the loan off, 
 the bank can, in normal circumstances, sell 
 
22 WAR AND LOMBARD STREET 
 
 the stock and get at least part of its money 
 back. With the Stock Exchange closed this is 
 impossible, and thus the banks found them- 
 selves 'with a large part of their assets solidified 
 and useless. 
 
 Another item in the visitation that they 
 suffered arose from the fact that in the last 
 days of July the whole machinery of foreign 
 exchange had broken down (how and why will 
 be shown later), and the meaning of this un- 
 comfortable event was that foreigners who owed 
 money to England could not with the best will 
 in the world send it, because the ordinary means 
 of doing so no longer existed. Now we have 
 seen that among the assets of a bank bills of 
 exchange hold an important place. In fact it 
 may be said that in times when the machinery 
 of finance is running smoothly, a bill of exchange 
 is reckoned as the very best asset that a bank 
 could possibly hold. Because every bill of 
 exchange bears the signature of an " acceptor," 
 who thereby promises to meet it at a certain 
 dxte. Therefore, a bill does not have to be 
 sold to be turned into cash, it only has to be 
 held till its due date and the acceptor has to 
 
THE INTERNAL PROBLEM 23 
 
 pay it ; in the meantime if immediate cash is 
 required a bill can, in normal times, always 
 be sold or " discounted" as it is called very 
 readily. The acceptors of the bills chiefly held 
 by the banks are the great private finance houses 
 of London, and the banks themselves, who do a 
 large part of this business of acceptance, which 
 will be made clearer in the next chapter. 
 
 For the present it must suffice to say that 
 the breakdown of exchange and the consequent 
 inability of foreign debtors to remit to England, 
 made the value of bills of exchange a much more 
 doubtful question than it had ever seemed to be 
 before. The private accepting houses and the 
 banks were in the habit of accepting bills in 
 the expectation that correspondents abroad 
 would remit money to them to meet the bills 
 when they fell due. If these correspondents 
 abroad were unable to remit, the accepting 
 houses and the banks would have to meet the 
 bills accepted by them out of their own assets. 
 We have already seen that many of the assets 
 of the banks were locked up and unrealizable, 
 and those of many of the accepting houses were 
 likely to be in a very similar plight. In the 
 
24 WAR AND LOMBARD STREET 
 
 matter of bills of exchange the banks were thus 
 hit on both sides of their balance-sheets. As 
 large holders of bills, they found that one of their 
 most valued assets had become greatly deterio- 
 rated in appearance, while as large acceptors 
 of bills, accepted on behalf of customers both at 
 home and abroad, they found themselves likely 
 to be called on to pay bills out of their own 
 weakened assets, instead of being able to rely 
 on the promptitude of their customers in finding 
 the money before the due date of the bill.* 
 
 It was an appalling position for a banker to 
 find himself in, with the chance before him that 
 many of his customers would want their money, 
 and on the other hand the knowledge that all 
 the Stock Exchange securities that he held 
 either as investments or as collateral were 
 unsaleable ; that the bills of exchange in his 
 portfolio might or might not be met at maturity, 
 and that the bills of exchange which he had 
 
 * The Economist of August 15 stated that the acceptances 
 of eighteen of the principal banks on June 30, 1914, amounted 
 to 36^ millions. 
 
 In the specimen bank balance-sheet given on p. 16, note, it 
 will be seen that there is a liability of 7 millions on acceptances, 
 with a corresponding asset consisting of the liability of the 
 bank's customers. 
 
THE INTERNAL PROBLEM 25 
 
 himself promised to pay might have to be met 
 out of his own resources. 
 
 Two other assets he had : his cash in hand 
 and at the Bank of England (with which all 
 the chief banks keep a balance) and his loans 
 to the bill-brokers. For years it has been a 
 commonplace criticism of English banking, 
 voiced chiefly by the bankers themselves, that 
 the banks have not kept a large enough store 
 of cash in hand and at the Bank of England. 
 There can be little doubt that this weakness, 
 arising from the fact that years of jog-trot 
 prosperity had tempted the banks to build too 
 big a fabric of credit on too small a foundation 
 of cash, made it more difficult for them to face 
 the crisis at the end of July. I have, however, 
 heard the contrary view expressed. With so 
 many of their reputedly liquid assets suddenly 
 frozen, it may be maintained that even if they 
 had held twice as much cash as they had, they 
 would still have had plenty of justification for 
 feeling uncomfortable. Nevertheless it cannot 
 be denied that a large holding of cash behind him 
 is a very present help to a banker in time of 
 trouble, and helps him to face it with the courage 
 
26 WAR AND LOMBARD STREET 
 
 which is his only hope of salvation, and with 
 the serene coolness which meets a run by free 
 and ready payment. 
 
 Loans to bill brokers form an asset which is 
 not separately displayed in bank balance-sheets, 
 but is a very important one. It is included in 
 the heading " cash at call and short notice/ 1 
 and it means money lent to a number of firms 
 and companies whose business consists chiefly 
 in dealing in bills of exchange. They buy these 
 bills as they come in from all parts of the world, 
 and pay for them with money that they borrow 
 chiefly from the banks. They make their profit 
 out of the difference between the rate of discount 
 at which they buy the bills, and the rate at 
 which they borrow from the banks " at call and 
 short notice," that is from day to day or for 
 short periods, usually a week. The bills that 
 they buy they usually sell to the banks, keeping 
 a stock of them and selling those which suit 
 the banker's fancy in the matter of date and 
 currency. The bill brokers are thus very largely 
 ii t the hands of the banks, which buy bills from 
 them or lend them the money to carry their 
 bills. When there is pressure for money the 
 
THE INTERNAL PROBLEM 27 
 
 banks call in their loans from the bill brokers, 
 who then are usually forced to apply to the 
 Bank of England and either sell bills to it at 
 Bank rate or borrow money from it at a rate 
 which is usually | per cent, above Bank rate. 
 With the money that the bill brokers thus raise 
 from the Bank of England they pay off their 
 loans from the banks, and the banks are thus 
 easily enabled to increase their holding of cash 
 at the Bank of England. The system works 
 very smoothly and easily in ordinary times, and 
 at Christmas and the end of the year it is usual 
 for the Bank of England to be called on to 
 create, by this method of a mere entry in its 
 books to the credit of the banks, some 25 
 millions or so of new " cash/' most of which is 
 wanted for ornamental purposes in balance 
 sheets. In the last two weeks of 1913, the 
 Bank of England's holding of " other securities " 
 rose by over 25 millions, this increase more or 
 less representing its advances to bill brokers and 
 others ; nearly the whole of this amount went 
 to swell the "other deposits" at the Bank of 
 England which contain the balances of the 
 other banks. 
 
28 WAR AND LOMBARD STREET 
 
 In the last week of July some of the banks 
 are said to have dealt very ruthlessly with the 
 bill brokers, pulling in money from them with a 
 violent jerk, and driving them to the Bank of 
 England to borrow much faster than was 
 pleasant to the bill brokers or agreeable to the 
 Bank of England. Bill brokers, however, 
 who in good times borrow from the banks at 
 specially low rates, because money lent to 
 them is supposed to be available whenever it 
 is wanted, have little right to complain if 
 money is called in from them quickly in 
 times of crisis. The Bank of England's weekly 
 return published on July 30 showed that during 
 the week that ended on July 29 there was an 
 increase in the Bank's holding of " other 
 securities" of no less than 13 J millions. It does 
 not follow that the whole of this amount had 
 been borrowed by unfortunate bill brokers 
 driven to the Bank of England by the other 
 banks, but it is safe to guess that a large part 
 of the increase was thus brought about. In 
 the last days of the week the movement went 
 still faster, until at last on the Saturday accord- 
 ing to the story of the bill brokers the Bank 
 
THE INTERNAL PROBLEM 29 
 
 of England tried to force the other banks to stay 
 this process by refusing to carry out its part of it, 
 and lend to the bill brokers the sums that the 
 banks called in from them. The experiences 
 of the bill brokers, thus crushed between the 
 upper and nether millstones of finance, were 
 extraordinarily unpleasant ; but the Bank of 
 England at last relented. During the last three 
 days before the Bank Holiday it increased its 
 holding of " other securities " by 18 millions. 
 
 Such then was the internal position of our 
 credit machine at the beginning of August. 
 The public was running on the banks. Some of 
 the banks were refusing to pay their customers 
 in gold, and so causing a run on the Bank of 
 England by the public which took to it, to be 
 turned into gold, the notes that the banks 
 handed out. The banks were also calling in 
 large amounts from the bill brokers, who had 
 to borrow them from the Bank of England. 
 During the two weeks that ended on August 5, 
 or rather during that part of them which was 
 not covered by the prolonged Bank Holiday, 
 the Bank of England added 3i| millions to 
 its holding of " other securities," representing 
 
3 o WAR AND LOMBARD STREET 
 
 roughly the amount that it had to lend to 
 borrowers who had had money called in by 
 their bankers, and had lost 16 millions in 
 notes and sovereigns that had been taken from 
 it for circulation, or hoarding, at home, and its 
 reserve, which has seldom in recent years been 
 allowed to fall below 20 millions, had sunk 
 below 10 millions. 
 
 It was not a pleasant situation, but did it 
 need a banking moratorium to mend it ? In 
 asking this question I must not be taken as 
 criticizing the action of those who handled the 
 crisis. The tornado burst so suddenly that the 
 officers of the ship could not be expected to take 
 in a little sail and wait to see whether she could 
 bear the rest of her canvas. They had to make 
 everything snug as fast as possible. I only 
 question whether a banking moratorium was 
 necessary in order to suggest that if such a 
 state of things should occur again, those who 
 have to meet it might try other measures first. 
 
 Our forefathers' remedy for an internal 
 crisis, which led to hoarding and a consequent 
 scarcity of currency, was a suspension of the 
 Bank Act, which, as explained above, restricts 
 
THE INTERNAL PROBLEM 31 
 
 the amount of notes that the Bank of England 
 is allowed to issue. Is there any reason to 
 suppose that this remedy would have failed, 
 as far as the internal crisis was concerned, this 
 time ? The trouble was, that the public was 
 alarmed about the outlook, and, partly owing to 
 the lead given it by some of the banks, was 
 hoarding money. This evil might have been 
 done away with by the prompt action of the 
 Government in stating publicly, as was done 
 by Mr. Lloyd George in Parliament, that the 
 Government was taking immediate steps to 
 provide additional currency, and that any one 
 who hoarded money was guilty of wicked 
 cowardice. This clearly showed that the 
 Government was behind the banks, and there 
 is good reason to believe that the position of the 
 banks would thereby have been secured with- 
 out the shelter of a moratorium. If the run 
 had continued for a few days the banks could 
 have met it with trie new currency provided, 
 as soon as it was ready. 
 
 " There's the rub." The currency was not 
 ready. It is easy to see now that it ought to 
 have been. If it had been, it might never have 
 
32 WAR AND LOMBARD STREET 
 
 been wanted. The fleet was ready, and the 
 expeditionary force was ready. The financial 
 machinery was not. Part of the machinery 
 was a supply of notes to take the place of our 
 gold currency, if the evil disease of hoarding 
 should break out, as was likely. Consequently, 
 whether the evil was met by a suspension of the 
 Bank Act, or by an issue of Government notes, 
 a supply of i and los. notes ought to have 
 been in existence. I have good authority for 
 stating that bankers had long ago represented 
 to the powers that be, that a store of emergency 
 currency would be needed if England were 
 involved in a great war. 
 
 What happened was that the Government 
 suspended the Bank Act the Currency and 
 Bank Notes Act, August 6, 1914, says that the 
 " governor and company of the Bank of England 
 . . . may so far as temporarily authorized by 
 the Treasury, and subject to any conditions 
 attached to that authority, issue notes in excess 
 of any limit fixed by law*' * and then made 
 this suspension unnecessary by issuing notes 
 itself. The Bank of England did not avail 
 
 * See Appendix III A. 
 
THE INTERNAL PROBLEM 33 
 
 itself of the suspension, but a new currency 
 made its appearance, consisting of i notes, 
 sometimes called "Bradburys" from the name 
 of the distinguished Treasury official whose 
 name they bear, and los. notes, scarlet in 
 colour, which I have heard referred to as 
 "pink 'uns." These notes were issued to the 
 banks, the amount that they might take being 
 limited to 20 per cent, of their liabilities on 
 deposit and current accounts. This limit gave 
 the banks the right to take about 225 millions. 
 They actually took less than 13 millions. These 
 figures were given by Mr. Lloyd George in his 
 speech in Parliament on November 27. " The 
 mere knowledge/' he added, " of these currency 
 facilities being available gave confidence.' 1 The 
 notes were issued in the form of an advance 
 by the Treasury to the banks that took them, 
 bearing interest at the current Bank rate, and 
 secured by a floating charge on the banks' 
 assets.* Postal orders were made legal tender 
 for the time being. 
 
 It was a new departure for the British Govern- 
 ment to issue paper money. In principle there 
 
 * See Appendix III B. 
 
34 WAR AND LOMBARD STREET 
 
 is no objection, under due regulation and 
 restriction. If the Government provides coined 
 currency, why not paper as long as it is con- 
 vertible on demand into gold, as this new currency 
 is ? Nevertheless, it seems to be a needless 
 break with tradition, the reasons for which are 
 obscure to the outer world, and, as will be 
 shown later, Government note issues carry 
 special dangers and temptations with them. It 
 is probable that new Bank of England notes 
 could have been more quickly produced at 
 least the time spent in designing the Treasury 
 notes would have been saved. And time was 
 all-important. Until a sufficient supply of 
 the new currency was ready, it would not have 
 been fair to expect the banks to open except 
 under the protection of a moratorium. Even 
 so there is something to be said for the view 
 that a Bank Holiday, extended for a week or 
 more until a sufficient supply of the new cur- 
 rency was printed, would have been better 
 than allowing English banking to fall under a 
 moratorium. 
 
 For any other debtors, a moratorium under 
 stress of war would have involved no loss of 
 
THE INTERNAL PROBLEM 35 
 
 dignity. But the belief that, whatever hap- 
 pened, English banking must and would, on 
 any day when it is open for business, hand out 
 legal-tender currency to any one who had a 
 claim on it, was a thing worth cherishing, a 
 flag that it was worth while to keep flying till 
 the last possible moment. An extended Bank 
 Holiday pending the provision of new currency, 
 accompanied by the appeals that were made to 
 the public by prominent men of both parties, and 
 by the newspapers, might have kept it flying 
 throughout the war. 
 
 As it was the flag was lowered by a pro- 
 clamation of August 6 authorizing debtors to 
 postpone the payment of any debt contracted 
 before August 4 by one month, which was later 
 extended for two more months.* Perhaps the 
 objection to such a measure, as applied to our 
 banks, is only a piece of sentimental pedantry. 
 Certainly if there was an error it was in the right 
 direction. It was better to make too sure than 
 not to make sure enough, and it was fortunate 
 that we had a Chancellor of the Exchequer who 
 was tied and bound by little or no respect for 
 
 * See Appendix I B. 
 
36 WAR AND LOMBARD STREET 
 
 precedent, who knew little of the machinery of 
 the City, knew that he knew little, and was ready 
 to take advice and quick to act on it with a 
 boldness that startled even those whom it 
 benefited. 
 
 By these measures the banks were protected 
 with a triple ring of trenches. They had a 
 moratorium between them and their debt to 
 their customers. The suspension of the Bank 
 Act empowered the Bank of England to lend 
 them an unlimited amount of Bank notes, 
 though this power was never used. And new 
 Treasury notes were available to an extent that 
 was very much greater than was actually 
 required. 
 
 The banks proceeded to rule a line across their 
 customers' pass-books, and to exercise their own 
 discretion as to meeting cheques drawn on 
 them. Money that they had received on current 
 account before August 4 implied a contract on 
 their part to repay it on demand, and from this 
 contract they were relieved for a month, by the 
 Proclamation for Extending the Postponement 
 of Payments. Most of them used their discre- 
 tion wisely, and allowed customers to draw what 
 
THE INTERNAL PROBLEM 37 
 
 they wanted for ordinary purposes. A few 
 made difficulties. A good deal of unmerited 
 abuse was showered on the banks at this time 
 because they did not give enterprising gentle- 
 men with schemes for capturing German trade 
 handsome overdrafts for building factories and 
 buying machinery. Factories and machinery 
 ought not to be financed by means of overdrafts 
 at banks. All that the banks could be asked 
 to do was to grant the usual banking facilities, 
 perhaps a little more freely than usual. This 
 most of them did. 
 
 The banks did not avail themselves of the 
 subsequent extension of the moratorium for two 
 more months. At the beginning of September 
 they credited their customers again with the 
 balances that were due to them on August 4, 
 when their accounts were ruled off. Whether, 
 having done so, they were or were not still 
 protected by the moratorium in respect of these 
 balances, is a point on which lawyers differ. 
 
CHAPTER III 
 
 THE EXTERNAL PROBLEM 
 
 WE have seen that in many respects the internal 
 problem that had to be faced by the London 
 money market at the beginning of the war was 
 an old enemy who had been faced and floored 
 before. It took the form of a run on the banks 
 and a disorganization of the currency system, 
 and for both of these events there was plenty 
 of precedent in history, though the scale on 
 which the evil seemed likely to develop was 
 bigger than anything that had ever been heard 
 of, owing to the wonderful rapidity with which 
 our banking machinery has grown in the course 
 of the last century. 
 
 The external problem was a novelty, and 
 demonstrated in a very remarkable manner 
 how very true is the major premiss of the 
 doctrine that Mr. Norman Angell has been 
 hammering into us ever since the appearance 
 of his first essay on the subject. This major 
 
 38 
 
THE EXTERNAL PROBLEM 39 
 
 premiss is to the effect that modern nations 
 are so closely knit together by the bonds of 
 international finance that they cannot go to 
 war without inflicting enormous damage on 
 themselves as well as on one another. This 
 statement, which nobody doubted, has been 
 shown to be entirely true. The conclusion 
 drawn from it, that since this is so there is no 
 longer any reason for going to war, has been 
 shown to be a mistake, since the certainty of 
 enormous material damage has not prevented 
 the five chief Powers of Europe from rushing in 
 and fighting one another with might and main, 
 regardless of the cost. The assumption, rather 
 a libel on human nature, that one only has to 
 prove that something does not pay in order to 
 stop it, has been shown to be groundless. 
 
 The worst that can happen to a country's 
 banking system on the outbreak of war is that, 
 at the time when its home customers are likely 
 4 to be troubling it with a run, external demands 
 on its gold store" may seriously weaken it. 
 Attacked on both sides it may have to put up 
 its shutters. This problem is evaded by most 
 countries by arrangements which enable their 
 
40 WAR AND LOMBARD STREET 
 
 banking systems to refuse to part with their 
 gold. It has, however, always been the pride 
 and the boast of English banking that any one 
 who can present a claim on an English bank will 
 get it immediately and unquestionably turned 
 into gold. As we have seen, the ordinary banks 
 are not bound to pay out gold, but any one who 
 has a cheque on them can turn it into notes, 
 and then change the notes into sovereigns at the 
 Bank of England. Consequently there was in 
 some quarters a fear that if we were threatened 
 with war a big foreign drain on our gold supply 
 would be added to the other inconveniences of 
 the situation, and a suggestion has been put 
 forward from time to time that a war chest, to 
 consist of a stack of gold, should be accumulated 
 by the Government. 
 
 On the other hand, it seemed probable that, 
 owing to the strength of England* s position 
 as the great moneylender of the world, the pull 
 would be all the other way, and that other 
 countries would have to remit such vast sums 
 to us that the exchanges would be strongly 
 in our favour, and that no drain on our gold 
 store need therefore be feared. In fact, this 
 
THE EXTERNAL PROBLEM 41 
 
 proved to be so emphatically the case that the 
 exchanges went in our favour so violently that 
 they broke the machinery. 
 
 But it is high time to make clear what is 
 meant by the exchanges going in our favour. 
 The exchange on London quoted in a foreign 
 country means the price in that country's money 
 which any one who wants to buy a pound sterling 
 in London has to pay for it. The normal 
 exchange on London in New York is 4.86! 
 dollars to the pound. That is the price at which 
 sterling drafts payable at sight can be got when 
 the exchange is at par. A sterling draft is a 
 bill of exchange for so many pounds sterling, 
 and when it is payable at sight then, like the 
 cheques that we draw in daily payments, it has 
 to be paid at once on presentation. 
 
