FROZEN WEALTH
We are now in a position to look more closely into the wealth of the
banks and at their position in the early days of the crisis, and
to regard them from what I call the standpoint of confidence. Many
happenings were foretold years ago by the prophets as the outcome
of a European war, but they never foretold the closing of the Stock
Exchange, nor foretold a moratorium.
I think it will be safe to say that in the closing days of July no
one in this country dreamed that the Stock Exchange would be closed.
I think it will be safe to say that if this had been foreseen, many
would undoubtedly have predicted disaster as its consequence. Though
the Stock Exchange may be regarded by moralists and puritans as the
shrine of Mammon, a place frequented only by gamblers and parasites,
it came home to them, as it came home to the entire nation, that
the institution plays a vital part in our economic organism. If we
destroyed it, we should have to set up a similar institution in its
place. It is the market for the exchange of certain essential species
of the community’s wealth.
The closing of the Stock Exchange not only froze up a considerable
portion of the wealth possessed by banks, but a far mightier portion
of wealth possessed by the general community. The banks could not
liquefy their wealth, and the community could not liquefy its wealth.
Their wealth was useless to both. There was no market for it, and when
markets no longer work, the machinery of exchange, of production and
distribution, works more slowly, and in some directions comes to a
standstill. This was one market, but, as I have said, it was a vital
market. Its closing restricted the power of the banks to liquefy
capital, it restricted the facilities of merchants, tradesmen, and
others to exchange investments for cash, or liquid capital. In other
words, it had the same effect as the destruction of a vast amount of
capital, and trade and employment suffered accordingly.
Banks, therefore, found themselves in possession of unsaleable
securities, those they held as collateral for loans and those in which
their reserve funds were invested. The Stock Exchange owed to them
approximately £80,000,000. Unable, therefore, to realize this wealth
and to call in their loans, their position was considerably weakened.
Then there was that other mass of wealth held as security against
advances to customers, which in such times was also unrealizable. The
market for this class of wealth was practically destroyed. The exchange
machinery came to a stop.
It was inevitable, too, that on the outbreak of so colossal a war,
the foreign exchanges would break down. International trading was
thrown immediately into a state of confusion. It was faced with all
the complicated risks of sea-warfare, contraband declarations, neutral
nation rights, insurance, freights, and the thousand and one unforeseen
difficulties arising from warfare between great maritime nations.
Debtors to this country could not remit money or goods to liquidate
their debts, and debtors here could not redeem their debts abroad.
As pointed out in former chapters, prophets always confidently
foretold that one immediate result of such a war would be a raid on
our gold stores by foreign countries. Our actual experiences showed
how feeble were these imaginings. They were too feeble to foresee the
impossibility of exporting great masses of gold abroad. Our navy would
stop their exportation to enemy countries, whilst risks of capture,
freights and insurance would stop their export to neutral countries. It
was rumoured that the British Government placed an embargo on exports
of gold. This is highly improbable, for the embargoes imposed by the
war were sufficiently preventative; certainly so in the early months of
the war.
But apart from these tremendous difficulties and obstacles, it was
vastly more important to discover that we had greater power to take
gold from foreign countries than foreigners had to take it from us,
thereby again destroying theories. It was revealed that this country
was, indeed, the world’s creditor; that nations were indebted to us,
not we to them. This was why, with few exceptions, notably the French
Exchange, the exchanges went in our favour. This was violently so
with the New York Exchange, which consequently broke down completely.
America was greatly in this country’s debt, and as it could not
liquidate in the ordinary way by buying exchange on London, New
York had eventually to send gold to Ottawa. This, together with our
subsequent huge military purchases in the States, gradually improved
the position, and in a few months the exchange was working normally.
Our banks called in credits from abroad, but our debtors, with all the
good will in the world, could not remit the funds. Not only did this
place the discount and accepting houses in serious difficulties, but
the banks were involved in these difficulties. The wealth, therefore,
which in normal times the banks regard as next to their cash reserves
in matter of quality, was practically of no avail. Bills of exchange
became as frozen as Stock Exchange securities, and naturally enough
the banks forthwith ceased to discount bills. And as the bill brokers
depend on the banks, they could not discount. Moreover, it was useless
at first to call in loans from the bill brokers, for they could not
get the funds. So the deadlock was complete.
What, then, was the most expedient thing for the Government to do in
these unprecedented circumstances? Let things take their course? Let
the problem solve itself? In that direction disaster lay. Even though
the banks might stand up, the nation’s commercial and economic position
could not stand up. Dire confusion would have resulted; ruin would have
followed; there would have been unemployment on a vast scale; and the
nation would have been in an infinitely weaker position than it was to
face and conduct the war. The problem was solved by the moratorium; and
the difficulties and complications arising out of the moratorium were
subsequently removed by degrees by the other measures adopted.
