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Rh

Floating Debt Outstanding (million )

Dec. 31

Treasury Bills

Ways and Means Advances

Total

1913 1914

1915 1916 1917 1918 1919 1920

21 117

280 ,099 ,058

,095 ,107 ,IO2

2

58 70 141 279 455 243 306

23 175 350 ,240

-337 -550 ,350 ,408

and to the other banks for assistance in providing the necessary funds. It has been shown above, in the analysis given of the pre- war working of our monetary system, that advances made by banks nearly always mean a corresponding addition in banking deposits and consequently an increase in the amount of money that the public can spend in the shape of the cheques that can be drawn against these deposits and are normally taken in payment for goods and services (see INFLATION). It is important to note that in so far as the Government got funds from the Bank of England on Ways and Means advances or Treasury bills or any other security on which the Bank lent to it, the credit basis on which all the other banks worked was thereby increased; because the money, as it was paid out to contractors and others to whom the Government owed it, was paid in by them to their own ac- counts with the outside banks, which thus received an increase in their cash at the Bank of England, which they could either hold as such or convert into currency notes; and so an advance was caused in the proportion between their cash and liabilities which encouraged them to expand the credit based on their increased cash holding. In the same way when the outside banks bought Treasury bills or Exchequer bonds or any other form of Government security issued, the result was an increase among their assets in their Government securities or bills discounted (if they included Treasury bills in this item), and a corresponding increase in the aggregate of banking deposits or potential money in the hands of the public, which was thus enabled to draw more cheques; because the money paid by banks for Treasury bills was paid first to the Government and by them paid out to the public, who v/ere able to draw against it. It should also be noted that the outside banks were enabled by the increase in their cash at the Bank of England, caused by the new credits created by it for the Government, to take out currency notes and add them to their cash reserves, paying for them by transferring to the Government cash at the Bank of England.

By this process the whole principle on which the money market worked was radically altered in practice, though in theory the old checks and restrictions were still operative, and London remained throughout the war, on paper, a free market in gold with a banking system working on a convertible cur- rency. It has already been stated that, though the Currency and Bank Notes Act of 1914 suspended the restrictions of the Bank Act of 1844, the Bank of England only availed itself of this suspension for a few hours and in all its published weekly returns showed a gold backing for every note issued above the legal limit of 18,450,000 on the fiduciary issue. Its notes were still convertible on demand, as were also the new currency notes, which were poured out in an almost steadily increasing volume through the process described above. There was during the war period no legal prohibition of gold exports, and so in theory anyone abroad who had a monetary claim on England could still turn his claim into legal-tender cash, turn the latter into gold and take the gold away. In fact, however, he would have found considerable difficulty in doing so, because the British public and banks had had impressed upon them the need for conserving the gold resources of the country for the purpose of financing abroad the war requirements of England and her Allies. The public had been effectively persuaded to pay in its gold holdings into its banks, and the banks and other professional financiers were re- strained by patriotic and other considerations from applying to the Bank of England for gold in order to oblige a foreign customer or earn a profit in exchange; moreover, the possibility of profit in exchange was largely, extinguished by Admiral

Last Return of Year

Highest

Lowest

1914 1915

1916 1917 1918 1919

1920 1921

38,478,000 103,125,000 150,144,000 212,782,000 323,241,000 356,152,000 367,626,000

38,478,000 103,125,000 150,144,000 212,782,000 323,644,000 358,231,000 368,231,000 360,615,000

21,535,000 35,409,000 97,758,000 143,043,000 210,143,000 307,480,000 324,994,000 323,884,000 (to June 30)

Bank-Note Circulation

End of

Bank of England

English Banks

Scottish Banks

Irish Banks

1913 1914

1915 1916 1917 1918 1919 1920

29,608,000 36,139,000 35,309,000 39,676,000 45,944,000 70,307,000 91,350,000 132,851,000

173,000 180,000 220,000 241,000 259,000 287,000 326,000 174,000

7,744,000 9,502,000 12,555,000 15,461,000 19,023,000 25,141,000 28,032,000 29,363,000

8,074,000 10,918,000 15,000,000 19,112,000 22,336,000 30,896,000 29,054,000 24,718,000

Tirpitz and the submarine campaign, which did much through the cost of freight and insurance to maintain the convertibility of British currency during the war (see EXCHANGES, FOREIGN). The convertibility of British currency thus became a pious fiction, and its amount, in the form of legal-tender notes, was limited only by the extent to which the Bank of England created new credit for the Government and others; and, in the shape of cheques, by the extent to which the public drew on the ever- increasing deposits which the other banks created on the basis of the new cash and credit provided by the Treasury and the Bank of England. There was thus a constant tendency to increasing abundance of money of one kind or another, as will be seen from the appended tables.

Currency Notes Circulation

The growing flood of new currency and credit tended to produce a low level of rates in the money market, which, if unchecked, would have cheapened the raising of the sinews of war, but would also have produced an adverse effect on the for- eign exchanges by encouraging Britain's foreign creditors to take their balances home instead of employing them in London. From the point of view of British financial prestige, which was of the highest possible importance for the war, it was necessary to make every effort to keep the foreign exchanges favourable. For the purpose of financing the war cheaply at home there was much to be said for a policy of low rates in the money market. As has already been shown, the Government was practically the only borrower, since no other party could offer issues except with the permission of a Treasury Committee and the export of capital was forbidden. Thus, if the tendency towards ease had been allowed to take its course, the Government could apparently have secured for itself at low rates all the investment money that was available, especially if it had made use of the hint of compulsion so effectively employed by Mr. Bonar Law when he achieved the greatest borrowing success of the war at the beginning of 1917. This consideration, however, gave way, perhaps rightly, to the need for maintaining our prestige abroad as expressed by the foreign exchanges; rates in the money market, as will be shown, were artificially propped up, and it was not until the last year of the war that a system was adopted of differential rates for home and foreign money. In consequence of this system of considering the effect upon foreign exchanges as more important than the price that the Government had to pay for the funds that it needed, and a belief of bankers that, even at a time of war crisis, when no other borrowers were in the market, the only way to induce the public or professional finan- ciers to subscribe for war securities was by offering them con- tinually higher rates for their money, this crescendo movemen^ continued until the autumn of 1016, when 6% was offered on an issue of Exchequer Bonds.

Such were the most important changes that affected the