 Now the only reason why any one in New 
 York should want to buy pounds in London 
 is because he has payments to make on this 
 side. He has money in hand in New York, 
 but of course it is all in dollars, and he has to 
 pay a debt in England, and in order to do so 
 he must buy pounds in England with his dollars 
 in New York, because his English creditor will, 
 
42 WAR AND LOMBARD STREET 
 
 naturally, only take payment in pounds. The 
 reasons why he may have to pay a debt in 
 England are manifold. He may be the New 
 York banker to a great American railroad which 
 has a large number of its bonds or shares held 
 in England, and has to remit hither to pay 
 interest or dividends ; or he may be an im- 
 porter of English goods which he sells in America 
 and pays for in England, or he may be the 
 American father of an English duchess who has 
 to remit her dowry, or he may be an Irish 
 peasant, working and earning wages in America 
 and sending home money to his father to help 
 him to pay his rent. All the hundreds of 
 reasons which make Americans pay money to 
 England make them want to buy English 
 money in New York with American dollars. 
 
 This they do by buying bills of exchange on 
 London at the current market price. These 
 bills of exchange represent the claims on London 
 that other Americans have to sell. The most 
 obvious example is a bill of exchange drawn on 
 an English cotton importer (or more probably 
 on some great English financial house with 
 whom the cotton importer has made the 
 
THE EXTERNAL PROBLEM 43 
 
 necessary arrangements), by an American grower 
 of cotton, or, more probably, an American 
 cotton merchant who has bought cotton from 
 the growers. The American cotton seller having 
 sold cotton to England has a claim on England 
 for so many pounds. He draws a bill on 
 England, which will be in some such form as 
 follows : 
 
 Pay on demand to me or order 
 
 10,000 
 
 against 1000 bales of cotton per s.s. Mayflower. 
 Jonathan P. Americanus. 
 John Bull & Co. 
 
 In the right-hand corner he signs his own 
 name, in the left-hand is the name of the London 
 house on which the bill is drawn. He can then 
 sell the bill to his bank in America for so many 
 dollars, and so get his money. The bank 
 sells the bill in New York at the market price 
 current, which will vary according to the number 
 of these claims on London that come to be sold, 
 in relation to the demand for them, which 
 depends, of course, on the amount required by 
 those who have debts to pay in England. This 
 variation in the supply of and demand for bills 
 
44 WAR AND LOMBARD STREET 
 
 on London in New York is considerable. At 
 certain seasons, when America is shipping its 
 cotton and other agricultural produce, and 
 drawing bills on England against it, the claims 
 on London that it has to sell are usually 
 in excess of the demand for them. Then 
 the price of English sovereigns, expressed in 
 American dollars, goes down, and the exchange 
 is said to move against London. At other 
 seasons, when the large amounts have to be 
 paid that America owes to England for interest, 
 etc., then bills on London are competed for in 
 New York, their price in dollars goes up and the 
 exchange moves in favour of London. And so 
 it seemed safe to expect that if England were 
 threatened with a crisis due to war and called 
 upon other countries for the large amounts that 
 she continually lends them in time of peace, the 
 exchanges would all go strongly in her favour, 
 and there would be no fear of a run on her gold 
 store from abroad. 
 
 But what has a favourable exchange to do 
 with movements of gold ? Just this. To take 
 again the example of New York, any one with a 
 bill on London for 1000 can, if he pleases, send 
 
THE EXTERNAL PROBLEM 45 
 
 his bill to London, demand sovereigns for it, 
 ship the gold to New York, and turn it into 
 dollars there at what is called the mint par ; 
 so that if the sovereigns were full-weighted he 
 would get 4866 dollars for his sovereigns less 
 the cost of shipment and insurance and loss 
 of interest on his money while it is afloat. 
 These charges in normal times are reckoned at 
 about 2 1 cents to the pound, so that even in 
 normal times 1000 taken in gold would only 
 net about $4841 to the importer, while if the 
 exchange were in London's favour he would 
 be able to sell his bill on London for, say, 
 $4885, and so it would obviously pay him much 
 better to do so than to bring over gold from 
 London. 
 
 If there were a chance of war, freight and 
 insurance would be much higher than in normal 
 times, and the loss on importing gold would be 
 all the greater. Consequently there was good 
 reason to expect that a threat of war would 
 not cause a foreign run on London* s gold, and 
 this expectation was fully borne out. As soon 
 as the trouble began to brew all the exchanges 
 went strongly in favour of London, with the 
 
46 WAR AND LOMBARD STREET 
 
 single exception of the Paris exchange. The 
 Paris exchange moved violently against London, 
 because French bankers had large balances 
 in London which they tried to take home, and 
 so bills on London were offered so heavily in 
 Paris that the price of them as expressed in 
 francs fell from 25 f. 17 c. to 24 f. 50 c., and 
 gold was shipped to Paris as fast as its transport 
 and insurance could be arranged for. 
 
 It is also true that during the week before 
 the war, sovereigns went abroad, in spite of 
 the exchanges, to Egypt, Belgium, Gibraltar, 
 Switzerland, "the Continent" (probably France), 
 and Malta. These losses made up a respectable 
 total, as the appended table shows : 
 
 Outward movements of gold during the week 
 
 before the war 
 
 I 
 
 France ... ... ... ... ... 1,762,000 
 
 Continent ... ... ... ... ... 847,000 
 
 Belgium ... ... ... ... ... 639,000 
 
 Egypt 565,000 
 
 Gibraltar ... ... ... ... ... 250,000 
 
 Malta ... ... ... ... ... 80,000 
 
 Switzerland ... ... ... ... ... 60,000 
 
 4,203,000 
 
 Out of this total, however, if the Continent 
 
THE EXTERNAL PROBLEM 47 
 
 meant France, over 2|- millions went in accor- 
 dance with the laws of exchange, and the 
 330,000 to Malta and Gibraltar went to British 
 possessions. The other shipments, to Egypt, 
 Belgium and Switzerland are, apparently, 
 evidences of a foreign drain on England in 
 spite of favourable exchanges. But it is more 
 than probable that the beginning of war, with 
 its high rates for freight and insurance, would 
 have stopped these shipments without the 
 moratorium. 
 
 Against these withdrawals London received 
 large amounts from New York and from India,* 
 so that, on balance, the strength of London's 
 position with regard to its gold store was con- 
 firmed by experience. During the moratorium 
 period, the Bank of England's stock of gold, 
 including what it held in Canada and South 
 Africa, was increased by 52^ millions through 
 receipts from abroad, f No gold went abroad 
 
 * The gold from India was not actually imported, but 
 released by the Secretary for India from a store that he holds 
 in London, but it had exactly the same cause and effect as 
 an import. Much of the American gold did not actually 
 come to London, but was sent to Ottawa and there held on 
 the Bank of England's account. 
 
 f See Appendix V. 
 
48 WAR AND LOMBARD STREET 
 
 from it during that period. It may be said 
 that the moratorium stopped it ; but without 
 the moratorium it could not have gone as an 
 exchange transaction, because the exchanges 
 were strongly in our favour, except that for a 
 time Amsterdam moved against us owing to our 
 big purchases of Java sugar. It has been stated 
 in bullion brokers' circulars and elsewhere that 
 an embargo was placed on the export of gold. 
 This was not so. Gold was made conditional 
 contraband by proclamation dated August 4, 
 but any one who could get it was otherwise free 
 to ship it. And any one could have got it, who 
 could have got Treasury notes or Bank of Eng- 
 land notes, which were still convertible, being 
 specially exempted from the moratorium.* 
 
 There were curious stories current at the 
 beginning of August that the German banks 
 had somehow helped themselves to a huge sum 
 at the expense of the London money market just 
 before the war, by calling in loans here and 
 refusing to remit what they owed us. Certainly 
 some of them called in loans from our Stock 
 Exchange, just as our banks did, and the French 
 
 * See Appendix I B. 
 
THE EXTERNAL PROBLEM 49 
 
 banks likewise. But the movement of the Ger- 
 man exchange itself refutes the story that the 
 Germans refused to pay what they owed London. 
 The pressure to buy sterling in Berlin, on the 
 part of people who were trying to pay London 
 what they owed, was so great that the price 
 of sovereigns expressed in marks rose from 
 20 m. 50 pf . to 20 m. 60 pf . and above. If they 
 had been carrying out the nefarious operation 
 with which gossip credited them, the movement 
 in the exchange would inevitably have been 
 the other way.* As far as I was able to get 
 authentic information on the point, German 
 bankers paid all debts that London called in as 
 long as they could buy sterling. At a point 
 their exchange broke down altogether like all 
 the others. 
 
 So, far, then, as the question of a drain on our 
 
 * Since this was written, Sir William Plender, who was 
 appointed by the Treasury as Controller of the German and 
 Austrian banks in London, publicly stated (see Times of 
 October 16) that there was no sign that any abnormal re- 
 mittances were made by any of them in anticipation of an 
 outbreak of hostilities. 
 
 On the other hand the Times of November 27 contained a 
 report of a case, in which the Berlin office of a German bank 
 was stated to have refused, on August i, to pay 436 IQS. 4^. 
 it owed tp a Condon firm. 
 
 E 
 
50 WAR AND LOMBARD STREET 
 
 gold reserves went, the crisis was free from the 
 terrors that had been foretold in some quarters. 
 But an unexpected and paradoxical difficulty 
 arose, from the very strength of London's 
 position. Other countries owed us so much 
 and had so little to pay it with, that with the 
 best will in the world they for some time could 
 not pay us a stiver. 
 
 We have seen above that the manner in 
 which other countries feed their exchange 
 markets with sterling bills, that is bills payable 
 in English money, is by shipping goods. Every 
 1000 worth of copper shipped to England from 
 America, or coffee from Brazil, gives the shipping 
 country a claim on London to that extent, and 
 means that in New York or Rio a bill for 1000 
 can be bought by those who have debts to pay 
 in London. A sale of securities, as when an 
 American railway makes an issue of bonds in 
 London, has the same effect. At the beginning 
 of August, sales of securities to London were 
 impossible, and only by the shipment of goods 
 or gold could bills on London be produced. But 
 in time of war shipping facilities are dear 
 and disorganized, and the war risk insurance 
 
THE EXTERNAL PROBLEM 51 
 
 is apt to rise so high that shipments of goods 
 may be unprofitable and so the supply of bills 
 is curtailed just when it is most needed, and 
 the price of pounds sterling may rise to prices 
 that are altogether unheard of. Thus in New 
 York the price of a sovereign in London, which 
 we have seen to be normally well below $5 
 (ranging from about 4.83! to about 4-88f), 
 is said to have touched $7 early in August. 
 All these things happened because England's 
 position as a creditor country is so over- 
 whelmingly strong that when she called on other 
 nations to pay what was due, the other nations 
 had a relatively trivial amount of outstanding 
 claims on England to set against what they owed 
 her, and being unable to ship goods or gold with 
 the usual facilities,, or to sell England securities, 
 simply could not pay. 
 
 But the question may well be asked, how 
 it was that England was able to claim immediate 
 payment of such large sums from other coun- 
 tries. Everybody knows that she makes large 
 investments in other countries by buying their 
 bonds and stocks and shares, but these invest- 
 ments are usually more or less permanent, and 
 
52 WAR AND LOMBARD STREET 
 
 do not give England any right to immediate 
 repayment, unless she can sell the securities back 
 to the countries of origin, which she clearly 
 could not do, at a time of international, or 
 world- wide, crisis. 
 
 To account for this power to call for im- 
 mediate payment that England holds, we have 
 to go back to the bill of exchange. In the 
 example of it given above we considered it 
 merely as a means of remittance, and for the 
 sake of simplicity imagined it to be drawn 
 payable at sight. But the bill is much more 
 than that. Usually it is drawn payable two, 
 three, or (more rarely) six months after sight 
 sight means the date on which the bill, having 
 arrived in London, is presented to the acceptor 
 for acceptance. The bill is usually sold, as we 
 saw on p. 43, in the country of its origin, to a 
 banker or dealer in exchange ; he forwards it 
 to his agent in London, and after it has been 
 accepted it can be sold (or discounted as it is 
 called) by the agent on behalf of the foreign 
 banker at the current rate of discount. When 
 the bill falls due it has to be paid, either by the 
 importer of the goods, if it was drawn directly 
 
THE EXTERNAL PROBLEM 53 
 
 on him, or by a bank or accepting house, which 
 the importer has induced, by paying it a com- 
 mission, to accept the bill on his account, and 
 so produce a bill that is ranked as first class 
 and can be sold more easily. During the two or 
 three months of its currency the bill has thus 
 provided credit for the importer, giving him 
 time to sell the produce that he has imported, 
 and has at the same time provided a very nice 
 liquid investment for bankers, who as we saw 
 on p. 22 always hold a large number of bills of 
 exchange among their assets. 
 
 But so far the bill of exchange does not give 
 England any right to call in money from abroad. 
 On the contrary, bills drawn by American cotton 
 sellers on English importers are claims on 
 England. In actual practice, however, very 
 many bills are drawn on England without any 
 shipment of goods to England. All over the 
 world the bill on England is well known and 
 welcome, chiefly owing to England's mighty 
 world-wide trade, and the fact that a claim on 
 London can always be turned into gold, except 
 when we have a moratorium, which has only 
 happened once, and then it was not necessary. 
 
54 WAR AND LOMBARD STREET 
 
 This universal popularity of the sterling bill has 
 made it become, to a great extent, the currency 
 of international commerce, so that it is a quite 
 common thing for a tea merchant in Shanghai 
 shipping tea to New York to draw a bill for the 
 value of his cargo, not on his American buyer 
 or an American bank, but on an English accept- 
 ing house or bank, with which the American 
 importer, or his bank, has made the necessary 
 arrangements. The goods go from China to 
 New York. The Chinese merchant draws a 
 bill on John Bull & Co. in London, and sells it 
 to the Shanghai branch of the English Bank of 
 China. Ah Sin has got his money and has 
 no further concern with the bill, except that as 
 drawer of it he is liable on it if John Bull & Co. 
 fail. The English Bank of China sends the bill 
 to its London office, which presents it to John 
 Bull & Co. for acceptance, and then sells it, 
 through a bill broker, to a London bank which 
 holds it as an investment till its due date. At 
 its due date John Bull & Co. have to meet the 
 bill, but in the meantime George Washington, 
 the American tea importer, has to send them the 
 money to meet it withal. He has presumably 
 
THE EXTERNAL PROBLEM 55 
 
 sold the tea for American dollars, and so is in 
 a position to buy a sight draft on London and 
 send it to John Bull & Co., and so the circle 
 is complete. The tea went from China to 
 America, the bill went from China to London, 
 and finally another bill goes from America to 
 London. 
 
 By this process a great deal of international 
 trade, passing from one end of the world to 
 another, is financed by bills on London. In 
 other words, London supplies credit to the rest 
 of the world for financing the movement of its 
 produce from one foreign country to another. 
 If this business suddenly stops owing to crisis, 
 then the supply of bills on London, of this kind, 
 is suddenly cut off at the main, and, at the same 
 moment, merchants and bankers abroad are 
 all clamouring for bills on London, to pay the 
 amounts that they owe to meet bills drawn 
 on their account. And up go the exchanges 
 all round the hemispheres. 
 
 But that is not all, or nearly all. Besides 
 all these bills drawn against goods that never 
 come to England, there is a large number of 
 bills that are drawn against no shipments of 
 
56 WAR AND LOMBARD STREET 
 
 goods at all. For instance, a bank in Denmark 
 may arrange a credit with a London accepting 
 house and draw bills on it, and, having sold 
 the bills, use the funds so created to lend to 
 its Danish customers who want capital for mak- 
 ing butter. Probably the bank would deposit 
 securities as collateral. It may be arranged 
 that the bills shall be renewed when due by a 
 fresh set being drawn and accepted. Some- 
 times these credits have run for years, though 
 the accepting house, of course, always retains 
 the right of terminating them with a stipulated 
 notice. But whatever the period may be, a 
 credit of this kind amounts to a loan from 
 London that can be called in with more or less 
 promptitude. And so here was another handle 
 with which London, when crisis overtook her, 
 could give a sudden tug at the economic entrails 
 of all the civilized countries of the world. 
 
 Such was the force of the tug that England 
 put all the rest of the world into a corner. For 
 a time there was not a bill on London to be had 
 ir, any of the chief financial centres, except, as 
 we have seen, in Paris.* Elsewhere the demand 
 
 * Madrid was also a minor exception. 
 
THE EXTERNAL PROBLEM 57 
 
 for English bills ate up all the supply and was 
 still clamorous. Even the rich American houses 
 could not remit to London, because they could 
 not buy bills or get gold or ship it if they got it ; 
 but New York seems to have begun to make 
 remittances sooner than any other centre, and, 
 as soon as it could buy bills, paid up gallantly, 
 in spite of heavy loss on exchange. It also 
 made heavy payments in gold as soon as it 
 was arranged that gold sent to Ottawa would 
 be accepted there by the Bank of England on 
 account of English creditors. This arrangement 
 was announced on August 12 ; the Bank of Eng- 
 land took gold at Ottawa, and thereupon gave a 
 credit in its books in London to those on whose 
 behalf their American debtors had transferred 
 the gold. The risk and expense of sending the 
 metal across the ocean were thus avoided. 
 
 London's external problem was thus quite 
 different from what had been feared. Instead 
 of anybody being able to give us trouble by 
 going off with our gold, the trouble was that 
 other countries not only could not pay us fast 
 enough what they owed, but could not pay us 
 at all. 
 
58 WAR AND LOMBARD STREET 
 
 Hence arose a very serious consequence. 
 
 We have seen that most of the bills drawn 
 on London from abroad are drawn on banks 
 and financial houses. This is often so even in 
 the case of bills drawn against goods shipped to 
 England, because the credit of the importing 
 merchants does not, as a rule, stand so high as 
 that of the banks and great houses, and so the 
 merchants pay a commission to the banks and 
 financial houses for accepting bills on their behalf, 
 and thus are enabled to pay their customers 
 abroad with a bill that is more readily sold. 
 In the case of bills drawn against goods going 
 from one foreign country to another, or of finance 
 bills drawn against no shipments of goods any- 
 whither, the banks and finance houses (who 
 are often called accepting houses from their 
 doing this business) are nearly always the 
 acceptors, and so are liable to meet the bills 
 when they fall due. 
 
 Consequently when it was found in the 
 week before the war began that the whole 
 machinery of exchange broke down (because 
 there were no bills on London to be had), and 
 that foreign debtors could not remit the funds 
 
THE EXTERNAL PROBLEM 59 
 
 to meet the bills that had been drawn on London 
 to provide them with credit, it was clear that 
 the banks and accepting houses, and also the 
 bill brokers, were in a very awkward position. 
 
 The banks, as already shown on p. 24, 
 were hit on both sides of their balance-sheets. 
 Most of them are under a considerable liability 
 as acceptors of bills ; this liability is small 
 when compared with the vast volume of their 
 deposits, but it was an additional cause of 
 discomfort at a time when discomfort was 
 already too plentiful. In fact it has been 
 contended in some quarters that this business 
 of accepting bills is one that the joint stock 
 banks, with their huge liability to the public, 
 ought not to enter into at all ; that by so doing 
 they are practically lending their customers' 
 money abroad, a risk that they have no right 
 to take with it ; and that acceptance requires 
 special knowledge of the position in foreign 
 countries such as is more likely to be found 
 among accepting houses, which specialize in 
 this class of business, than among joint stock 
 banks whose attention is more closely centred 
 on home affairs. It seems to me that this 
 
60^ WAR AND LOMBARD STREET 
 
 contention goes much too far. For a bank to 
 give its name to a bill on behalf of a customer 
 whose position it is exceptionally well able to 
 gauge is a perfectly natural operation ; and if 
 the banks are to have no commitments abroad 
 they will be prevented, for example, from 
 investing any of their funds in first-class 
 American railroad mortgage bonds, or perhaps 
 even in the securities of the British colonies. 
 But there is certainly good reason for the view 
 that acceptances are a liability which should 
 not be indulged in too freely by the joint stock 
 banks, whose first business it is to supply the 
 public at home with currency and credit, and 
 to see that the public's money is safe in their 
 keeping. 
 