It was impossible for the highest human wisdom to grasp in its entirety
and instantly the vast problem that had to be faced. No guidance was to
be got from tradition or precedent. It was like sudden ruin overtaking
an ordinary prosperous and comfortable household. The disaster not
having been foreseen, and no provision having been made for it, the
head of the household is in a state of bewilderment. He cannot at first
see and think clearly. It is only by force of will and self-control
that he finds a way to battle with his troubles and difficulties, and
to minimize and overcome them.
So with the Government of the national household. It had to exercise
self-control, self-will, act boldly and act firmly, adopting what
appeared the wisest course, not staying to ask what our forefathers did
or would have done. The nation’s ancestors never had such trials and
difficulties to face, such problems to settle.
The only action the wisdom of which I have doubts, was the rapid
advance in the Bank of England rate to 10 per cent. It is possible
that this would have had graver consequences had the bulk of the
public understood the meaning of it. To those who understood it looked
like the symptoms of panic. Fortunately, the bulk of the public did
not understand the significance of it. In its ignorance it regarded
it as something wisely and inevitably done, a greater safeguard
and, therefore, a measure designed to strengthen and not weaken its
confidence in the banking and financial position.
Those versed in its meaning were able to discount its importance. Now,
however, that recent experiences have greatly enlightened the public,
it would be well to take this lesson to heart.
The object of raising the rate was, presumably, to protect the Bank’s
reserve, and to draw gold from abroad. No rate, however, will protect
the reserve in the day of world-wide panic, and no rate will bring
gold here in such a world-war. Scarcely was it raised than it had to
be brought down again. If it had to be legally raised to 10 per cent.
before emergency currency could be issued, the sooner this piece of
red tape is destroyed the better.
However, it is hardly likely that a crisis of the dimensions we have
experienced will recur. Should it recur some generations hence, the
Government in those days will have experience and precedent to guide
them.
Though the greater part of the wealth of the banks was frozen in these
early days, owing to the circumstances I have mentioned, and they had
only their cash wealth to carry them through, there was no panic. The
stability of the banking structure was not assailed by a tempest, and
its position never seemed in real peril. A zephyr might have blown
about it, but not a hurricane. Its foundations never swerved visibly.
Let us recall, too, that the crisis occurred at an unfortunate time
in the days when there are heavy calls upon the banks for holiday
cash. If they paid depositors largely in notes, they fulfilled their
legal obligations, and their action in this respect must be judged in
the light of the legal restrictions on which I have laid emphasis in
former chapters. If depositors had to go to the Bank of England to
exchange their notes for gold, this was no proof of a panicky run on
the Bank of England. Moreover, there can be little doubt that in all
their elaborate scheming prior to the war, the Germans prepared to
start a panic by a fictitious run on the Bank. But this plan failed as
egregiously as their plans to bring about revolution in India and the
colonies.
So far as the depositors were concerned the banks had little need to
claim the protection of the moratorium. The system soon began to work
as smoothly and as perfectly as in normal times.
For all that, it is a pity that years ago the Government did not take
power on its own behalf, or give provisional power to the Bank of
England, to issue legal tender notes of £1 and 10_s._ denomination.
Notes of high denomination are useless for ordinary currency
purposes. The recent crisis has demonstrated, once and for all,
their uselessness. Because this provision had never been made, and
because the country had no machinery for providing small currency in
emergencies, new machinery had to be improvised. This entailed delay,
which, though it had no grave consequences, resulted in needless loss.
It was responsible in chief measure for the prolonged holiday, which
was a joy to some people and a sorrow to others. However, now that we
have the machinery, let us keep it to use, not to abuse. After all,
very little of the new paper currency has been needed.
Having, then, in the crisis only their cash reserves to rely upon,
those reserves which some critics have constantly insisted have ever
been too slender, the banks came through comfortably, successfully,
thoroughly justifying the confidence reposed in them. This confidence
has strengthened as the days have gone by. It shows that confidence is
of greater value than “credit.” Such a statement takes on the aspect
of a paradox. Though wealth was frozen, and though the creation of the
highest class of wealth was greatly slowed down, verging on stoppage,
still confidence remained. This appears to me to be confidence not only
in the soundness of our banking system, but confidence in our entire
economic structure, in the wisdom of Government, in the wealth of the
nation, in the strength of our army and navy, in the holiness of our
crusade, and in the strength of our national character. But would this
confidence remain were our banking system to fall? As Mr. Lloyd George
said in Parliament, the mere knowledge of the currency facilities being
available gave confidence. That is, it strengthened confidence in the
nation’s financial fabric.