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at the time of the issue of Mr. McKenna's 45 % War Loan, but had made little headway owing to the lack of a security in which the working classes could invest with a certainty of being able to get their money back in full at any time. This campaign was now taken up with much greater energy by the National War Savings Committee, which, with the assistance of thousands of devoted workers all over the country, especially among the teachers of the primary schools, did most satisfactory and effec- tive work in securing savings for the war, so lessening the degree to which the war had to be financed by the creation of new credit by the Bank of England and the other banks.

The question of exchange was now requiring serious attention, and in July of this year bank rate was raised to 6 %, partly owing to a rise in money rates in New York, which actually proved to be short-lived. An issue of 150 millions 6% Exchequer bonds re- payable in Feb. 1920 was made in the following Oct., and pro- voked a good deal of criticism on the ground of the very high rate that was being offered to professional capitalists at a time when economy and self-denial for the war were being extensively preached. During this year, in accordance with the rise in bank rate, the rates at which Treasury bills were offered were raised on July 14 to si% for 3 months, 5!% for 6 months and 6% for 12 months, but on Sept. 27 the official rates for all dates were re- duced to 5 1 % ; the 3 months' market rate closely followed as usual the rate for Treasury bills of that usance, being slightly below it for a few weeks in Nov. and at or above it during the rest of the half-year. A feature of this year's war finance was the expansion in Treasury bills and the absence of any great war loan.

In 1917 this system of financing the war largely by Treasury bills and entirely by short-date obligations was at once reversed by Mr. Bonar Law, who had become Chancellor of the Exchequer in succession to Mr. McKenna on the formation of the Coalition Government at the end of 1916. In the first days of 1917 the great 5% War Loan was issued, which realized over 1,000 millions. Mr. Bonar Law told a great meeting at the Guildhall, held to inaugurate the campaign for the placing of the loan, that the rate of 5! % which it secured to subscribers at the issue price of 95 was as high a rate as they would get from British Government loans, and that if they did not subscribe on these terms the "resources of civilization were not exhausted"; this plain hint at compulsion was heartily cheered by a meeting largely composed of wealthy capitalists. Bank rate was brought down to 55 % in the middle of Jan. and to 5 % at the beginning of April. The offer of Treasury bills was suspended altogether on Jan. 4, pending the issue of the War Loan, and the tender system was resumed for a short time, from March 30 to June 15, after which the daily sale was resumed at 4^% for 3 and 6 months' bills. No change was made in the rate which the Bank was giving to clearing bankers for surpluses until Feb. 26, when it was reduced from 5 to 4!%, coming down again to 4% on June 19. On each occasion the rate given by the Bank of Eng- land to banks outside the clearing was kept \/ below the rate given to the clearing banks. The market rate of discount fell from si % to 5 % when the sale of Treasury bills was suspended, and showed renewed weakness in March owing to false hopes of easy money resulting from America's intervention. The huge transfers involved by the War Loan payments were carried out with surprising ease owing to arrangements enabling the banks to borrow from the Bank of England; moreover, the payments on War Loan were continually offset by the Government's disbursements and by the maturing of Treasury bills, the out- standing amount of which was reduced between Jan. 4 and April 14 from 1,093 millions to 454 millions; after that date they began to mount up rapidly again and by the end of the year again exceeded a thousand millions. The second half of 1917 was notable for the institution of a system of continuous borrow- ing from the beginning of October by issues of National War Bonds, by which the funds necessary for carrying on the war were to a great extent provided, without the disturbance and inflation caused by huge issues made largely with the assistance of credit manufactured by banks, even when the banks themselves were not practically compelled to make subscriptions to securities

which involved an inconvenient lock-up of their funds. On Nov. 15 a special rate for foreign money was established by the Bank of England when it announced that it would allow 45% on deposits of foreign money made through the clearing banks. This measure was a good deal criticised as impracticable, and could, of course, only have been attempted in war-time when patriotic sentiment put a strong bar upon all the openings for fraud which the system offered and when the existence of the censorship over foreign correspondence made it possible to trace any attempts to take advantage of them. In the last days of the year the rate at which Treasury bills were offered was reduced to 4% and there was a corresponding tumble in the market rate of discount. At the same time the rate given by the Bank of England to clearing banks was reduced from 4 to 33 per cent. As the special rate for foreign money remained at 4!% there was thus established a considerable difference in the rates for home and foreign money; the more favourable terms which were thus made possible for home financing enabled a further reduction to be made in the Treasury bill rate on Feb. 4 1918 to 32%, and the market rate of discount as usual followed suit; the Bank of England's rate on three-day loans from clearing banks also dropped to 3 per cent. At the end of May another important step was taken when the banks agreed that the special rate on deposits granted by many of them to favoured customers should be abandoned and that 3 % should henceforward be the best rate that the clearing banks would grant. Arrangements were also made to bring the banks outside the clearing and the discount houses into line with this arrangement, which was made with a view to cheapening the supply of home money and stimulating the sale of war bonds. Another interesting monetary event was the appointment, brought about by the speed at which bank amalgamations were proceeding, of a committee to consider the question of their effect; its report, issued towards the end of May, made the recommendation, which was afterwards adopted, that in future all such amalgamations should only be permitted after receiving official sanction. In the second half of the year there was hardly any change in monetary conditions, with Treasury bills still on offer at 3!% and the market rate of dis- count steady at about that level. The Government continued to finance itself by means of the continuous issue of National War Bonds, which was highly successful, though it still left a gap to be filled by Treasury bills and Ways and Means advances. The Armistice was granted to Germany on Nov. n 1918.

Thus at the end of the war the money market found itself expected to face the problems of peace in a highly water-logged condition. The gold standard was still theoretically existent, for both Bank of England notes and currency notes were by law convertible into gold on demand, and there was no legal pro- hibition of the export of gold, but the pre-war connexion between the amount of gold in the country and the fabric of credit that could be built upon it no longer existed. New credit had to be continually produced by the Bank of England to finance the inability of the Government to pay its way by taxation or by borrowing of saved money from genuine investors, and on this credit so produced the other banks expanded credit for their customers and so increased the amount of banking money in the form of cheques competing in the purchase of goods and services. Obviously the most efficient check on this process of expansion was reduction of Government expenditure to a point where it could be financed out of taxation and real borrowing. This policy, in fact, had been recommended by the report of a very strong Committee appointed, with Lord Cunliffe as chair- man, in Jan. 1918, to consider problems connected with currency and foreign exchanges during the period of reconstruction and to report upon " the steps required to bring about the restoration of normal conditions in due course."

Its report appeared at the end of Oct. 1918 and stated that " the conditions necessary to the maintenance of an effective gold standard in this country no longer exist, and it is imperative that they should be restored without delay." To secure tkis end the Committee urged that Government borrowing should cease at the earliest possible moment and that a sinking fund should