 That the accepting houses were put into an 
 awkward position by the failure of their foreign 
 clients to remit is a fact that needs little explana- 
 tion. In the case of most of them, the greater 
 part of their business consists of this acceptance 
 business, by which they accept, and so promise 
 1 o pay, bills due at a certain date, in the expecta- 
 tion that before that date arrives their foreign 
 clients will have provided them with the funds 
 
THE EXTERNAL PROBLEM 61 
 
 wherewith to do so. If they are careful in the 
 choice of the clients for whom they accept, 
 and spread their risks prudently all round the 
 trading nations of the globe, the business is in 
 normal times perfectly safe and perfectly sound, 
 as long as it is kept within due limits, and the 
 amount of the liability undertaken is not allowed 
 to be too big for the firm's resources. But no 
 conceivable precautions could make an accept- 
 ing house, with an active business, able to pass 
 wholly unscathed through a crisis such as 
 that of last July, which tied up the exchange 
 machinery of the civilized nations and made 
 them unable to pay what they owed. 
 
 This being so, since all the accepting houses 
 were in a more or less uncomfortable position, 
 there began to be a fear that some of them would 
 not be able to stand the strain, and so bills of 
 exchange, that had been looked on as the most 
 liquid investment that a banker could hold, 
 began to be considered in a different light. And 
 the bill brokers, whose stock-in-trade consisted 
 of bills of exchange, and who were already un- 
 comfortable enough owing to the demands made 
 on them by the banks to pay back loans with 
 
62 WAR AND LOMBARD STREET 
 
 which they carried their stock-in-trade, were 
 in a position of cruel anxiety. 
 
 Something had to be done. The Govern- 
 ment was not greatly exercised about the bill 
 brokers, though failures in the City would have 
 been an unpleasant accompaniment for the 
 first round of the big fight ; nor perhaps about 
 the accepting houses for their own sake, since 
 any disaster that befell them, though it might 
 have frightened the general public, would not 
 have had any direct or overt effect on the general 
 public's pocket. But the stability of the accept- 
 ing houses was of very great importance with 
 regard to foreign trade, for we have seen that 
 they supply much of the credit with which it is 
 carried on ; and it was clearly most important 
 that nothing should be allowed to check foreign 
 trade, which was already hampered by high 
 freights, war risk insurance premiums and all 
 the dislocation that is inevitably involved by a 
 sudden plunge into war on the part of five 
 great European Powers, followed by several 
 other peoples. Further, since it was above all 
 things necessary that the joint stock banks 
 should be supported and encouraged, and since 
 
THE EXTERNAL PROBLEM 63 
 
 the joint stock banks had already seen all their 
 Stock Exchange investments and loans against 
 Stock Exchange securities frozen into im- 
 mobility when the Stock Exchange closed its 
 doors, an effort clearly had to be made to make 
 the banks feel happier about their bills of 
 exchange. And this was what finally was done. 
 
 **"' 
 
 The accepting houses were not relieved of any 
 liability on their bills. Ultimately they will 
 have to meet them, out of their own pockets if 
 their clients are still unable to remit, but in the 
 meantime it was arranged that the Bank of 
 England will lend them the money wherewith to 
 pay them as they fall due, and the Government 
 guaranteed the Bank of England against loss on 
 this tremendous operation. This arrangement 
 made all the bills held by the joint stock banks a 
 good asset, and incidentally helped the bill brokers. 
 Several steps marked the progress of the 
 policy which ended in this arrangement. First 
 of all on August 2 a proclamation was issued 
 under which all bills accepted before August 4 
 should not be payable on their due date, but 
 should be re-accepted for a month.* 
 
 * See Appendix II A. 
 
64 WAR AND LOMBARD STREET 
 
 By this measure of relief acceptors were 
 given breathing time, in the hope that the 
 position with regard to foreign exchange might 
 be righted, so that remittances from abroad 
 might come to their rescue. But this improve- 
 ment showed little sign of happening, and in 
 the meantime the banks were not at all eager 
 to buy new bills, because they had not been 
 assured with regard to the value of those that 
 they held already ; nor had they been provided 
 with any means for turning them into cash. 
 The discount market was consequently at a 
 standstill, for when the banks do not buy bills, 
 it follows that the bill brokers cannot do so, 
 since the bill brokers, as we have seen, are 
 merchants in bills relying on the banks to buy 
 them ultimately. Foreign trade, already beset 
 with difficulties, was hampered by the difficulty 
 of drawing bills and selling them. A stronger 
 tonic was evidently needed, and the market's 
 physicians, the Chancellor of the Exchequer and 
 the Bank of England, duly produced one. It 
 was announced on August 13 that the Bank 
 of England would discount all approved bills 
 accepted before August 4, without recourse 
 
THE EXTERNAL PROBLEM 65 
 
 against the holders, and the Government agreed 
 to guarantee the Bank of England " from any 
 loss it may incur in discounting bills of exchange, 
 either home or foreign, bank or trade, accepted 
 prior to August 4." * 
 
 On paper, it was a big liability for the State 
 to assume, for the number of bills outstand- 
 ing was estimated at some 350 millions. But 
 there is little reason to fear that the tax- 
 payer will be called upon, to any extent that 
 he will feel appreciably, in consequence of this 
 guarantee. In the first place he is protected 
 by the Bank of England's power of discrimina- 
 tion, contained in the word " approved/' in 
 the second by the great strength of the banks 
 and accepting houses on whom most of the bills 
 are drawn, and in the third by the charge of 
 2 per cent, over Bank rate made for discounting 
 bills (and later, when the form of guarantee 
 was varied, for lending money to acceptors 
 wherewith to take bills up). As Bank rate was 
 5 per cent., the total charge was 7 per cent., 
 out of which, as Mr. Lloyd George told the 
 House of Commons on November 27, " 2\ goes 
 
 * See Appendix II B. 
 
66 WAR AND LOMBARD STREET 
 
 to Government as insurance for any possible 
 loss, 4 per cent, goes to the Bank as interest 
 and J per cent, for the part they took in 
 carrying through the transaction/'* 
 
 The arrangement that the Bank of England 
 was to discount all these bills " without recourse 
 against the holder" needs explanation. Nor- 
 mally every seller of a bill of exchange 
 endorses it by writing his name on the back, 
 and is liable for its amount to his buyer, if it 
 is not met at maturity. This liability is ex- 
 pressed by saying that the buyer has recourse 
 against the firm or company that sold it to him. 
 So that if when a bill is due the acceptor cannot 
 pay, the holder has recourse against his seller, 
 who has recourse against his, and so on all the 
 way up the chain. The Bank of England, with 
 the State behind it, was ready to buy bills with- 
 out recourse against the holders, and so relieved 
 the banks of all liability on the bills in their 
 portfolios, and enabled the banks to turn 
 them into cash. But previous holders, who 
 had endorsed the bills, were still, apparently, 
 liable if the bills were not finally met. It was 
 
 * Parliamentary Debates, Vol. 68, No, 12, p. 1522. 
 
THE EXTERNAL PROBLEM 67 
 
 also provided that, on the maturity of the bills, 
 the Bank of England would give the acceptor 
 the opportunity " until further notice/' of post- 
 poning payment, he paying interest at Bank 
 rate plus 2 per cent. Acceptors were thus made 
 comfortable pending further notice, which was 
 taken to mean until the war was over and 
 business was normal again. But the vagueness 
 of the phrase was an element of uncertainty. 
 
 By this arrangement, then, the joint stock 
 banks were able to sell their bills to the Bank 
 of England and rid themselves of all liability. 
 The result was that the banks sent bills for 
 discount in very large amounts to the Bank of 
 England, and still the evils that it was hoped 
 to correct were not abolished. New bills, ac- 
 cepted after the moratorium, came forward 
 very slowly and were bought sparingly by the 
 banks, and, because new bills on London were 
 created slowly, the exchanges still refused to 
 work freely. It was a case of a vicious circle. 
 As long as the exchanges did not work, acceptors 
 were not anxious to be drawn on, because 
 they feared that their foreign customers would 
 not be able to remit when the bills fell due. 
 
68 WAR AND LOMBARD STREET 
 
 Unless acceptors were ready to be drawn on the 
 exchanges could not work, because there were no 
 bills to be had, and there could not be a free 
 market in exchange. Queer notions got abroad, 
 as for example that the only bill which could 
 be accepted with safety was a bill drawn 
 against an actual shipment of goods to England, 
 because in its case the goods came to this country 
 and were sold here, and so the funds to meet 
 the bill were ready on the spot, and there was 
 no question of a foreign remittance to meet the 
 bill. Of course it is perfectly true that this 
 kind of bill is the safest, when there is any 
 chance of the exchanges being disorganized, 
 but for London suddenly to say that it would 
 no longer be drawn on against goods going 
 from one country to another, and would no 
 longer accept finance bills drawn against no 
 movement of goods at all, was the same thing 
 as for London to inform the rest of the world 
 that it could no longer have credit for inter- 
 national trade, but must learn to trade on a cash 
 basis. But this whole question of finance bills, 
 and their utility and necessity, is so big that 
 it must wait for another chapter. 
 
THE EXTERNAL PROBLEM 69 
 
 Finding that the revolutionary arrangement 
 by which the Bank of England promised to 
 discount all the pre-moratorium bills did not 
 produce the desired result, one more effort was 
 made at the beginning of September. The 
 general moratorium had in the meantime 
 been continued till October 4, by proclamations 
 dated September i and September 3.* It was 
 announced on September 5 f that the Bank of 
 England, instead of merely buying bills accepted 
 before the moratorium, would lend money to the 
 acceptors to meet them, thereby relieving not 
 only the holders of the bills, but also all the 
 previous endorsers. Further, the assets of the 
 acceptors were to be subject to a first-charge in 
 favour of the holders of any bills drawn since 
 the moratorium, so that the Government not 
 only undertook a big liability on the pre- 
 moratorium bills, but ranked itself as holder of 
 a second charge on the assets of those who had 
 accepted them. The Bank of England also 
 undertook not to claim repayment from the 
 acceptors until a year after the end of the war. 
 At the same time the acceptors were expected 
 
 * See Appendix ID. f See Appendix II c. 
 
70 WAR AND LOMBARD STREET 
 
 to make every effort to induce their foreign 
 customers to remit, and to use the funds so 
 received to pay off loans from the Bank of 
 England that they had raised for meeting their 
 bills. 
 
 Finally it was stated that in order to facilitate 
 fresh business and international trade the joint 
 stock banks had " arranged, with the co- 
 operation, if necessary, of the Bank of England 
 and the Government, to advance to clients [i.e. 
 to acceptors] the amounts necessary to pay 
 their acceptances at maturity/' if necessary. 
 " The acceptor," it was added, " would have to 
 satisfy the joint stock banks or the Bank of 
 England both as to the nature of the transaction 
 and as to the reason why the money is not 
 forthcoming from the client" (i.e. from the 
 foreign customer on whose account the bill had 
 been accepted). 
 
 Thus it was left to the joint stock banks, 
 with the Bank of England behind them, to give 
 further assistance to acceptors if any new bills 
 that were drawn on them were again, at the time 
 of maturity, not provided for by remittances 
 from the foreign drawers. 
 
THE EXTERNAL PROBLEM 71 
 
 These arrangements were apparently drastic 
 enough, but they did not produce a satisfactory 
 result. They put everybody into an awkward 
 position. The accepting houses were bound to 
 bring pressure on their foreign customers who 
 had drawn on them, to remit money to meet 
 their pre-moratorium bills. The said foreign 
 customers generally were able to plead a mora- 
 torium in their own country, or, if not, were 
 able to point to so ruinous a rate of exchange 
 and so much difficulty in buying bills on London, 
 that all pressure was bootless. The only way 
 out was to let them draw a new bill, and with 
 its proceeds, when it had been sold in the London 
 discount market, to meet the old one. If all 
 the accepting houses had boldly done so there 
 would have been a plentiful supply of new 
 sterling bills, the exchanges would have come 
 down to something like their normal levels, and 
 the whole machinery would have got to work 
 again. But there were two obstacles in the way 
 of the accepting houses taking this spirited line. 
 It was not certain that new bills drawn on some 
 of them would be bought by the banks, as readily 
 as they had been before the crisis; and for 
 
72 WAR AND LOMBARD STREET 
 
 an accepting house to have its bills refused or 
 even questioned is an experience that it is most 
 reluctant to hazard. And if the new bill were 
 accepted and discounted, and then at the end 
 of its life the foreign customer were still unable 
 to remit, then the accepting house would have 
 to go to its banker to ask him for the loan of 
 funds to meet the bill, and to "satisfy" the 
 banker as to the nature of the transaction. This 
 again was a position in which the accepting 
 house would be most reluctant to place itself. 
 
 Under this arrangement, in short, the joint 
 stock banks were made, to a greater extent 
 than usual, the arbiters as to the position of the 
 accepting houses, and the question was com- 
 plicated by the fact that the joint stock banks, 
 are, as we have seen, big acceptors themselves, 
 and so are competitors with the accepting 
 houses for acceptance business. The best bills 
 handled by the London money market are 
 drawn on the joint stock banks and the great 
 accepting houses. But the ultimate home of 
 nearly all these bills, as they pass through the 
 hands of the bill brokers, is found in the port- 
 folios of the joint stock banks. It is therefore 
 
THE EXTERNAL PROBLEM 73 
 
 in the hands of the latter to decide whose bills 
 shall be taken and whose shall be left homeless. 
 Human nature being what it is, it was natural, 
 at this time of uncertainty and nervous worry, 
 that the banks should be accused of unfair 
 discrimination against the bills of the accepting 
 houses, and even of attempting to drive the 
 latter out of the accepting business and keeping 
 it all for one another. A certain amount of 
 gossip of this kind was certainly current in 
 Lombard Street, but there seems to have been 
 little or no foundation for it. The banks have 
 not the necessary equipment for doing a large 
 part of the business that is handled by the 
 accepting houses, and, as has already been 
 shown, a large expansion in acceptance business 
 on the part of the banks would hardly be 
 prudent, after the recent experience that they 
 have had of its risks at a time when their 
 liabilities to their home customers required all 
 their attention. 
 
 Critics of the action of the joint stock banks 
 during the moratorium period are on surer 
 ground when they contend that, in view of the 
 great measures of relief that had been designed 
 
74 WAR AND LOMBARD STREET 
 
 and taken to strengthen their position and 
 restore the confidence of the public in them, 
 they might have shown greater readiness to 
 assist in the task of reorganizing exchange, by 
 buying new bills freely, after they had been 
 relieved of all responsibility for their pre- 
 moratorium paper. By so doing they would 
 not merely have been helping the accepting 
 houses to get in what was owed to them, but 
 also, as will be shown later, would have been 
 lending a hand towards the much more impor- 
 tant task of keeping British tractg busy and so 
 checking unemployment at home. 
 
CHAPTER IV 
 
 FINANCE BILLS AND TRADE 
 
 IF a bank wants to ruin all its customers and 
 therefore, incidentally and consequently, itself, 
 the easiest way for it to do so is to ask them all 
 to pay, forthwith, what they owe it. If there 
 is some other bank from which they can borrow 
 the wherewithal to pay, then bank number one 
 may get its money back and lose its business. 
 If not, bank and customers are in a hole together 
 and remain there until the bank thinks better 
 of the demand that it is making. 
 
 This was in effect what London was doing 
 to the rest of the world at the beginning of the 
 war. London was the world's banker, as it 
 has so often boasted, and it said to the world, 
 Pay up. There was no other banker to which 
 the world could apply, no other centre in which 
 there is an accumulation of capital and a 
 machinery of credit capable of financing the 
 world's commercial requirements. Paris might 
 
 75 
 
76 WAR AND LOMBARD STREET 
 
 at a different season have provided some of the 
 credits that London was wanting to turn into 
 cash, but Paris had its own preoccupations and 
 was not asking for new acceptance business at 
 the beginning of August, 1914. Berlin used 
 to accept a fair number of bills, and she also 
 would have been ready enough to fill the gap 
 that London made, if Germany had not been 
 at war, and if London would have lent the 
 money to Berlin to finance other countries with. 
 But in the circumstances then ruling, Berlin 
 was as helpless as Paris, in fact much more so, 
 since it may be doubted whether even in normal 
 times Germany has any surplus capital to spare. 
 The fact that it does finance other countries 
 is no proof, since we know that it also finances 
 itself in London and Paris. New York had a 
 great opportunity for taking London's business 
 away from it and establishing itself as the world's 
 financial centre, at this time when London was 
 trying to force liquidation on other countries. 
 But New York was so busy in trying to pay 
 its own debts that it seems to have made little 
 or no attempt to finance any one else. The 
 mass of securities that the Eastern Hemisphere 
 
FINANCE BILLS AND TRADE 77 
 
 had thrown at it in the months before the war, 
 and the huge blocks of gold that it had had 
 to send to Europe in payment for them, had 
 crippled and dispirited American finance, which 
 had already had many lean years to endure, 
 chiefly owing to local preoccupations. 
 
 Thus there was no one to help the borrowing 
 countries, and so, as we have seen, they simply 
 could not pay. London was doing to its foreign 
 customers just what the English and foreign 
 banks had already done to the London Stock 
 Exchange. By calling in loans from the Stock 
 Exchange the banks had helped it to close its 
 doors. By calling in credits from abroad, 
 London invited foreign countries to put up 
 their shutters, which they proceeded to do by 
 declaring moratoriums, or if that was con- 
 stitutionally impossible, as in the United States, 
 acting as if they had one.* They had no 
 choice, because there was not a bill on London 
 to be had, except the few drawn against 
 shipments to England, which did not nearly 
 
 * A New York banker wrote on September 3, 1914, to a 
 correspondent in London : " We have no legal moratorium, 
 but the Stock Exchange and all business (houses ?) have 
 practically declared one in the financial district." 
 
78 WAR AND LOMBARD STREET 
 
 suffice to make the payments that London 
 required. 
 
 For years London had proudly asserted that 
 the bill on herself was the currency of inter- 
 national trade. How true this was she proved 
 at this crisis. For she said in one and the same 
 breath, " You other countries shall not have 
 any more bills on London/' and " Give me back 
 my money/' as if they could, when their supply 
 of currency was stopped. London's claim to 
 supremacy in finance was never more clearly 
 proved than by the deadlock produced by the 
 vicious circle, round which she and her foreign 
 customers gyrated at the beginning of this war, 
 until they were all dizzy. 
 
 These things all happened because a credit 
 system can only be worked on credit, and credit 
 is the belief that trade will go on much as usual. 
 If there comes a great shock, and all money 
 lenders suddenly decide to strengthen them- 
 selves by turning their loans into cash, by calling 
 on their debtors to pay, the only possible result 
 \s a brick wall against opposite sides of which 
 lenders and borrowers batter their heads, to 
 their mutual discomfort. 
 
FINANCE BILLS AND TRADE 79 
 
 It is easy enough to see that by making 
 this imperative claim on the rest of the world 
 London only increased the evils from which it 
 was suffering, but it is not so easy to criticize 
 London for doing so. For we have to remember 
 that London, when considered as the world's 
 banker, consists not of one great body able to 
 take a serene and disinterested view of what 
 is happening, but of a number of banks and 
 accepting houses, each of which has liabilities 
 which it may be called on to meet, and is there- 
 fore impelled to make its assets as liquid as 
 possible. " Every tub/' as the Pilgrim's Pro- 
 gress says, " must stand upon its own bottom/' 
 
 We must also remember that this crisis, 
 terrible alike in the vastness of its scope and the 
 suddenness of its swoop, happened at a time 
 when the financial world was by no means in 
 good shape to meet it. For years past develop- 
 ment all over the world had been clamouring 
 for capital, while at the same time the old 
 capital-saving countries had been spending 
 their saving power on armaments, public ex- 
 travagance, and private luxury. For years, 
 consequently, there had not been enough capital 
 
8o WAR AND LOMBARD STREET 
 
 to go round, and the price of capital, expressed 
 in the rate of interest on good securities, had 
 been going up, that is, the price of securities, 
 on which the solvency of so many financial 
 institutions depends, had been going down. 
 Finance was already sick of a slow fever, when 
 it was expected to stand up and smile under the 
 biggest blow that had ever been dealt to it. 
 All this considered, it took its punishment with 
 as good a grace as could have been expected. 
 
 " The devil was sick, the devil a monk would 
 be." Finance, being shaken with an ague, 
 became extremely virtuous. All who had any- 
 thing to do with bills of exchange acceptors, 
 bill brokers and bankers began to bethink them 
 that there had been too many finance bills, 
 and so, many of them jumped to the extreme 
 and impossible conclusion that there ought not 
 to be any finance bills at all. Finance bills, 
 as already explained on p. 56, are bills drawn 
 not against the actual shipment of produce 
 from place to place but against securities de- 
 posited, or sometimes merely against the good 
 credit of the drawer, or some one who guarantees 
 the drawer, that is, promises the acceptor that 
 
FINANCE BILLS AND TRADE 81 
 
 if the drawer cannot pay in time to meet the 
 bill, he will pay for him. 
 
 Finance bills are thus a development of 
 the accommodation paper, with which Mr. 
 Richard Swiveller and others of his kidney have 
 been assisted to outrun the constable. It is a 
 form of bill which is extremely liable to abuse, 
 and the amount of it that is about is a matter 
 that always has to be carefully watched by 
 those responsible for the soundness and safety 
 of the London money market. For some time 
 before the crisis it had been felt that finance 
 bills had been created too rapidly. Owing to 
 the difficulty of issuing long-time securities, 
 caused by the scarcity of capital referred to 
 above, many borrowers abroad who ought to 
 have issued bonds or shares for financing 
 their enterprises, had applied to their local 
 banks, who had raised the cash to lend them 
 by drawing finance bills on London. This was 
 an unsound development, and its gradual re- 
 duction was already in process when the crisis 
 came upon us. 
 
 But because finance bills had been abused 
 and multiplied beyond the limit of prudence, 
 
 G 
 
82 WAR AND LOMBARD STREET 
 
 that was no reason why they should be cut out 
 of the programme altogether. In due measure 
 they are not only legitimate but indispensable. 
 If no finance bills were drawn, there would be 
 no bills except those created by a genuine ship- 
 ment of goods or produce, or unless there was 
 a genuine debt to be paid by one country to 
 another for securities or freights ; by admitting 
 bills drawn for payments of this kind we are 
 giving a much wider meaning to the commercial 
 bill than it usually carries. But even after thus 
 making the best of it we cannot make the com- 
 mercial bill an efficient instrument of inter- 
 national currency, unless it is allowed the 
 assistance of its disreputable but useful financial 
 colleague. Commercial bills have a most in- 
 convenient habit of coming into being only 
 at certain times of year. In the autumn, when 
 the United States garners its harvest of cereals 
 and cotton, it holds the Western Hemisphere 
 in fee for the time being, and has a huge mass 
 of bills to draw against the produce that it is 
 .hipping to feed and clothe its customers on this 
 side. The creation of this great mass of bills 
 if left to itself would naturally flood the market 
 
FINANCE BILLS AND TRADE 83 
 
 and depress the American exchange to a point 
 at which gold would have to be imported from 
 London every autumn in large amounts, because 
 claims on London would be sold so cheap in 
 American dollars that it would pay their holders 
 better to bring them home in the form of gold. 
 Finance bills tend to prevent this clumsy 
 method of settling claims in metal. At times 
 when claims on London are scarce and wanted 
 in New York (because little or no produce is 
 being shipped, while interest is due to England 
 on millions invested in America) then financial 
 houses on both sides of the water agree together 
 to make fictitious claims. A New York house 
 draws a bill on its London correspondent in 
 July for example, when many coupons have 
 to be met and the expenditure of American 
 travellers in Europe means that many dollars 
 have to be turned into sovereigns, and so bills 
 on London are wanted and dear. Any one 
 who then meets this demand by creating an 
 apparently fictitious bill, probably benefits him- 
 self because he sells his claim on London, so 
 created, at a high price. He also benefits those 
 who want claims on London by supplying their 
 
84 WAR AND LOMBARD STREET 
 
 need, and he also helps to prevent the necessity 
 for gold shipments from America to England by 
 keeping the exchange from going up to the point 
 at which it would pay better to ship gold than to 
 buy a bill. 
 
 But that is not all the benefit that he confers. 
 For he has to " cover " his bill. It was drawn 
 in July, payable at 90 days after sight. It 
 arrived in London and was " sighted " and ac- 
 cepted by the English firm drawn on on July 10. 
 So that before October n (90 days plus the 
 usual three days' grace) the American must buy 
 a draft on London and ship it to his English 
 correspondent to enable him to meet the bill ; 
 thus he comes into the exchange market as a 
 buyer of sterling money, just at the time when 
 the market is flooded with cotton bills and claims 
 on London are going begging. He is thus 
 enabled to make a profit for himself by buying a 
 bill on London cheap, and also by his timely 
 demand helps to steady the price of sterling in 
 dollars and prevent gold from having to be 
 .-.hipped from London to New York. 
 
 Finance bills of this kind, drawn in anticipa- 
 tion of shipments of produce, thus perform a 
 
FINANCE BILLS AND TRADE 85 
 
 most useful office by checking fluctuations in 
 exchange, and expensive and clumsy shipments 
 of gold from one side of the ocean to another. 
 If they were abolished, the exchanges would 
 tend to swing violently from one gold point to 
 another, according as the movement of produce 
 or the payment of other seasonal debts shifted 
 the balance of claims from one country to 
 another. 
 
 There is no doubt, of course, that many 
 finance bills have been drawn in times past for 
 less legitimate purposes, to provide money that 
 was going into factory building or other forms 
 of fixed capital which ought to have been 
 provided out of more permanent forms of 
 security, such as bond issues or creations of 
 shares or debenture stocks. Sometimes they 
 have been produced for mere gambling pur- 
 poses and for financing big operations on the 
 Stock Exchanges of the world. That finance 
 paper of this kind should gradually be cut down 
 at a time when capital was cheap and long 
 securities could be issued easily, would have 
 been a sound and remedial policy. But it is 
 one of the well-worn maxims of banking that 
 
86 WAR AND LOMBARD STREET 
 
 bankers must not restrict credit too roughly 
 when times are bad, because if they do they put 
 their customers in a corner, and if they only put 
 enough of their customers in a corner they will 
 inevitably join them there themselves. But 
 this was what London did, and duly found itself 
 in a corner. Without finance bills it found that 
 there could not be a free market in exchange, 
 because there were not enough pure commercial 
 bills to supply all those who had debts to meet 
 in London, and so London could not collect its 
 debts. 
 
 If this result had merely inconvenienced the 
 manufacturers of credit in Lombard Street, they 
 might fairly have been left to worry their way 
 through their difficulties, with the help of the 
 vast store of financial ingenuity that is to be 
 found in and about its purlieus. But the evil 
 was much bigger than that. Lombard Street 
 does not exist to enable a number of acute 
 gentlemen to make fortunes by signing and 
 trafficking in pieces of paper. It exists to 
 grease the wheels of the world's commerce, 
 and if it makes mistakes, these mistakes react 
 on the people who keep us all alive and clothed 
 
FINANCE BILLS AND TRADE 87 
 
 and comfortable, the growers, makers and 
 forwarders of the necessaries and luxuries that 
 we all consume. And this was why, when the 
 City was threatened with grave trouble, the 
 Government was ready to pledge its credit so 
 promptly and freely. 
 
 If Lombard Street had insisted on cutting off 
 finance bills, the effect on our export trade would 
 have been disastrous, and unemployment would 
 have been seriously increased. For every year 
 England invests a huge amount abroad, 200 
 millions and more in recent years. To this 
 extent she imports securities from abroad, and 
 exports goods and services and claims for 
 interest. This investment, and the traffic that 
 it causes, almost ceases in time of war, or rather 
 it has almost ceased in this war up to the present. 
 Since the war began a few French Treasury bills 
 have been placed in London, and some Colonial 
 Treasury bills have been renewed. Renewals 
 have also been effected on a very small scale of 
 American railroad notes falling due. But on 
 the whole it may be said that the machinery 
 by which English money is borrowed by foreign 
 countries, enabling them to buy our goods and 
 
88 WAR AND LOMBARD STREET 
 
 services, and to pay their interest on existing 
 debt to us, has stopped with a jerk. The con- 
 sequence inevitably is a lessened demand for 
 our goods and services, and defaults in interest 
 payments. 
 
 To this extent it was inevitable that our 
 foreign trade should be hit hard by war. But 
 that is all the more reason why we should not 
 give it another and quite unnecessary blow, by 
 making all our foreign debtors liquidate the 
 debts due to us on short credits raised through 
 finance bills. For how can foreign countries 
 liquidate this debt ? Either by sending us 
 extra goods, or gold, or by lessening their 
 purchases of goods from us. If we suppose 
 that the amount of these credits is a hundred 
 millions, then, if foreign countries cannot send 
 us this sum in goods, over and above what 
 they usually ship to us (which is extremely 
 unlikely owing to the many difficulties that 
 war puts in the way of international trade), or 
 in gold, which is practically impossible because 
 most countries refuse to part with their gold, 
 the only way in which they can balance the 
 account is by taking fewer goods and services 
 
FINANCE BILLS AND TRADE 89 
 
 from us. And this can only mean an increase 
 of unemployment at home, at the very time when 
 it is all-important that every able-bodied man 
 who is not at the front, or in training, should be 
 hard at work and earning good wages. 
 
 A good deal of unnecessary pessimism was 
 indulged in at the beginning of the war, about 
 the extent of the unemployment that was 
 alleged to be inevitable, and the rapidity with 
 which it was supposed to be certain to increase. 
 Unemployment ought not to be a necessary 
 result of war. In a state in which industry was 
 organized on a rational basis it would rather 
 follow that war would increase the demand for 
 labour, by taking away a large number of able- 
 bodied men from the labour market, and at the 
 same time greatly quickening the demand for all 
 kinds of goods that are necessary for the feeding 
 and clothing of a fleet and army on active 
 service, and for the upkeep of their weapons 
 and ammunition. To a country which can 
 keep its means of outside communication open, 
 and is not itself invaded, a time of war ought 
 to be a time at which, so far from there being 
 any fear of enforced idleness, every man and 
 
90 WAR AND LOMBARD STREET 
 
 woman who can work would be working hard 
 to make good the gap in the productive ranks, 
 caused by the drafting away of the flower of 
 our manhood into the business of fighting our 
 battles. In fact, the extent of unemployment 
 in war time may be said to be a measure of the 
 misdirection of our industrial energy in time of 
 peace. Because so much of this energy usually 
 goes into turning out luxuries and frivolities 
 and absurdities that nobody really needs and 
 that everybody is ashamed to be seen consuming 
 at a time of national crisis, war brings with it a 
 great dislocation of trade, and thousands of 
 unfortunate people who made futile frillings for 
 our hours of ease are out-of-work, while there is 
 not enough labour available to turn out all the 
 things that are urgently required for our troops 
 and sailors. And so we see the melancholy 
 spectacle of out-of-works in one street, and over- 
 pressure in the next. It may perhaps be hoped 
 that one of the lessons that this war will teach 
 our well-to-do classes will be that much of the 
 frivolous expenditure that formerly warped the 
 course of our industrial effort did not do them 
 any good or make them any happier. Then 
 
FINANCE BILLS AND TRADE 91 
 
 if they will also learn that it was bad for the 
 working classes, we shall have gone a long way 
 towards a great and salutary economic reform. 
 
 In the meantime, however, some dislocation 
 in trade is inevitable and unemployment follows 
 in its train. And it was much to be deplored 
 that this tendency to unemployment should 
 have been increased by the rigorous policy of 
 Lombard Street, in cutting down credits given 
 to foreign customers. By so doing Lombard 
 Street only maintained the deadlock in exchange 
 by making bills on London scarce and increasing 
 the demand for them, and at the same time, and 
 in consequence, made foreigners anxious to sell 
 to us and shy of buying from us. 
 
 Let us take Sweden as an example. The 
 exchange is normally 18 kronor 20 ore to the 
 pound sterling. London banks and accepting 
 houses had given Swedish banks and merchants 
 large credits, that is, had allowed them to draw 
 bills on London to finance their local enterprises. 
 A mass of these bills, periodically renewed, was 
 chronically outstanding. Then came the war, 
 and Lombard Street said that these credits must 
 be called in, with the result that all its debtors in 
 
92 WAR AND LOMBARD STREET 
 
 Stockholm had to try to buy bills on London to 
 remit them in payment. The exchange went up 
 to 19 kronor 20 ore to the pound, and hardly 
 any bills were to be had even at that price. So 
 that anybody who could sell a pound* s worth of 
 goods to England got 19 kronor 20 ore instead of 
 the 18 kronor 20 ore that he used to expect, 
 and was thereby encouraged to sell to us as fast 
 as he could ; and contrariwise any one who 
 bought a pound's worth of goods from us had to 
 pay 19 kronor 20 ore in his own currency to do 
 so instead of only 18 kronor 20 ore, and so was 
 to that extent deterred from buying our goods. 
 There can be no doubt that Lombard Street's 
 untimely fit of virtue on the subject of finance 
 bills prolonged the difficulties from which it 
 suffered during the first months of the war. 
 The question was complicated by the fact that 
 under the Treasury's statement of September 5, 
 any acceptor who allowed his foreign customers 
 to draw on him fresh bills after the moratorium 
 did so with the possibility before him, if the 
 Customer was unable to remit to meet the bill 
 when it fell due, of having to ask his banker to 
 lend him the money to meet it, and satisfy his 
 
FINANCE BILLS AND TRADE 93 
 
 banker that the bill was one that ought to have 
 been drawn. The obstacles in the way of new 
 bills, produced by this possibility, have already 
 been pointed out, and so the effect of the cold fit 
 about finance bills was particularly severe and 
 widespread. There was also the very practical 
 danger, that credits given to neutral countries 
 might be used by them for financing trade with 
 our enemies. 
 
 With these and other difficulties in the way 
 of the creation of new bills after the crisis, it 
 is not surprising that the exchanges were slow 
 in coming down to a normal level, and that the 
 export trade of the country was hampered by the 
 fact that our foreign customers, who had been 
 in the habit of buying from us with money that 
 we lent them, now found that they could no 
 longer do so, but were expected to pay back to 
 us the credits that they had formerly enjoyed. 
 The effect of these evils was such that I heard 
 the opinion expressed by an acute observer of 
 all that goes on in Lombard Street, that the 
 Government ought to have been asked to go 
 still further in the way of guaranteeing the 
 accepting business of the City, purely in the 
 
94 WAR AND LOMBARD STREET 
 
 interest of our export trade and the wages of 
 the workers employed in it. He contended that 
 the loss likely to fall on the taxpayer for the 
 guarantee already given is very small ; and 
 that it was therefore a feasible suggestion and 
 one that would have benefited the trade of the 
 country that the recognized accepting houses 
 should accept new bills on behalf of customers 
 for whom they have hitherto done so, with a 
 further guarantee of the Treasury behind them, 
 charging their customers, on behalf of whom 
 they accepted, twice the normal commission, 
 and paying the extra commission into a fund 
 to secure the Treasury against loss on this 
 guarantee. 
 
 If such a scheme could have been carried 
 out, it would have at once relieved the Bank of 
 England to a great extent of the necessity of 
 lending funds to the accepting houses in order to 
 take up their pre-moratorium bills, because they 
 could immediately have enabled their customers 
 (except such as were enemy aliens) to provide 
 lands to meet them by drawing new bills, which 
 would have been sold to their local bankers, 
 and by them sent to London to be discounted 
 
FINANCE BILLS AND TRADE 95 
 
 in the usual manner that worked so easily before 
 the war. There would have been a free discount 
 market, for these bills with a Treasury guarantee 
 would have been readily bought by the banks, 
 there would have been a free market in exchange, 
 because foreign centres would have been supplied 
 with plenty of sterling bills, the exchanges 
 would have returned to a more or less normal 
 basis, and (most important of all) foreigners 
 would have been able to buy our goods and 
 services as of yore, instead of having to check 
 their purchases of them in order to liquidate 
 their debt to us. 
 
 Such a scheme would have involved many 
 difficulties and required many restrictions and 
 limitations. But it is clear that if we insist 
 on foreign countries paying us all that they owe 
 on finance bills, they can only do so either 
 by borrowing from us in some other form, or 
 by sending us gold, of which we have already 
 got a very good supply, or by cutting off their 
 purchases of our goods, to the detriment of our 
 trade. Russia, whose exchange has shown an 
 especially severe depreciation in the value of 
 her currency, doubtless owing to the great 
 
96 WAR AND LOMBARD STREET 
 
 difficulty put in the way of her export trade, 
 through the naval war in the Baltic and the 
 closing of the Dardanelles, and the accompany- 
 ing necessity of making large purchases of war 
 material and clothing here, has sent some 
 8,000,000 hither in sovereigns and bar gold, 
 and is said to be negotiating for a big issue of 
 Treasury bills in London.* And arrangements 
 are in progress for some sort of a loan from 
 England, or the Bank of England, to the United 
 States, or to American bankers, in order to 
 save American finance from the necessity for 
 further shipments of gold to Ottawa. Brazil has 
 fallen back on the remedy, tried by it before, 
 of a funding scheme, by which it practically 
 helps itself to a loan from England of 15,000,000, 
 by suspending the interest of its English-held 
 debt for three years, and a further sum that it 
 takes by suspending the redemption of this debt 
 for thirteen years. 
 
 Any country, in short, that has been used 
 
 * Since the above sentence was written it has been 
 announced (see Times of December 5) that the Government 
 has agreed " to arrange with the Bank of England to discount, 
 under a guarantee of H.M. Government, Russian Treasury 
 bills " to the amount of ^12,000,000. 
 
FINANCE BILLS AND TRADE 97 
 
 to buying our goods and paying interest to us 
 with periodical doses of credit advanced by us, 
 can only do two things if we refuse to continue 
 the doses, and call back as much as we can 
 of those that we have administered. Either it 
 must reduce its purchases of our goods or default 
 in its interest payments, or both. ^The austerity 
 of Lombard Street's attitude towards finance 
 bills already showed signs of softening before 
 the moratorium ended. Austerity is a highly 
 respectable virtue in the right place and at the 
 right season, but in times of crisis leniency 
 towards debtors is like the quality of mercyA- 
 " it is twice blest ; it blesseth him that gives 
 and him that takes." 
 
CHAPTER V 
 
 AFTERTHOUGHTS 
 
 WITH the end of the moratorium on November 4, 
 it may be said that the crisis produced by the 
 outbreak of war was over. When peace comes, 
 and the Stock Exchanges are reopened, and 
 prices adapt themselves to the new price of 
 capital that the present destruction of some 
 eight to ten millions of it a day will bring about, 
 and creditors begin to try to collect debts from 
 impoverished debtors in war-wasted countries, 
 then there will be a new set of problems, the 
 acuteness of which will largely depend on the 
 length of the war and the extent to which 
 the fighters are worn out. These problems will 
 exercise all the ingenuity and strength that 
 Lombard Street can muster. For the present 
 it is enough to see how we stand at the end of 
 the opening period of the war, and what have 
 been the effects of the financial tornado with 
 
 which its beginning was heralded. 
 
 98 
 
AFTERTHOUGHTS 99 
 
 The earlier chapters of this book have been 
 written in vain if they have not shown that the 
 crisis of last August was the greatest evidence 
 of London's strength as a financial centre that 
 it could have desired or dreamt of. It was so 
 strong that it did not know how strong it was. 
 Consequently, being a little flustered by the 
 suddenness of the outbreak of war, on a scale 
 that mankind had never seen before, it made 
 the mistake of asking its debtors to repay it, not 
 the thousands of millions that it had lent in the 
 form of permanent investment, but the com- 
 paratively trifling amount perhaps 150 or 200 
 millions that it had lent in the shape of bills 
 of exchange drawn on it, and other forms of 
 short credits. Thereby it put the rest of the 
 economically civilized world, for the time being, 
 into the bankruptcy court, and so, finding that 
 none of its debtors could pay, it thought itself 
 obliged to ask for time from its own creditors 
 at home. Foreign creditors it had none, except 
 Paris. It sent gold to Paris as fast as it could 
 be shipped and insured, and so seems to have 
 liquidated its debt. For when a market in 
 exchange reopened after the first shock of war, 
 
ioo WAR AND LOMBARD STREET 
 
 the Paris cheque soon steadied itself at a more 
 or less normal level, above the point at which 
 gold could be sent to France as an exchange 
 operation. It is possible, however, that London 
 was still in debt to Paris, and that Paris pre- 
 ferred for obvious reasons to leave its money 
 on this side of the Channel. 
 
 Of the three possible rivals to London as a 
 financial Centre, Paris was the only one that 
 gave any evidence of real financial strength. 
 Behind Paris stands the enormous power of 
 the thrifty French investor, who probably 
 accumulates a greater proportion of his income 
 than anybody in the world, except, perhaps, 
 some classes of Scotsmen. This accumulating 
 power of the French gives the Paris money 
 market a position of first-rate importance in 
 the financial world, because capital has to be 
 saved, and a saving people has capital to lend. 
 The advantage that London holds in its more 
 elastic credit system is partly balanced by the 
 advantage given to Paris by the thrifty habits 
 of the French people. If Paris adopted a more 
 businesslike policy with regard to her huge 
 store of gold, which she has hitherto seemed to 
 
AFTERTHOUGHTS jpx 
 
 regard as a precious asset to be sat on and 
 protected by the charge of a premium to 
 audacious people who want to withdraw a bit 
 of it, she might, in normal times, be a much 
 more dangerous rival to London than she is. 
 But it need hardly be said that Paris, as a 
 financial centre, was soon wrapped in the cloud 
 of war and invasion, and had no chance of 
 making any effort to oust London from her 
 pride of chief place. 
 
 Berlin was equally cut off from competition, 
 for Berlin had to devote herself to the task of 
 financing war for Germany. Moreover, the rapid 
 depreciation in the value of the mark that took 
 place before the war began showed that Germany 
 was still a debtor country in the short-loan 
 market. The Berlin exchange, while war was 
 as yet only a dreaded possibility, rose from 
 20 m. 50 pf . to 20 m. 60 pf . Germany invests 
 money abroad, but she seems to borrow as 
 much, and more, in the discount markets of 
 London and Paris. So it came to pass that, 
 in spite of the big sales of securities that she 
 had thrown on the markets of New York and 
 London, she still had to pay when the big day 
 
.102 WAP AND LOMBARD STREET 
 
 of settlement came, and to pay so fast that she 
 had not a bill on London left to pay with. 
 
 It was the chance of a century for New 
 York. American ambition has long ago in- 
 formed the world that the United States, having 
 been the world's granary, is now the world's 
 most progressive manufacturer, and means soon 
 to be the world's banker. This may happen 
 some day, and might have happened already if 
 American policy in currency, financial and fiscal 
 matters had been more enlightened, and if her 
 people had been more thrifty. But they have 
 tied their credit system in the bonds of narrow 
 banking laws and their trade in those of a 
 cramping tariff. These bonds they have just 
 begun to shake off, and if the crisis had 
 happened a few years later they might perhaps 
 have made a bid for London's place as world 
 banker. But it is hardly likely, for the develop- 
 ment of the enormous resources of the country 
 still craves for much more capital than its 
 people can provide. The United States is 
 scill a debtor to the world at large and seems 
 likely to be so for some time to come, and 
 it is doubtful whether even New York, with all 
 
AFTERTHOUGHTS 103 
 
 its skill in the jugglery of finance, can make itself 
 a great banking centre as long as its heavy 
 balance of indebtedness is always waiting to 
 turn the world's exchanges against it, whenever 
 the monetary sky is overcast. 
 
 It was the chance of a century, but New York 
 could not take it. When London called in its 
 credits from other countries, any centre that 
 could have said to these countries, " We will 
 give you the credit that London has cut off, 
 and lend you the money to pay London," would 
 have stepped straight on to London's financial 
 throne and set London a very difficult task to 
 regain it after the war was over. In spite of 
 the large amounts of gold taken from America 
 to Europe before the war, the United States 
 had still a huge store within its borders some 
 estimates of it ranged up to 400 millions sterling. 
 If the United States had had the courage to use 
 this mountain of metal and let other countries 
 draw on it, London would have had more gold 
 than it knew what to do with, and New York 
 would have had a big slice of London's business. 
 The United States were at peace, and, with 
 all the chief countries of this antiquated 
 
104 WAR AND LOMBARD STREET 
 
 hemisphere engaged in the mediaeval business 
 of killing one another* s citizens and destroying 
 one another's property, the United States might 
 have been expected to leap into the position 
 of economic leadership. But America feared 
 to use its gold, and held on to it as tightly as 
 it could, fearful of internal trouble and a run 
 on its banks if too much of the metal went 
 abroad. In New York, as in most other centres, 
 the question of the moment was, not to take 
 London's business, but to pay what she owed 
 to London and to buy bills on London at sky- 
 rocket prices wherever they could be found. 
 The strength of the fat old moneylender, whom 
 the Australian papers, angry with him because 
 he did not lend fast enough, used to call John 
 Bull Cohen, was never more wonderfully made 
 manifest. Strength in money bags is not every- 
 thing very far from it but at least J. B. Cohen 
 can claim that he has made good use of it. He 
 has peopled and fertilized the uttermost ends 
 of the earth with his sons and his capital, and 
 he alone among the nations has had the courage 
 and the homely wit to throw his ports open to 
 all and to tell all the peoples of the world to 
 
AFTERTHOUGHTS 105 
 
 send their stuff along if it is worth buying. 
 Moreover he has lately shown that, in spite of 
 all his alleged decadence, he can still tuck up 
 his sleeves on occasion and fight, at least as 
 well as anybody else. 
 
 So far was New York from being able to 
 supplant London that, as we have seen, the 
 United States had to make special arrangements 
 to tide over the difficulty which London's claims 
 on her had produced. A Reuter telegram from 
 Washington, published in the English papers of 
 October 10, stated that 
 
 " the conditions of exchange between England 
 and the United States and the situation of the 
 cotton markets of the world will be discussed 
 at an approaching conference between the 
 American Treasury officials and Sir George 
 Paish and Mr. Basil Blackett, who are coming 
 over from England at the invitation of Mr. 
 McAdoo, Secretary for the Treasury. It is 
 understood that the two Englishmen will also 
 meet the new Federal Reserve Board, and that 
 possibly this meeting may render it unnecessary 
 for Americans to ship a large part of the fund of 
 $100,000,000 in gold, which has been raised 
 here to help to solve the foreign exchange 
 situation." 
 
io6 WAR AND LOMBARD STREET 
 
 It appears from the terms of this message 
 that the American Government found it neces- 
 sary to ask officials of the British Treasury to 
 come over and help it to find ways and means 
 for meeting part of the debt of the United States 
 to England, without shipping any more American 
 gold. This could only be done by England's 
 giving America some sort of credit to take the 
 place of the finance bills and other forms of 
 accommodation which Lombard Street had 
 withdrawn. 
 
 At the same time there is no doubt that New 
 York did some of the business for herself that 
 London had formerly done for her. If she was 
 not in a position to finance other countries, 
 she did make a beginning in financing her 
 own imports. Exporters of goods from South 
 America to the United States who had formerly 
 taken payment by drawing bills on London, 
 and were no longer able to do so, drew on 
 financial institutions in New York instead. 
 Some of these bills were used to make three- 
 ;ornered payments from South America to 
 London, and a very costly means of payment 
 they were to the debtor, owing to the high rate 
 
AFTERTHOUGHTS 107 
 
 of discount in New York, and the depreciation 
 of the American dollar as compared with the 
 pound sterling. 
 
 It seems likely that this business of financing 
 American trade New York will keep in her own 
 hands to a greater extent than she did before. 
 Probably she would have taken more of it to 
 herself even if there had been no war. Her new 
 banking legislation has included in its aim the 
 establishment of branches of American banks 
 abroad, and the development of acceptance 
 business in New York. It could not be expected 
 that New York would always be content to see 
 the greater part of America's external trade 
 financed with English credit. Her next step 
 will be to endeavour to finance other people's 
 trade, and she is already beginning to set about 
 taking it, being assisted by Lombard Street's shy- 
 ness in the matter of new acceptance business.* 
 If the war should be long continued, its appalling 
 
 * An announcement in the Times of December 4 that 
 American bankers had taken $12,690,000 Canadian Pacific 
 Railway Equipment Certificates and $5,000,000 Swedish 
 Government Treasury notes seemed to indicate that New York 
 was starting as international moneylender on a considerable 
 scale. But both these issues were immediately offered in 
 London. 
 
io8 WAR AND LOMBARD STREET 
 
 drain on the combatants ought to help her by 
 exhausting the rivals whom she hopes to drive 
 out of the field. 
 
 So far, then, from the late crisis having 
 given any evidence of weakness on the part of 
 London, or of any likelihood that she will lose 
 her supremacy as the world's banker, the com- 
 manding strength of her position has been made 
 abundantly manifest. The only weak point was 
 not in her armour but in that of her foreign 
 customers. The question arises whether she 
 was wise in lending so much to debtors who 
 showed such unanimous inability to pay on the 
 due dates. I have heard it contended by a 
 disinterested and well-qualified critic, that the 
 risk run by Lombard Street in allowing bills 
 to be drawn on her from all parts of the world 
 against goods shipped from one country to 
 another, has been shown by the late crisis to be 
 too great to be worth the candle. Bills drawn 
 against goods coming to England are safe 
 enough, for as long as the goods come to port 
 and can be sold for them, the acceptor is sure 
 of his money. But when the goods go from 
 China to Peru, and Peru finds that it cannot 
 
AFTERTHOUGHTS 109 
 
 remit to meet the bill, the acceptor is incon- 
 venienced, and the bank or bill broker who holds 
 the bill finds that he has got a security which 
 was not quite as gilt-edged as he thought it. 
 This is all quite true, but contrariwise it may be 
 argued that this sort of world crisis is not going 
 to happen again very soon, and that if all 
 finance had to be arranged on the theory 
 that it was likely to recur frequently, there 
 would be very little finance of any kind. These 
 bills drawn against international shipments of 
 goods do much to make the bill on London 
 popular all over the world, and if they are to be 
 frowned on there will be a considerable restric- 
 tion of international commerce, which will react 
 unpleasantly on England. In ordinary times 
 these bills are safe enough, if due precautions 
 are taken. If mistakes are made they happen 
 rarely and the resources of the accepting houses 
 are easily able to repair the damage. 
 
 As to finance bills, it has already been 
 admitted that much credit was given by their 
 means which was used for purposes with which 
 bills of exchange ought not to be associated. The 
 essence of a bill of exchange is that it has to 
 
no WAR AND LOMBARD STREET 
 
 be met at its due date, and so it should 
 only be drawn to finance some commercial 
 operation that will mature before the bill falls 
 due, or to provide means of remittance when 
 they are scarce, owing to seasonal causes which 
 will have passed before the bill's maturity. 
 When rolling credits, as they are called, are 
 established, which go on from year to year, 
 each bill being met by drawing another, and 
 the money so raised in the borrowing country is 
 put into bricks and mortar or machinery or 
 other forms of fixed capital, the uses of the bill 
 of exchange are being strained. When a jolt 
 comes to the machinery and the rolling credit 
 stops rolling, it is not possible to sell the factory 
 or plant to provide a means of remittance. But 
 there is no doubt that for a time, at least, this 
 kind of finance bill is likely to be scarcer than 
 it was ; in fact, as we have seen, it was the 
 excessive suddenness of the fit of virtue that 
 seized Lombard Street on this subject that 
 made the crisis more acute than it need have 
 been, by reducing the means of remittance 
 and so keeping the exchanges at an abnormal 
 point. 
 
AFTERTHOUGHTS in 
 
 Lombard Street has thus shown that it has 
 fully learnt the only lesson that the external 
 side of the crisis had to teach it. Too many 
 finance bills of the wrong kind were out, and 
 Lombard Street saw the fact so clearly that for 
 some weeks it rang with the cry that there must 
 never be any more finance bills of any kind 
 at all. This exaggerated view is already dis- 
 credited, and there is good reason to hope that 
 opinion will settle down to a sensible midway 
 path, taking the finance bill as a quite legitimate 
 and necessary convenience, dangerous only when 
 abused and distorted. 
 
 More numerous and more intricate problems 
 arise when we begin to consider the lessons of 
 the crisis as it affected us at home, but little 
 can be said about them until peace has brought 
 with it the day of reckoning and recon- 
 struction. 
 
 First of all, the crisis will have left us a 
 legacy in the shape of Government paper money, 
 and this is a new departure that will have to 
 be watched over and regulated very carefully. 
 When a bank issues its own paper money, it can 
 only get it into circulation by inducing those 
 
H2 WAR AND LOMBARD STREET 
 
 to whom it owes or lends money to take it in 
 that form. When a Government issues its own 
 paper money, it can compel those to whom it 
 owes money to take it in its own notes, and so 
 can go on merrily paying its way in pieces 
 of paper, and inflating the currency to any 
 extent that it pleases. As the Act stands 
 there is nothing in it, as far as the eye of 
 an ordinary reader can discern, to prevent 
 the Government from making all its payments 
 on supply or for interest on the debt in 
 Treasury notes. It could drop all taxation 
 for a time, if it liked, and just print notes. The 
 Act merely says that " The Treasury may, 
 subject to the provisions of this Act, issue 
 currency notes/' it does not say to what extent. 
 Later it observes that " currency notes may be 
 issued to such persons and in such manner as the 
 Treasury may direct/' * These unlimited powers 
 were quite reasonable and right when they were 
 first granted, but Parliament seems unlikely 
 to leave them to the Treasury in their present 
 beautiful simplicity. 
 
 There is a check, and a very valuable one, in 
 
 * See Appendix III A. 
 
AFTERTHOUGHTS 113 
 
 the provision that gives the holder of a note 
 the right to demand gold for it at the Bank of 
 England, but a great deal of evil inflation might 
 easily be possible before this check came into 
 play. The powers at present given by the Act 
 might be a dangerous temptation to a short- 
 sighted Government with a subservient majority 
 behind it. 
 
 It may also be hoped that Parliament will 
 ask for some more clear statement of the weekly 
 account issued by the Paper Currency Depart- 
 ment. At present it is quite incomprehensible 
 except to those who have privileged access to 
 an understanding of its mysteries. Most of 
 the accounts issued by our rulers are of this 
 kind, dim candles lit to make darkness visible, 
 but now that the Government has gone into 
 the note-issuing business, it is desirable that 
 it should show the country what it is doing. 
 Look at this specimen the account for the week 
 ending on November 4, and taken from the 
 Times of November 7 : 
 
H4 WAR AND LOMBARD STREET 
 
 ISSUE ACCOUNT. 
 
 Total Issued up to Oct. 28, 1914, 
 inclusive : 
 
 s. d. 
 
 i 34,571,372 o o 
 
 los. ... 9,180,263 10 o 
 
 Issued during the week ended 
 Nov. 4, 1914 : 
 
 s. d. 
 
 i 3,682,000 o o 
 
 los. ... 492,000 o o 
 
 Total ... 47,925,635 10 o 
 
 Notes cancelled up to Oct. 28, 
 1914, inclusive. 
 
 s. d. 
 
 i 11,096,676 o o 
 
 los. ... 1,288,269 o o 
 
 Cancelled during the week ended 
 Nov. 4, 1914. 
 
 s. d. 
 
 i ... ... 2,271,650 o o 
 
 105. ... 334,628 10 O 
 
 Total ...14,991,223 10 o 
 Outstanding. 
 
 i 24,885,046 o o 
 
 i os. ... 8,049,366 o o 
 
 3 2.934.4 I 2 o o 
 
 Total ... 47,925,635 10 o 
 
 BALANCE SHEET. 
 
 .<*. 
 
 Notes outstanding 32,934,412 o o 
 
 Total 32,934,412 o o 
 
 Advances 
 
 Scottish and Irish Banks of Issue 
 
 Other Bankers 334,ooo o 
 
 Post Office Savings Bank 750,000 o 
 
 Trustee Savings Bank 850,000 o 
 
 Currency Note Redemption Account 
 
 Gold Coin and Bullion 10,500,000 o 
 
 Government Securities ... ... ... ... 13,923,545 17 
 
 Balance at the Bank of England 6,576,866 2 
 
 Total ... 32,934,412 o o 
 
 Who could tell from it to whom and for 
 what purposes the notes had been issued ? 
 We know that the notes, or some of them, were 
 
 
AFTERTHOUGHTS 115 
 
 originally issued to the banks, and that the 
 banks paid interest on them at Bank rate, which 
 was in those days 5 per cent. The banks passed 
 them on to their customers and they went into 
 circulation. But this statement shows that out 
 of the 32,934,412 outstanding only 334,000 
 are represented by loans to banks (other than 
 the Post Office Savings Bank and Trustee 
 Savings Banks, which are not banks in the 
 ordinary sense of the word). Apparently there- 
 fore the banks have paid off the loans which they 
 took from the Government in the form of notes. 
 But the banks cannot have paid the loans back 
 in notes, because they have gone into circulation 
 and are still outstanding Presumably there- 
 fore the banks paid back the Government by 
 transferring to it part of their balances at the 
 Bank of England, and so by guesswork we are 
 able to account for the balance at the Bank of 
 England shown as an asset against the notes. 
 But what are these Government securities to a 
 total of 13,923,546 ? Some people think they 
 are Treasury bills in which the Currency Depart- 
 ment of the Treasury has invested part of its 
 balance ; or again there are some who suspect 
 
n6 WAR AND LOMBARD STREET 
 
 that they are loans to the spending Government 
 departments, though I am told that this is 
 impossible. One may amuse oneself all day 
 by groping after the meaning of these mysteries, 
 but these mysteries ought to be made clear. 
 The sum of 10,500,000 held in gold means, one 
 supposes, that the Currency Department has 
 used part of its balance at the Bank of England, 
 acquired by the repayments of the banks, to 
 take gold from the Bank of England as a 
 metallic backing for its paper. In so far as they 
 are not backed by metal, the notes outstanding 
 represent in fact a loan that the Government 
 has raised without any interest to pay on it. 
 This is very good business for the Government 
 and quite legitimate within certain limits. But 
 dangerous temptations lurk in this short and 
 simple means of raising cash by printing it. 
 Already I have come across proposals that the 
 Government should make use of it for lending 
 inconvertible paper money to local bodies, 
 without interest, to be used in works devised 
 to meet unemployment owing to the war. Our 
 old friend the assignat is still the ideal form of 
 currency in the eyes of many reformers. 
 
AFTERTHOUGHTS 117 
 
 It may be also observed that the converti- 
 bility of these new Treasury notes at the Bank 
 of England, which is carefully provided by the 
 Act, constitutes a new liability for the Bank, 
 which is not recognized in its weekly Account. 
 
 On this question of legal-tender paper 
 currency, the great lesson the crisis taught was 
 that there must be at all times, whatever the 
 normal amount of the circulation, a store ready 
 for an emergency, so that we shall not again 
 have to have an extended bank holiday and a 
 banking moratorium because the printing press 
 cannot work fast enough. If such a supply had 
 been known to be ready at the end of July, 
 bankers might have met the crisis with a much 
 serener spirit. It was not their fault that the 
 supply was lacking. 
 
 It was also clearly shown that the notion, 
 in whoever' s brain it may lurk, that the Bank 
 Act cannot be suspended unless Bank rate 
 stands at 10 per cent., should be stamped out 
 once and for all. Rocket-like movements on 
 the part of Bank rate, at a time when the public 
 shows signs of growing uneasy, are the very 
 worst thing that could happen. Perhaps the 
 
n8 WAR AND LOMBARD STREET 
 
 question of a suspension of the Bank Act will 
 never again arise now that the business of pro- 
 viding paper currency has been added by the 
 Treasury to its own functions. Nevertheless, as 
 it was thought necessary at the time of our 
 latest crisis to suspend the Bank Act, in spite of 
 the issue of Treasury notes, it is as well that it 
 should be made quite clear that emergency legal- 
 tender currency can be provided for the banking 
 community without the public's nerves being 
 startled by sensational jumps in Bank rate. 
 
 Another problem that may have to be aired 
 when the right time comes is that of the loans 
 of the banks to the Stock Exchange. One of the 
 worst blows to the banks in the week before 
 the war was the closing of the " House " and 
 the consequent locking up of most of the funds 
 that they had invested in Stock Exchange 
 securities, or lent to stockbrokers against such 
 securities, or lent to their own customers against 
 them. All these operations are legitimate within 
 due limits, but the lending by banks to stock- 
 brokers seems to be the one that requires most 
 careful watching. For a bank to invest part of 
 its funds in good securities is an obvious means 
 
AFTERTHOUGHTS 119 
 
 of making a livelihood, though recent experience 
 has shown them that it is often a costly one, 
 when securities insist on having to be written 
 down year after year. For a bank to make a 
 loan to a customer with Stock Exchange 
 securities as collateral is also natural and bene- 
 ficial to both parties, and an assistance to all 
 kinds of enterprise. It is possible, of course, 
 that the customer may only be borrowing the 
 money in order to indulge in extravagance or 
 speculation, but as it is at least equally possible 
 that he is going to use it to develop some useful 
 enterprise, the banker is entitled to give him 
 the benefit of the doubt. 
 
 But when a bank lends money to stock- 
 brokers, it thereby is simply assisting specula- 
 tion ; it is lending to people who relend it to 
 operators in the Stock Exchange who have 
 bought securities and do not want to pay for 
 them. Now speculation is not a vice in itself. 
 It is a stupid way of losing one's money, but 
 the speculator is quite a useful person as long 
 as he is not given rope enough to allow him to 
 become a danger to other people. He helps 
 to make a free market and he provides lodgings 
 
120 WAR AND LOMBARD STREET 
 
 for new issues until such time as the real investor 
 comes and buys them and puts them away with 
 money that he has saved. But if there are too 
 many speculators, there is apt to be dangerous 
 inflation in prices and an artificial appearance 
 of a keen demand for securities, both new 
 and old, when in fact the appetite of the real 
 investor is gorged. 
 
 It is a temptation to bankers to make use 
 of their funds in this manner, for they get a 
 better rate for them thereby than by buying 
 bills of exchange or making loans to bill brokers. 
 The Stock Exchange firms to which they lend 
 are usually of first-rate standing, and the loans 
 run only for a fortnight from one Stock 
 Exchange settlement to another and so are 
 comfortably liquid in normal times. It would 
 be absurd to contend that such business should 
 not be done, but it is quite possible to have too 
 much of it. 
 
 Fortunately for the banks, they had very 
 little of this business on their books when the 
 crisis smote them. The Stock Exchange account 
 had been cut down to unusually narrow limits 
 by the slow fever of which finance had long 
 
AFTERTHOUGHTS 121 
 
 been sick for several miserable years. Dwindling 
 prices, caused by the scarcity and dearness of 
 capital, extravagant expenditure by Govern- 
 ments and individuals all over the world, labour 
 troubles and the threat of more to follow, 
 politics in America, default in Mexico, and 
 finally the expectation of civil war in Ulster, 
 had taken all the heart out of the speculator, 
 and it was generally agreed by most active 
 stockbrokers in the middle of July that they 
 had never seen the Stock Exchange account so 
 small, that is to say, so little stock being carried 
 over on borrowed money. And yet, when the 
 Stock Exchange made a careful examination, 
 after the crisis, of its position with regard to 
 the money that it owed to the banks and other 
 lenders, the estimated total came to the respect- 
 able figure of 80 millions sterling. This amount 
 is not really large when we compare it with the 
 imposing total of the bankers' assets, of which 
 it forms a part, and when we bear in mind that 
 it includes advances from finance houses and 
 others, besides the banks. Nevertheless it is 
 big enough, especially when we remember that 
 the banks are estimated to have also lent some 
 
122 WAR AND LOMBARD STREET 
 
 250 millions directly to their customers against 
 Stock Exchange securities as collateral. When 
 we also remember that it was very far below 
 the amount that the banks lend to the Stock 
 Exchange during times when speculative activity 
 is normal, there is reason to think this part of 
 the banker's business is sometimes overdone. 
 For when the banks buy bills of exchange, or 
 lend money to bill brokers wherewith to carry 
 bills of exchange, they are probably financing 
 trade ; when they lend money to their own cus- 
 tomers, they may be financing trade ; when they 
 lend money to stockbrokers wherewith to carry 
 securities, they can only be financing speculation. 
 Finally, there is the good old question of the 
 banks and their cash reserves that has been 
 debated for years at recurring intervals and 
 lulled to sleep with reassuring hints about a 
 bankers' committee which is some day going 
 to report and recommend measures. There is 
 no need to repeat now the many statements 
 by bank chairmen and eminent bankers that the 
 proportion of cash to liabilities held by the 
 banks was too low, or the strictures that have 
 been uttered concerning the habit cherished 
 
AFTERTHOUGHTS 123 
 
 by some of the banks, of calling in money on 
 occasions when they publish a statement of 
 their position, so that the position published 
 may be stronger than the position with which 
 they normally work. It is true that no holding 
 of cash which would be practically possible, if 
 the banks are to earn a living, could have made 
 the bankers altogether comfortable under the 
 complicatedly unpleasant circumstances that 
 beset them at the end of July. But it is equally 
 true that if they had been stronger in cash they 
 would have been more comfortable and serene, 
 and some things might not have happened, 
 which had been better left undone. 
 
 On the whole Lombard Street is certainly 
 entitled to congratulate itself on the manner in 
 which it met the crisis. If its system shivered 
 and shook under the shock of world-wide war, 
 that is only because world-wide war is a relapse 
 into barbarism, and barbarism and banking are 
 incompatible companions. 
 
 That the Stock Exchange should have to 
 remain in a state of suspended animation, meet- 
 ing in Throgmorton Street and dealing at 
 artificially fixed prices, is a melancholy but 
 
124 WAR AND LOMBARD STREET 
 
 inevitable result of the international growth 
 of modern finance. If the House had opened 
 and dealings had been free, it would have been 
 impossible to prevent our enemies from financing 
 themselves at our expense. Who could have 
 prevented, for example, German holders of 
 American or Canadian securities from selling 
 them to Dutchmen, and the Dutchmen from 
 selling them to us ? A free market was im- 
 possible on political grounds, and so, as there 
 could not be a free market, it was necessary for 
 the Government to intervene here again, when 
 the moratorium ended, and to enable those who 
 had lent money to the Stock Exchange to unlock 
 part of the funds that were shut in behind the 
 closed doors of Capel Court. So the Govern- 
 ment arranged with the Bank of England to 
 advance to lenders (other than the banks, who 
 had already been relieved by the new currency 
 placed at their disposal) 60 per cent, of the value 
 of the securities held by the lenders against 
 any Stock Exchange loans which they had 
 outstanding on July 29, these securities being 
 valued at the making-up prices of the July 29 
 settlement. The loans were to run, at i per 
 
AFTERTHOUGHTS 125 
 
 cent, above Bank rate, with a minimum of 
 5 per cent., and the Bank of England under- 
 took not to press for repayment till twelve 
 months after peace, or till after the expiry of 
 the Courts (Emergency Powers) Act. This was 
 an Act designed to protect debtors who could 
 show that, owing directly or indirectly to the 
 war, they were unable to meet their liabilities. 
 It is given in full in Appendix IV. 
 
 Similar relief was given to British exporters 
 who were embarrassed by being unable to 
 collect debts outstanding in foreign countries 
 and the colonies. A committee was formed 
 representing the Treasury, the Bank of England, 
 the joint stock banks, and the Association of 
 Chambers of Commerce ; it was empowered, 
 after examination of claims for assistance, to 
 authorize the applicant's banker to accept a 
 six months' bill drawn by the trader and certi- 
 fied by the Committee as guaranteed. The 
 ultimate loss, if any, is to be borne as to 75 per 
 cent, by the Exchequer and as to 25 per cent, by 
 the accepting bank. 
 
 A fine load of liabilities, on paper, has thus 
 been taken by the broad shoulders of the British 
 
126 WAR AND LOMBARD STREET 
 
 taxpayer, but, unless the war lasts longer than 
 seems likely, he need not fear that he will have 
 a big bill to meet. A good deal of nonsense has 
 been talked about the helplessness of finance in 
 the face of this crisis and its dependence on 
 Government assistance. All finance always de- 
 pends on the stability of the social structure, 
 which has to be maintained by Government. 
 When politics go so far awry that this stability 
 is in jeopardy, the Government has to pledge the 
 resources of the nation to uphold the fabric of 
 finance. 
 
 English banking has always got much of its 
 strength from the fact that behind the banks is 
 the Bank of England and behind the Bank of 
 England is the Government. This the deposit- 
 ing public has always known dimly, and now 
 knows very positively and practically. As long 
 as the Government gives us peace, finance only 
 asks it to leave it alone. When the Government 
 finds it necessary to join in a great European 
 war, then it has to help finance, or finance will 
 not be able to help it. The real test of the extent 
 to which finance had to rely on the Government 
 will come when we see how much the taxpayer 
 
AFTERTHOUGHTS 127 
 
 will have to pay owing to the guarantees that 
 the Treasury gave to finance. This sum will, 
 I hope and believe, be a fleabite to a nation that 
 every year pours 160 millions' worth of strong 
 drink down its throat. It is even possible that 
 the nation may make a profit out of the in- 
 surance fund that financiers are providing. 
 
 Lastly, let us recognize how easily and 
 pleasantly the system works by which the Bank 
 of England can come to everybody's assistance 
 by giving them a credit in its books. Year 
 in, year out, it was a marvel of ease and sim- 
 plicity, when it was only called on to provide a 
 trifle of 25 millions or so at the turn of the 
 half-year. Now we have found that it can be 
 expanded, to suit the taste and requirements of 
 customers, to an extent that has never been 
 dreamt of, without the smallest difficulty or 
 inconvenience. Look at the figures of the Bank 
 return of September 2 (the date on which the 
 "other securities " in the Banking Department 
 touched their highest point during the mora- 
 torium) as compared with those of July 15, the 
 ast one that can be taken as normal, and 
 unaffected by war or the fear of war : 
 
128 WAR AND LOMBARD STREET 
 
 AN ACCOUNT pursuant to the Act 7 and 8 Viet. cap. 32, for the Week 
 ending on Wednesday, the I5th July, 1914. 
 
 ISSUE DEPARTMENT. 
 
 Notes Issued 
 
 I 
 
 56,908,235 
 
 56,908,235 
 
 Government Debt 
 Other Securities 
 Gold Coin & Bullion 
 Silver Bullion 
 
 i 
 
 . 11,015,100 
 
 7,434.900 
 
 38,458,235 
 
 56,908,235 
 
 
 BANKING DEPARTMENT. 
 
 
 
 i 
 
 
 
 Proprietors' Capital 
 
 ... 14.553,00 
 
 Govt. Securities 
 
 11,005,126 
 
 Rest 
 
 ... 3,431,484 
 
 Other Securities 
 
 33,623,288 
 
 Public Deposits 
 
 ... 13,318,714 
 
 Notes 
 
 27,592,980 
 
 Other Deposits 
 
 ... 42,485,605 
 
 Gold and Silver Coin ... 
 
 1,596,419 
 
 7 Day and other Bills 
 
 29,010 
 
 
 
 
 73,817,813 
 
 
 73,817,813 
 
 
 J. G. NAIRNE, Chief 
 
 Cashier. 
 
 Looking first at the figures of the Issue 
 Department, we see that the Notes issued had 
 risen by 8J millions ; the assets held against 
 them showed that the Bank had ignored the 
 suspension of the Bank Act, and still had gold 
 against every note issued, above the statutory 
 Jimit of 18,450,000. In both accounts this 
 amount is held in .securities, while in the Sep- 
 tember 2 figures the gold held has risen by 
 
AFTERTHOUGHTS 
 
 129 
 
 \N ACCOUNT pursuant to the Act 7 and 8 Viet, cap 32, for the Week 
 ending on Wednesday, September 2, 1914. 
 
 ISSUE DEPARTMENT. 
 
 tfotes Issued 
 
 65,501,075 
 
 65,501,075 
 
 Government Debt 
 Other Securities 
 Gold Coin & Bullion 
 Silver Bullion 
 
 . 11,015,100 
 
 7,434,900 
 
 47,051,075 
 
 65,501,075 
 
 
 BANKING DEPARTMENT. 
 
 
 
 
 
 
 
 
 'roprietor's Capital 
 
 ... 14,553,000 
 
 Govt. Securities 
 
 ... 28,023,971 
 
 *est 
 
 ... 3,717,666 
 
 Other Securities 
 
 ... 121,820,692 
 
 'ublic Deposits 
 
 ... 28,676,828 
 
 Notes 
 
 ... 30,213,315 
 
 )ther Deposits... 
 
 133,818,826 
 
 Gold & Silver Coin 721,637 
 
 Day and other Bills 
 
 13,295 
 
 
 
 
 180,779,615 
 
 
 180,779,615 
 
 
 J. G. NAIRNE, 
 
 Chief Cashier. 
 
 8J millions, tallying with the increase in the 
 notes. 
 
 In the Banking Department the most interest- 
 ing features on the liabilities side are the increase 
 of 15 odd millions in the Government balances, 
 or public deposits, and the Gargantuan swell- 
 ing of 91 millions in the other deposits, which 
 include the bankers' balances. These increases 
 have been produced by additions of 17 millions 
 
130 WAR AND LOMBARD STREET 
 
 ' to the Government securities held by the Bank 
 on the assets side (probably caused by pur- 
 chases of Treasury bills) and of no less than 
 88 millions to the other securities, representing 
 the business in loans and discounts done by the 
 Bank in fulfilling its time-honoured function as 
 friend in need to Lombard Street.* 
 
 If capacity for variation be, as scientists tell 
 us, the secret of strength and progress, the Bank 
 of England, for all its weight of years, can still 
 claim to be young and lusty as an eagle, when 
 proved by the stress of crisis. It made an 
 entirely new departure by, in effect, establishing 
 offices for the receipt of gold in Canada, South 
 Africa, and India. It bought bills, including 
 those of the agencies of foreign banks, that it 
 would not have looked at in ordinary times. 
 It made advances with similar lack of prejudice. 
 The world was rather startled to hear, on 
 October 16, from the official liquidator of the 
 
 * The Chancellor of the Exchequer, in his speech on 
 November 27, stated that "the total number of bills dis- 
 counted on the Government guarantees has been 120,000,000. 
 That shows that of the 350,000,000 to 500,000,000 worth of 
 bills which were out at the outbreak of the war, most have 
 been disposed of in the ordinary course. That is very, very 
 satisfactory." Parliamentary Debates, Vol. 68, No. 12, p. 1530. 
 
AFTERTHOUGHTS 131 
 
 London agencies of the German banks that they' 
 would meet their acceptances in full (except, 
 of course, such as were held by enemy aliens). 
 Some said it was a wonderful evidence of their 
 strength : I think it is more probable that here 
 also the Bank of England had acted as fairy 
 godmother, for the benefit of the English holders 
 of the German banks' acceptances. It has 
 undertaken to advance money to any holder of 
 the new 350 millions War Loan up to the issue 
 price of the stock. And it was ready with a 
 supply of tea and buns for Belgian refugees who 
 brought Belgian money to be turned into sterling. 
 Summing up the effects of the war, as far as 
 it has gone, on Lombard Street, we may confi- 
 dently claim that they have given a striking 
 proof of the resourcefulness and adaptability of 
 the Bank of England, the prudent and success- 
 ful courage of the Government in pledging the 
 national credit in order to maintain our trade, 
 and the masterful power of England's wealth. 
 These things are worth noting, even at a time 
 when most of our attention is fixed on the 
 bravery and skill of our fighting forces on sea 
 and land. 
 
APPENDIX I 
 
 THE GENERAL MORATORIUM 
 
 A. POSTPONEMENT OF PAYMENTS ACT, 1914. 
 [4 & 5 GEO. 5.] [Cn. ii.] 
 
 An Act to authorize His Majesty by Proclama- 
 tion to suspend temporarily the payment of 
 Bills of Exchange and payments in pursuance 
 of other obligations. [3rd August, 1914.] 
 
 BE it enacted by the King's most Excellent 
 Majesty, by and with the advice and consent 
 of the Lords Spiritual and Temporal, and 
 Commons, in this present Parliament as- 
 sembled, and by the authority of the same, 
 as follows : 
 
 i. (i) His Majesty may by Proclamation 
 authorize the postponement of the payment of 
 any bill of exchange, or of any negotiable instru- 
 ment, or any other payment in pursuance of any 
 contract, to such extent, for such time, and sub- 
 ject to such conditions or other provisions as may 
 be specified in the Proclamation. 
 
 (2) No additional stamp duty shall be payable 
 in respect of any instrument as a consequence 
 
 133 
 
134 APPENDIX I 
 
 of any postponement of payment in pursuance 
 of a proclamation under this Act unless the 
 proclamation otherwise directs. 
 
 (3) Any such proclamation may be varied, 
 extended, or revoked by any subsequent pro- 
 clamation, and separate proclamations may be 
 made dealing with separate subjects. 
 
 (4) The proclamation dated the third day of 
 August, nineteen hundred and fourteen, relating 
 to the postponement of payment of certain bills 
 of exchange is hereby confirmed and shall be 
 deemed to have been made under this Act. 
 
 2. (i) This Act may be cited as the Post- 
 ponement of Payments Act, 1914. 
 
 (2) This Act shall remain in force for a period 
 of six months from the date of the passing 
 thereof. 
 
 B. PROCLAMATION OF AUGUST 6xn, 
 
 1914. 
 
 FOR EXTENDING THE POSTPONEMENT OF PAY- 
 MENTS ALLOWED TO BE MADE BY THE 
 
 PROCLAMATION OF THE 2ND AUGUST, 1914, 
 
 TO CERTAIN OTHER PAYMENTS. 
 
 GEORGE R.I. 
 
 WHEREAS under the Postponement of Payments 
 Act, 1914, His Majesty has power by Proclamation 
 
THE GENERAL MORATORIUM 135 
 
 to authorize the postponement of the payment 
 of any bill of exchange or of any negotiable 
 instrument or of any other payment in pursuance 
 of any contract to such extent for such time and 
 subject to such conditions or other provisions 
 as may be specified in the Proclamation : 
 
 And whereas it is expedient that provision 
 should be made for the purpose of such post- 
 ponement of payment in addition to the provision 
 already made by Our Proclamation, dated the 
 second day of August, nineteen hundred and 
 fourteen, relating to the postponement of pay- 
 ment of certain bills of exchange. 
 
 Now, THEREFORE, We have thought fit, by 
 and with the advice of our Privy Council, to 
 issue this Our Royal Proclamation, and We do 
 hereby proclaim, direct, and ordain as follows : 
 
 Save as hereinafter provided, all payments 
 which have become due and payable before the 
 date of this Proclamation, or which will become 
 due and payable on any day before the beginning 
 of the Fourth day of September, nineteen 
 hundred and fourteen, in respect of any bill of 
 exchange (being a cheque or bill on demand) 
 which was drawn before the beginning of the 
 Fourth day of August, nineteen hundred and 
 fourteen, or in respect of any negotiable instru- 
 ment (not being a bill of exchange) dated before 
 that time, or in respect of any contract made 
 before that time, shall be deemed to be due and 
 
136 APPENDIX I 
 
 payable on a day one calendar month after the 
 day on which the payment originally became 
 due and payable, or on the Fourth day of 
 September, nineteen hundred and fourteen, 
 whichever is the later date, instead of on the 
 day on which the payment originally became 
 due ; but payments so postponed shall, if not 
 otherwise carrying interest, and if specific 
 demand is made for payment and payment is 
 refused, carry interest until payment as from the 
 Fourth day of August, nineteen hundred and 
 fourteen, if they become due and payable before 
 that day, . and as from the date on which they 
 become due and payable if they become due and 
 payable on or after that day, at the Bank of 
 England rate current on the Seventh day of 
 August, nineteen hundred and fourteen ; but 
 nothing in this Proclamation shall prevent pay- 
 ments being made before the expiration of the 
 month for which they are so postponed. 
 This proclamation shall not apply to : 
 
 (1) any payment in respect of wages or 
 
 salary ; 
 
 (2) any payment in respect of a liability 
 
 which when incurred did not exceed 
 five pounds in amount ; 
 
 (3) any payment in respect of rates or 
 
 taxes ; 
 
 (4) any payment in respect of maritime 
 
 freight ; 
 
THE GENERAL MORATORIUM 137 
 
 (5) any payment in respect of any debt 
 
 from any person resident outside 
 the British Islands, or from any firm 
 company or institution whose princi- 
 pal place of business is outside the 
 British Islands, not being a debt 
 incurred in the British Islands by a 
 person, firm, company, or institution 
 having a business establishment or 
 branch business establishment in the 
 British Islands ; 
 
 (6) any payment in respect of any dividend 
 
 or interest payable in respect of any 
 stocks, funds, or securities (other 
 than real or heritable securities in 
 which trustees, are, under Section 
 One of the Trustee Act, 1893, or any 
 other Act for the time being in force, 
 authorized to invest ; 
 
 (7) any liability of a bank of issue in 
 
 respect of bank notes issued by that 
 bank ; 
 
 (8) any payment to be made by or on 
 
 behalf of His Majesty or any Govern- 
 ment Department, including the pay- 
 ment of old age pensions ; 
 
 (9) any payment to be made by any per- 
 
 son or society in pursuance of the 
 National Insurance Act, 1911, or 
 any Act amending that Act (whether 
 
138 APPENDIX I 
 
 in the nature of contributions, bene- 
 fits, or otherwise) ; 
 
 (10) any payment under the Workmen's 
 Compensation Act, 1906, or any 
 Act amending the same ; 
 (n) any payment in respect of the with- 
 drawal of a deposit by a depositor in 
 a trustee savings bank. 
 Nothing in this Proclamation shall affect any 
 bills of exchange to which Our Proclamation 
 dated the Second day of August, nineteen hun- 
 dred and fourteen, relating to the postponement 
 of payment of certain bills of exchange applies. 
 GOD SAVE THE KING. 
 
 C. PROCLAMATION OF AUGUST 
 
 1914. 
 
 FOR POSTPONEMENT OF PAYMENTS. 
 GEORGE R.I. 
 
 WHEREAS it is expedient to extend Our Procla- 
 mation, dated the sixth day of August, nineteen 
 hundred and fourteen (relating to the postpone- 
 ment of payments), so as to cover bills of ex- 
 change under certain circumstances, and also 
 payments in respect of any debt from any bank 
 whose principal place of business is in any part 
 of His Majesty's Dominions or any British 
 Protectorate : 
 
THE GENERAL MORATORIUM 139 
 
 Now, THEREFORE, WE have thought fit, by 
 and with the advice of Our Privy Council, to 
 issue this Our Royal Proclamation, and We do 
 hereby proclaim, direct, and ordain as follows : 
 
 Notwithstanding anything contained in the 
 said Proclamation, dated the sixth day of 
 August, nineteen hundred and fourteen (relating 
 to the postponement of payments), that Pro- 
 clamation shall apply, and shall be deemed 
 always to have applied : 
 
 (a) to any bill of exchange which has not 
 
 been re-accepted under Our Proclama- 
 tion, dated the second day of August, 
 nineteen hundred and fourteen, as it 
 applies to a bill of exchange, being a 
 cheque or bill on demand, unless on 
 the presentation of the bill the acceptor 
 has expressly refused re-acceptance 
 thereof, but with the substitution, 
 as respects rate of interest, of the 
 date of the presentation of the bill for 
 the seventh day of August, nineteen 
 hundred and fourteen ; and 
 
 (b) also to payments in respect of any debt 
 
 from any bank whose principal place 
 of business is in any part of His 
 Majesty's Dominions or any British 
 Protectorate, although the debt was not 
 incurred in the British Islands and the 
 bank had not a business establishment 
 
140 APPENDIX I 
 
 or branch business establishment in 
 
 the British Islands. 
 
 Given at Our Court at Buckingham Palace, this 
 Twelfth day of August, in the year of our 
 Lord One thousand nine hundred and fourteen, 
 and in the Fifth year of Our Reign. 
 
 GOD SAVE THE KING. 
 
 D. PROCLAMATION OF SEPTEMBER 3RD, 
 
 1914. 
 
 VARYING THE PROCLAMATIONS IN RESPECT OF 
 THE POSTPONEMENT OF PAYMENTS DATED 
 
 RESPECTIVELY THE SECOND DAY OF AUGUST, 
 
 THE SIXTH DAY OF AUGUST, AND THE 
 TWELFTH DAY OF AUGUST, AND REVOKING 
 THE PROCLAMATION DATED THE FIRST DAY 
 OF SEPTEMBER, NINETEEN HUNDRED AND 
 FOURTEEN. 
 
 GEORGE R.I. 
 
 WHEREAS under the Postponement of Pay- 
 ments Act, 1914, We have power, by Pro- 
 clamation, to authorize the postponement of the 
 payment of any bill of exchange, or of any 
 negotiable instrument, or any other payment in 
 pursuance of any contract,. to such extent, and 
 for such time, and subject to such conditions or 
 other provisions as may be specified in the 
 Proclamation : 
 
THE GENERAL MORATORIUM 141 
 
 AND WHEREAS, in pursuance of that power, 
 We have issued Proclamations in relation to the 
 postponement of payments due before We were 
 in a state of war or due in respect of contracts 
 made before that time, dated the sixth day of 
 August, and the twelfth day of August, nineteen 
 hundred and fourteen ; and on the second day of 
 August, nineteen hundred and fourteen, We also 
 issued a Proclamation which is confirmed by the 
 said Postponement of Payments Act, 1914, and 
 is deemed to have been issued under that Act : 
 
 AND WHEREAS, under the said Act, We have 
 power to vary, extend or revoke any Proclama- 
 tion under that Act by a subsequent Procla- 
 mation : 
 
 AND WHEREAS it is desirable in the best 
 interests of Our Realm at the present juncture 
 that all persons who can discharge their liabilities 
 should do so without delay, but it is at the same 
 time for certain purposes expedient that Our 
 said Proclamations should be varied, and for 
 that purpose We issued a Proclamation dated the 
 first day of September, nineteen hundred and 
 fourteen : 
 
 AND WHEREAS it is expedient to revoke the 
 last-mentioned Proclamation and to substitute 
 therefor such variations of Our other Proclama- 
 tions as are hereinafter set forth : 
 
 Now, THEREFORE, We have thought fit, by 
 and with the advice of Our Privy Council, to 
 
142 APPENDIX I 
 
 issue this Our Royal Proclamation, and We do 
 hereby proclaim, direct, and ordain as follows : 
 
 1. If on the presentation for payment of a 
 bill of exchange which has before the fourth day 
 of September, nineteen hundred and fourteen, 
 been re-accepted under the terms of Our said 
 Proclamation, dated the second day of August, 
 nineteen hundred and fourteen, the bill is not 
 paid, then, the said Proclamation shall, in its 
 application to that bill, have effect as if the 
 period of two calendar months had been in the 
 Proclamation substituted for the period of one 
 calendar month, and the sum mentioned in the 
 form of re-acceptance under the said Proclama- 
 tion shall be deemed to be increased by the 
 amount of interest on the original amount of 
 the bill for one calendar month calculated at the 
 Bank of England rate current on the date when 
 the bill is so presented for payment as aforesaid. 
 
 2. Our said Proclamation, dated the sixth 
 day of August, nineteen hundred and fourteen, 
 as extended by Our said Proclamation, dated 
 the twelfth day of August, nineteen hundred and 
 fourteen, shall apply to payments which become 
 due and payable on or after the fourth day of 
 September and before the fourth day of October, 
 nineteen hundred and fourteen (whether they 
 become so due and payable by virtue of the said 
 Proclamations or otherwise) in like manner as 
 it applies to payments which became due and 
 
THE GENERAL MORATORIUM 143 
 
 payable after the date of the said first mentioned 
 Proclamation and before the beginning of the 
 fourth day of September, nineteen hundred and 
 fourteen. 
 
 3. Nothing in this Proclamation shall affect 
 the payment of interest under the Proclamations 
 extended thereby, or prevent payments being 
 made before the expiration of the period for 
 which they are postponed. 
 
 4. Our said Proclamation, dated the first 
 day of September, nineteen hundred and four- 
 teen, is hereby revoked. 
 
 GOD SAVE THE KING. 
 
 E._ PROCLAMATION OF SEPTEMBER 30, 
 
 1914. 
 
 VARYING THE PROCLAMATIONS IN RESPECT OF 
 THE POSTPONEMENT OF PAYMENTS, DATED 
 RESPECTIVELY THE SECOND AUGUST, SlXTH 
 AUGUST, TWELFTH AUGUST, AND THIRD 
 SEPTEMBER, 1914. 
 
 GEORGE R.I. 
 
 WHEREAS under the Postponement of Payments 
 Act, 1914, We have power by Proclamation 
 to authorize the postponement of the payment 
 of any bill of exchange or of any negotiable 
 instrument or any other payment in pursuance 
 
144 APPENDIX I 
 
 of any contract to such extent and for such time 
 and subject to such conditions or other provisions 
 as may be specified in the Proclamation : 
 
 AND WHEREAS in pursuance of that power 
 We have issued Proclamations in relation to the 
 postponement of payments due before We were 
 in a state of war or due in respect of contracts 
 made before that time, dated the sixth day of 
 August, the twelfth day of August, and the third 
 day of September, nineteen hundred and fourteen 
 (which are respectively referred to in this 
 Proclamation as the first, second, and third 
 General Proclamation), and on the second day 
 of August, nineteen hundred and fourteen, We 
 also issued a Proclamation which is confirmed 
 by the said Postponement of Payments Act, 
 1914, and is deemed to have been issued under 
 that Act and is referred to in this Proclamation as 
 the Bills (Re-acceptance) Proclamation : 
 
 AND WHEREAS under the Postponement of 
 Payments Act, 1914, We have power to vary 
 extend or revoke any Proclamation under that 
 Act by a subsequent Proclamation : 
 
 AND WHEREAS it is desirable in the best 
 interests of Our Realm at the present juncture 
 that all persons who can discharge their liabili- 
 ties should do so without delay, but it is at the 
 same time expedient for the benefit of persons 
 who cannot so discharge their liabilities that 
 a further limited and final extension of the 
 
THE GENERAL MORATORIUM 145 
 
 postponement of payments authorized by the 
 said Proclamations should be made : 
 
 Now, THEREFORE, We have thought fit by 
 and with the advice of Our Privy Council to 
 issue this Our Royal Proclamation, and We do 
 hereby proclaim direct and ordain as follows : 
 
 i. The first General Proclamation as ex- 
 tended by paragraph (b) of the Second General 
 Proclamation shall, subject to the limitations 
 of this Proclamation, apply to payments which 
 become due and payable on or after the fourth 
 day of October and before the fourth day of 
 November, nineteen hundred and fourteen 
 (whether they so become due and payable by 
 virtue of the said Proclamations or the third 
 General Proclamation or otherwise), in like 
 manner as it applies to payments which became 
 due and payable after the date of the first 
 General Proclamation and before the beginning 
 of the fourth day of September, nineteen hundred 
 and fourteen. 
 
 Provided that, if the payment is one the date 
 whereof has been postponed by virtue of any 
 of the said General Proclamations, and is one 
 which carries interest either by virtue of the 
 terms of the contract or instrument under which 
 it is due and payable or by virtue of the said 
 General Proclamations, then the person from 
 whom the payment is due shall not be entitled 
 to claim the benefit of this Article unless, within 
 
 L 
 
I 4 6 APPENDIX I 
 
 three days after the date to which the payment 
 has been postponed by virtue of the said General 
 Proclamations, all interest thereon up to that 
 date is paid. 
 
 This Article shall not apply to 
 
 (a) Any payment in respect of rent ; 
 
 (b) Any payment due and payable to or 
 
 by a retail trader in respect of his 
 
 business as such trader. 
 2. The Bills (Re-acceptance) Proclamation 
 shall continue to apply to bills of exchange (other 
 than cheques and bills on demand) accepted 
 before the beginning of the fourth day of August 
 nineteen hundred and fourteen, the date of the 
 original maturity whereof is after the third day 
 of October. 
 
 If on the presentation for payment of any 
 such bill the bill is not paid and is not re- 
 accepted under the said Proclamation, then, 
 unless on such presentation the acceptor has 
 expressly refused re-acceptance thereof, the bill 
 shall for all purposes, including the liability of 
 any drawer and indorser or any other party 
 thereto, be deemed to be due and payable on a 
 date one calendar month after the date of its 
 original maturity instead of on the date of its 
 original maturity, and to be a bill for the original 
 amount thereof increased by the amount of 
 interest thereon, calculated from the date of the 
 original maturity to the date of payment at the 
 
THE GENERAL MORATORIUM 147 
 
 Bank of England rate current on the date of its 
 original maturity, and paragraph (a) of the 
 second General Proclamation shall not apply to 
 any such bill. 
 
 3. If on the presentation for payment of a 
 bill of exchange, the date of maturity of which 
 has before the fourth day of October nineteen 
 hundred and fourteen become postponed either 
 by virtue of the Bills (Re-acceptance) Proclama- 
 tion or paragraph (a) of the second General 
 Proclamation (whether or not the date of 
 maturity has been further postponed by virtue 
 of the third General Proclamation), the bill is 
 not paid, then the date of maturity shall be 
 deemed to be further postponed for fourteen 
 days from the date of such presentation for 
 payment, and the original amount of the bill 
 shall be deemed to be further increased by the 
 amount of interest on the original amount of the 
 bill for fourteen days, calculated at the Bank of 
 England rate current on the date of such presen- 
 tation for payment. 
 
 4. Save as otherwise expressly provided, 
 nothing in this Proclamation shall affect the 
 application of the General Proclamations to 
 payments to which those Proclamations apply, 
 and nothing in this Proclamation shall prevent 
 payments to which this Proclamation applies 
 being made before the expiration of the period for 
 which they are postponed thereunder. 
 
 GOD SAVE THE KING. 
 
APPENDIX II 
 
 MEASURES FOR DEALING WITH BILLS 
 OF EXCHANGE. 
 
 A. PROCLAMATION OF SUNDAY, AUGUST 2nd, 
 1914, FOR POSTPONING THE PAYMENT OF 
 CERTAIN BILLS OF EXCHANGE. 
 
 GEORGE R.I. 
 
 WHEREAS in view of the critical situation 
 in Europe and the financial difficulties caused 
 thereby it is expedient that the payment of 
 certain bills of exchange should be postponed 
 as appears in this Proclamation : 
 
 Now, THEREFORE, WE have thought fit, by 
 and with the advice of Our Privy Council, to 
 issue this Our Royal Proclamation, and We do 
 hereby proclaim, direct, and ordain as follows : 
 
 If on the presentation for payment of a bill 
 of exchange, other than a cheque or bill on 
 demand, which has been accepted before the 
 beginning of the fourth day of August, nineteen 
 hundred and fourteen, the acceptor re-accepts 
 the bill by a declaration on the face of the bill 
 in the form set out hereunder, that bill shall, 
 
 148 
 
BILLS OF EXCHANGE 149 
 
 for all purposes, including the liability of any 
 drawer or indorser or any other party thereto, 
 be deemed to be due and be payable on a date 
 one calendar month after the date of its original 
 maturity instead of on the date of its original 
 maturity, and to be a bill for the original amount 
 thereof increased by the amount of interest 
 thereon calculated from the date of re-acceptance 
 to the new date of payment at the Bank of 
 England rate current on the date of the re- 
 acceptance of the Bill. 
 
 Form of Re- Acceptance. 
 
 Re-accepted under Proclamation for 
 (insert increased sum). 
 
 Signature 
 
 Date 
 
 Given at Our Court at Buckingham Palace, this 
 second day of August, in the year of our Lord 
 one thousand nine hundred and fourteen, and 
 in the Fifth year of Our Reign. 
 
 GOD SAVE THE KING. 
 
 B. NOTICE PUBLISHED ON AUGUST i3th, 1914, 
 CONCERNING THE DISCOUNTING OF BlLLS BY 
 THE BANK OF ENGLAND. 
 
 The Chancellor of the Exchequer has for 
 several days past been in close and constant 
 
ISO APPENDIX II 
 
 consultation with the Governor of the Bank of 
 England, the bankers, the accepting houses and 
 the principal traders for the purpose of providing 
 the country with all the banking facilities it 
 needs in the present emergency. We are now 
 able to announce that the Chancellor of the 
 Exchequer has completed arrangements with 
 the Bank of England for terminating the present 
 deadlock in the money market and for enabling 
 the trade and commerce of the country to resume 
 its normal course. The greatest difficulty arose 
 from the stoppage of remittances to London 
 both from the provinces and from other countries 
 not only in Europe but in all parts of the world. 
 This caused a breakdown in the foreign exchanges 
 and deterred bankers from discounting bills in 
 the normal way. To overcome this difficulty as 
 well as that of providing traders in this country 
 with all the banking facilities they need, the 
 Government have now agreed to guarantee the 
 Bank of England from any loss it may incur in 
 discounting bills of exchange either home or 
 foreign, bank or trade, accepted prior to August 
 4th, 1914. Accordingly we are authorized to 
 make the following announcement : 
 
 " The Bank of England are prepared on the 
 application of the holder of any approved bill 
 of exchange accepted before the 4th day of 
 August, 1914, to discount at any time before its 
 due date at Bank rate without recourse to such 
 
BILLS OF EXCHANGE 151 
 
 holder, and upon its maturity the Bank of 
 England will in order to assist the resumption 
 of normal business operations give the acceptor 
 the opportunity until further notice of post- 
 poning payment, interest being payable in the 
 meantime at 2 per cent, over Bank rate varying. 
 Arrangements will be made to carry this scheme 
 into effect so as to preserve all existing obliga- 
 tions. 
 
 The Bank of England will be prepared for 
 this purpose to approve such bills of exchange 
 as are customarily discounted by them and also 
 good trade bills and the acceptances of such 
 foreign and colonial firms and bank agencies as 
 are established in Great Britain." 
 
 C. STATEMENT OF THE TREASURY, PUBLISHED 
 SEPTEMBER 5th, 1914, CONCERNING AD- 
 VANCES TO ACCEPTORS BY THE BANK OF 
 ENGLAND, ETC. 
 
 The breakdown of the foreign exchanges has 
 caused, and is still causing, very great incon- 
 venience to traders throughout the country, and 
 strong representations have been made to the 
 Chancellor of the Exchequer upon the subject. 
 It has been pointed out to him that the dislocation 
 of exchange is exercising an extremely prejudicial 
 influence upon trade generally, and especially 
 
152 APPENDIX II 
 
 upon the foreign trade of the country, and that 
 in the absence of the usual exchange facilities, 
 goods can neither be imported nor exported in 
 any appreciable quantity. To ascertain the causes 
 and to find a remedy for the difficulties in obtain- 
 ing international exchange the Chancellor of the 
 Exchequer consulted a large number of leading 
 traders, members of accepting houses, and 
 bankers. After a series of conferences at the 
 Treasury, the Chancellor of the Exchequer now 
 wishes to announce that an arrangement has 
 been arrived at which is designed to remove the 
 difficulties. 
 
 PRINCIPAL FEATURES OF THE SCHEME. 
 
 The main features of the arrangement may be 
 summarized as follows : 
 
 (1) The Bank of England will provide where 
 required acceptors with the funds necessary 
 to pay all approved pre-moratorium bills at 
 maturity. This course will release the drawers 
 and endorsers of such bills from their liabilities 
 as parties to these bills, but their liability under 
 any agreement with the acceptors for payment 
 or cover will be retained. 
 
 (2) The acceptors will be under obligation 
 to collect from their clients all the funds due to 
 them as soon as possible, and to apply those 
 funds to repayment of the advances made by the 
 
BILLS OF EXCHANGE 153 
 
 Bank of England. Interest will be charged upon 
 these advances at 2 per cent, above the ruling 
 Bank rate. 
 
 (3) The Bank of England undertakes not to 
 claim repayment of any amounts not recovered 
 by the acceptors from their clients for a period of 
 one year after the close of the war. Until the 
 end of this period the Bank of England's claim 
 will rank after claims in respect of post-mora- 
 torium transactions. 
 
 (4) In order to facilitate fresh business and 
 the movement of produce and merchandise 
 from and to all parts of the world the joint- 
 stock banks have arranged, with the co-operation, 
 if necessary, of the Bank of England and the 
 Government, to advance to clients the amounts 
 necessary to pay their acceptances at maturity 
 where the funds have not been provided in due 
 time by the clients of the acceptors. The 
 acceptor would have to satisfy the joint-stock 
 banks or the Bank of England both as to the 
 nature of the transaction and as to the reason 
 why the money is not forthcoming from the 
 client. These advances would be on the same 
 terms as regards interest as the pre-moratorium 
 bill advances. 
 
 The Government is now negotiating with a 
 view to assisting the restoration of exchange 
 between the United States of America and this 
 country. 
 
APPENDIX III 
 
 MEASURES FOR PROVIDING PAPER 
 CURRENCY. 
 
 A. THE CURRENCY AND BANK NOTES ACT, 
 
 . 5). 
 
 An Act to authorize the issue of Currency Notes, 
 and to make provision with respect to the 
 Note Issue of Banks. [6th August, 1914.] 
 
 BE it enacted by the King's most Excellent 
 Majesty, by and with the advice and consent 
 of the Lords Spiritual and Temporal, and 
 Commons, in this present Parliament assembled, 
 and by the authority of the same, as follows : 
 
 One Pound and Ten Shilling Currency Notes. 
 
 i. (i) The Treasury may, subject to the 
 provisions of this Act, issue currency notes for 
 one pound and for ten shillings, and those notes 
 shall be current in the United Kingdom in the 
 same manner and to the same extent and as fully 
 as sovereigns and half-sovereigns are current 
 
 154 
 
PAPER CURRENCY 155 
 
 and shall be legal tender in the United Kingdom 
 for the payment of any amount. 
 
 (2) Currency notes under this Act shall be 
 in such form and of such design and printed 
 from such plate and on such paper and be 
 authenticated in such manner as may be directed 
 by the Treasury. 
 
 (3) The holder of a currency note shall be 
 entitled to obtain on demand, during office 
 hours at the Bank of England, payment for the 
 note at its face value in gold coin which is for the 
 time being legal tender in the United Kingdom. 
 
 (4) The Treasury may, subject to such con- 
 ditions as to time, manner, and order of presenta- 
 tion as they think fit, call in any currency notes 
 under this Act on paying for those notes at their 
 face value in gold. 
 
 (5) Currency notes under this Act shall be 
 deemed to be bank notes within the meaning 
 of the Forgery Act, 1913,* and any other enact- 
 ment relating to offences in respect of bank notes 
 which is for the time being in force in any 
 part of the British Islands, and to be valuable 
 securities within the meaning of the Larceny 
 Act, i86i,f and any other law relating to stealing 
 which is for the time being in force in any part of 
 the British Islands, and to be current coin of the 
 realm for the purpose of the Acts relating to 
 truck and any other like enactment. 
 
 * 3 & 4 Geo. 5, c. 2. t 2 4 & 2 5 Vict - c - 9 6 - 
 
156 APPENDIX III 
 
 (6) For the purpose of meeting immediate 
 exigencies all postal orders issued either before 
 or after the passing of this Act shall temporarily 
 be current and legal tender in the United King- 
 dom in the same manner and to the same extent 
 and as fully as current coins, and shall be legal 
 tender in the United Kingdom for the payment 
 of any amount. 
 
 The holder of any such postal order shall be 
 entitled to obtain on demand, during office hours 
 at the Bank of England, payment for the postal 
 order at its face value in any coin which is 
 for the time being legal tender in the United 
 Kingdom for the amount of the note. 
 
 Provisoes (b) and (c) to subsection (i) of 
 section twenty-four of the Post Office Act, 
 1908,* shall not apply to any such postal 
 orders. 
 
 This subsection shall have effect only until 
 His Majesty by proclamation revokes the same, 
 and any proclamation revoking this subsection 
 may provide for the calling in or exchange of 
 any postal orders affected thereby. 
 
 Issue of Currency Notes. 
 
 2. Currency notes may be issued to such 
 persons and in such manner as the Treasury 
 direct, but the amount of any notes issued to any 
 
 * 8 Edw. 7, c. 48. 
 
PAPER CURRENCY 157 
 
 person shall, by virtue of this Act and without 
 registration or further assurance, be a floating 
 charge in priority to all other charges, whether 
 under statute or otherwise, on the assets of that 
 person. 
 
 Authority to issue Bank Notes beyond limit. 
 
 3. The governor and company of the Bank 
 of England and any persons concerned in the 
 management of any Scottish or Irish bank of 
 issue may, so far as temporarily authorized by 
 the Treasury and subject to any conditions 
 attached to that authority, issue notes in excess 
 of any limit fixed by law ; and those persons 
 are hereby indemnified, freed, and discharged 
 from any liability, penal or civil, in respect of 
 any issue of notes beyond the amount fixed by 
 law which has been made by them since the 
 first day of August nineteen hundred and four- 
 teen in pursuance of any authority of the 
 Treasury or of any letter from the Chancellor 
 of the Exchequer, and any proceedings taken to 
 enforce any such liability shall be void. 
 
 Power to make Bank Notes not otherwise Legal 
 Tender, Legal Tender in Scotland and Ireland. 
 
 4. Any bank notes issued by a bank of issue 
 in Scotland or Ireland shall be legal tender for a 
 
158 APPENDIX III 
 
 payment of any amount in Scotland or Ireland 
 respectively, and any such bank of issue shall 
 not be under any obligation to pay its notes on 
 demand except at the head office of the bank, 
 and may pay its notes, if thought fit, in currency 
 notes issued under this Act : 
 
 Provided that notes which are legal tender 
 under this section shall not be legal tender for 
 any payment by the head office of the bank by 
 whom they are issued for the purpose of the 
 payment of notes issued by that bank. 
 
 This section shall have effect only until His 
 Majesty by proclamation revokes the same, and 
 any proclamation revoking this section may 
 provide for the calling in or exchange of notes 
 affected thereby. 
 
 Interpretation, Short Title and Extent. 
 
 5. (i) In this Act, the expression " bank of 
 issue " means any bank having power for the 
 time being to issue bank notes. 
 
 (2) This Act may be cited as the Currency 
 and Bank Notes Act, 1914. 
 
 (3) This Act shall apply to the Isle of Man 
 as if it were part of the United Kingdom, but 
 shall not apply to any other British possession. 
 
PAPER CURRENCY 159 
 
 B. EXPLANATORY MEMORANDUM BY THE 
 TREASURY. 
 
 The following are the arrangements made in 
 accordance with the provisions of the Currency 
 and Bank Notes Act, 1914, for placing currency 
 notes at the disposal of the Banks for meeting 
 exceptional demands. 
 
 (i) England and Wales. 
 
 Currency notes are issued through the Bank 
 of England to bankers as and when required up 
 to a maximum limit not exceeding, in the case 
 of any bank, 20 per cent, of its liabilities on 
 deposit and current accounts. 
 
 The amount of notes issued to each bank is 
 treated as an advance by the Treasury to that 
 bank bearing interest from day to day at the 
 current Bank rate, the security for the Treasury 
 advance consisting of a floating charge on the 
 assets of the bank up to the amount of the notes 
 issued. The bank is permitted to repay the 
 whole or any part of any advance at any time. 
 Any amount repaid can be renewed if and 
 when necessity arises, provided that the total 
 amount outstanding at any one time does not 
 exceed the authorized percentage of the bank's 
 liabilities. 
 
 Any sums received by the Bank of England 
 
i6o APPENDIX III 
 
 in repayment of advances are either applied 
 forthwith to cancelling any currency notes which 
 have been returned from circulation and are for 
 the time being in the hands of the Bank of 
 England, or, in so far as any such sums may 
 exceed the amount of currency notes returned 
 from circulation in the hands of the Bank of 
 England at the time of receipt, are carried to a 
 separate account in the books of the Bank of 
 England and applied to the cancellation of notes 
 as and when they return from circulation. 
 
 In order to give the Banks the advantage of 
 the credit allowed under this arrangement even 
 though actual currency may not be required, it 
 is proposed by the amending Bill to take power 
 to issue certificates in lieu of actual notes. 
 
 The effect of the issue of these certificates 
 will be that the Banks will be able to obtain 
 credits with the Bank of England on the same 
 terms as currency notes and the expense of 
 printing and handling notes will be avoided 
 except in so far as the notes may be required 
 for actual circulation. 
 
 (2) Scotland and Ireland. 
 
 The arrangement in England and Wales 
 applies generally to Scotland and Ireland ; but 
 in the case of banks of issue in Scotland and 
 Ireland currency notes, instead of being issued 
 
PAPER CURRENCY 161 
 
 to the public, are used as cover for the banks' 
 own notes. This arrangement has in practice 
 the effect of enabling the Scottish and Irish 
 banks of issue to exceed the normal limits of 
 issue of fiduciary notes so long as such excess 
 issues are covered by currency notes. 
 
 The new certificates will also be available for 
 the purpose of cover for these issues. 
 
 M 
 
APPENDIX IV 
 
 THE COURTS (EMERGENCY POWERS) ACT, 1914 
 (4 & 5 GEO. 5). 
 
 An Act to give, in connexion with the present 
 War, further powers to Courts in relation to 
 the remedies for the recovery of money, and 
 in relation to other similar matters. 
 
 August, 1914.] 
 
 BE it enacted by the King's most Excellent 
 Majesty, by and with the advice and consent of 
 the Lords Spiritual and Temporal, and Commons, 
 in this present Parliament assembled, and by the 
 authority of the same, as follows : 
 
 Power of Courts to Defer Execution, &c. 
 
 i. (i) From and after the passing of this 
 Act no person shall 
 
 (a) proceed to execution on, or otherwise to 
 the enforcement of, any judgment or 
 order of any court (whether entered or 
 162 
 
EMERGENCY POWERS 163 
 
 made before or after the passing of this 
 Act) for the payment or recovery of a 
 sum of money to which this subsection 
 applies, except after such application 
 to such court and such notice as may 
 be provided for by rules or directions 
 under this Act ; or 
 
 (b) levy any distress, take, resume, or enter 
 into possession of any property, exercise 
 any right of re-entry, foreclose, realize 
 any security (except by way of sale 
 by a mortgagee in possession), forfeit 
 any deposit, or enforce the lapse of any 
 policy of insurance to which this sub- 
 section applies, for the purpose of en- 
 forcing the payment or recovery of any 
 sum of money to which this subsection 
 applies, or, in default of the payment 
 or recovery of any such sum of money, 
 except after such application to such 
 court and such notice as may be pro- 
 vided for by rules or directions under 
 this Act. 
 
 This subsection shall not apply to any sum 
 of money (other than rent not being rent at or 
 exceeding fifty pounds per annum) due and 
 payable in pursuance of a contract made after 
 the beginning of the fourth day of August nine- 
 teen hundred and fourteen. 
 
 This subsection applies to life or endowment 
 
164 APPENDIX IV 
 
 policies for an amount not exceeding twenty-five 
 pounds, or payments equivalent thereto, the 
 premiums in respect of which are payable at not 
 longer than monthly intervals, and have been 
 paid for at least the two years preceding the 
 fourth day of August nineteen hundred and 
 fourteen. 
 
 (2) If, on any such application, the court to 
 which the application is made is of opinion that 
 time should be given to the person liable to 
 make the payment on the ground that he is 
 unable immediately to make the payment by 
 reason of circumstances attributable, directly or 
 indirectly, to the present war, the court may, in 
 its absolute discretion, after considering all the 
 circumstances of the case and the position of all 
 the parties, by order, stay execution or defer the 
 operation of any such remedies as aforesaid, for 
 such time and subject to such conditions as the 
 court thinks fit. 
 
 (3) Where a bankruptcy petition has been 
 presented against any debtor, and the debtor 
 proves to the satisfaction of the court having 
 jurisdiction in bankruptcy that his inability to 
 pay his debts is due to circumstances attribut- 
 able, directly or indirectly, to the present war, 
 the court may, in its absolute discretion, after 
 considering all the circumstances of the case and 
 the position of all the parties, at any time stay 
 the proceedings under the petition for such time 
 
EMERGENCY POWERS 165 
 
 and subject to such conditions as the court 
 thinks fit. . 
 
 (4) This Act shall apply to all proceedings 
 for the recovery of possession of tenements under 
 the Small Tenements Recovery Act, 1838,* as 
 if they were in all cases proceedings for the pay- 
 ment or recovery of a sum of money due and 
 payable on account of rent. 
 
 (5) The Lord Chancellor may make such rules 
 and give such directions as he thinks fit for the 
 purpose of giving full effect to this Act, and may, 
 by those rules or directions, provide for any 
 proceedings for the purposes of this Act being 
 conducted, so far as desirable, in private and 
 for the remission of any fees. 
 
 (6) The powers given under this Act shall be 
 in addition to, and not in derogation of, any other 
 powers of any court. 
 
 (7) Nothing in this Act shall affect any right 
 or power of pawnbrokers to deal with pledges, 
 or give any power to stay execution or defer the 
 operation of any remedies of a creditor in the case 
 of a sum of money payable by, or recoverable 
 from, the subject of a Sovereign or State at war 
 with His Majesty. 
 
 (8) Any stay of execution or of other pro- 
 ceedings, and any postponement of the operation 
 of the remedies of a creditor, which has been 
 granted or ordered by any court since the 
 
 * i & 2 Viet. c. 74, 
 
166 APPENDIX IV 
 
 commencement of the present war and before 
 the passing of this Act shall be as valid as if 
 this Act had been in operation when the stay 
 or postponement was granted or ordered. 
 
 Short Title, Application, and Duration. 
 
 2. (i) This Act may be cited as the Courts 
 (Emergency Powers) Act, 1914. 
 
 (2) In the application of this Act to Scotland 
 the Court of Session shall be substituted for the 
 Lord Chancellor ; " Act of Sederunt " shall be 
 substituted for " rules " ; " a petition for seques- 
 tration " shall be substituted for " a bankruptcy 
 petition " ; " diligence " shall be substituted for 
 "execution"; and "decree" shall be sub- 
 stituted for " judgment or order/' and shall be 
 deemed to include any warrant authorizing 
 diligence; "creditor in a heritable security" 
 shall be substituted for " mortgagee " ; and 
 " proceedings in removings and ejections in the 
 case of subjects let at a rent not exceeding 
 twenty-one pounds" shall be substituted for 
 " proceedings for the recovery of possession of 
 tenements under the Small Tenements Recovery 
 Act, 1838." 
 
 (3) In the application of this Act to Ireland 
 the Lord Chancellor of Ireland shall be substi- 
 tuted for the Lord Chancellor. 
 
 (4) His Majesty may, by Order in Council, 
 
EMERGENCY POWERS 167 
 
 at any time determine the operation of this Act, 
 or provide that this Act shall have effect subject 
 to such limitations as may be contained in the 
 Order ; but, subject to the operation of any such 
 Order in Council, this Act shall have effect during 
 the continuance of the present war, and for a 
 period of six months thereafter. 
 
APPENDIX V 
 
 THE BANK OF ENGLAND'S GOLD STOCK DURING 
 THE MORATORIUM. 
 
 The following is a summary of the receipts 
 of gold from abroad by the Bank during the 
 Moratorium period, August 4 to November 4, 
 1914. These receipts include gold deposited 
 abroad : 
 
 i 
 
 Sovereigns received ... ... ... 4,852,000* 
 
 Indian Gold released ... ... ... 3,400,000 
 
 Bar Gold bought ... ... ... ... 22,011,000 
 
 United States Gold coin bought ... ... 22,087,000 
 
 In addition to these receipts from abroad, 
 89,000 was returned from use at home. On 
 the other hand, 10,500,000 was set aside by 
 the Treasury as backing for the new Treasury 
 notes. The net increase in the Bank's gold 
 stock was thus 41,939,000. 
 
 * Including 3,400,000 sovereigns from Russia. 
 
 168 
 
INDEX 
 
 ACCEPTING HOUSES, 
 
 position of in crisis, 60 
 
 seq, 6g seq. 
 AMSTERDAM, 
 
 exchange on London in, 48 
 ANGELL, MR. NORMAN, 
 
 supported by crisis, 38 
 
 refuted by crisis, 39 
 
 BANK ACT, 
 
 provisions of, 8 
 
 suspension of, 32 
 BANK OF ENGLAND, 
 
 discounts approved bills, 
 64,65 
 
 easy working of its system, 
 127 seq. 
 
 increase in its gold, 47 
 
 increase in " other securi- 
 ties " of, 27, 29, 130 
 
 lends to acceptors, 63, 69 
 seq. 
 
 movements in figures of, 
 128, 129 
 
 rush to cash notes at, 14, 
 
 15 
 
 variety of its activities, 
 
 130, 131 
 BANK RATE, 
 jump in, 10 
 
 BANKS, 
 
 and acceptances, 24, 59, 
 
 60, 72 seq. 
 
 and moratorium, 35 seq. 
 assets of, locked up, 17 
 
 seq. 
 
 cash reserves of, 25, 123 
 loans of to Stock Exchange, 
 
 118 seq. 
 refused gold to customers, 
 
 13, 14 
 BANK BALANCE SHEET, 
 
 example of, 16 n. 
 BERLIN, 
 
 as financial centre, 101 
 
 BlLLBROKERS, 
 
 business of, 26 
 experiences of in crisis, 28, 
 
 29, 61, 63 
 BILL OF EXCHANGE, 
 
 simplified example of, 43 
 varieties of, 54, 55 
 BRAZIL, 
 
 borrows by funding scheme, 
 96 
 
 COURTS (EMERGENCY) 
 
 POWERS) ACT, 
 purpose of, 125 
 
 169 
 
170 
 
 INDEX 
 
 CURRENCY, 
 
 supply of not ready, 32 
 CURRENCY AND BANK NOTES 
 ACT, 
 
 suspends Bank Act, 32 
 
 EXCHANGE, 
 
 explained, 41 seq. 
 
 gold movements ruled by, 
 
 45 
 
 why machinery of col- 
 lapsed, 51 seq. 
 
 FAVOURABLE EXCHANGE, 
 
 effect of, 44, 45 
 FINANCE BILLS, 
 
 and export trade, 88, 91, 
 
 95 
 
 outcry against, 80 seq. 
 utility of, 82 seq. 
 
 GERMAN BANKS, 
 
 acceptances of, 131 
 
 and London market, 48, 
 
 49 
 GOLD EXPORTS, 
 
 extent of, 46 
 
 fears of, 39, 40 
 
 not prohibited, 48 
 
 why improbable, 40 
 GOVERNMENT, 
 
 relations of with finance, 
 
 126 
 GOVERNMENT NOTE ISSUE, 
 
 dangers of, 112, 116 
 
 INDIA, 
 
 gold released by, 47 
 
 INVESTMENTS ABROAD, 
 and export trade, 87 
 cessation of, in war, 87 
 
 LLOYD GEORGE, MR. 
 
 speech by, quoted, 33, 
 130 n. 
 
 MORATORIUM, 
 
 applied to banks, 35, 36 
 
 meaning of, 4, 5 
 
 was it necessary ? 30 seq. 
 
 NEW YORK, 
 
 chance for, 103 
 exchange on London in, 
 
 4i, 5i 
 Stock Exchange closed in, 
 
 20 
 position of, in crisis, 104 
 
 seq. 
 
 OTTAWA, 
 
 Bank of England takes 
 gold at, 57 
 
 PARIS, 
 
 as financial centre, 100 
 exchange on London in, 
 46, 100 
 
 REACCEPTANCE, 
 
 proclamation providing, 63 
 RUSSIA, 
 
 exchange difficulties of, 95 
 
 ships gold, 96 
 
 STOCK EXCHANGE, 
 
 and loans from banks, 118 
 seq. 
 
INDEX 
 
 STOCK EXCHANGE continued TREASURY, 
 
 171 
 
 relief, measure for, 124, 
 
 125 
 
 small account at crisis, 121 
 why it closed, 18 seq. 
 why it remained shut, 124 
 SWEDEN, 
 
 exchange on London in, 
 91, 92 
 
 and Bank rate, n, 12 
 TREASURY NOTES, 
 how issued, 33 
 obscure statement of, 114 
 seq. 
 
 UNEMPLOYMENT, 
 and war, 89 seq. 
 
 THE END 
 
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