vided by the other banks, this warning did not suffice, the Bank of England was accustomed to take further action by borrowing aoney itself in the market and so artificially restricting the supply. By this means the level of rates in London was raised, with the result in normal times that a demand for bills on London was stimulated among foreign capitalists who wanted to lend funds there, the exchanges turned in London's favour, the threat of gold exports was reduced and, if the policy was maintained with sufficient determination, gold imports finally resulted, thus materially reinforcing the basis of credit.
Effect of the World War. Such was the delicate machine into vhich war crashed like a bomb into a greenhouse. Its effects were immediate, and began, in fact, some days before a shot had been exchanged on the field of battle. England declared war on Tuesday, Aug. 4, but on the preceding Friday, July 31, the London Stock Exchange, which had remained open for business all through the Napoleonic wars, decided that it had to close before this war had even begun. The bourses of continental Europe had already set the example and the London Stock Ex- change, which had been subjected to an enormous flood of continental selling, was unable to continue alone to bear the brunt of these realizations. It should be noted that the New York Exchange, though it was not then the international market that it has since become, but chiefly confined its operations to dealing in American securities, immediately followed London's lead. The effect on the banking position of the closing of the market in securities was twofold: In the first place the banks were unable to increase their cash resources by realizing their investments; in the second place they were unable to call in loans from stockbrokers and other customers who had given Stock Exchange securities by way of collateral pledge, owing to the inability of the borrowers to realize their security.
Thus one of the banking assets, which had been regarded as more or less liquid, had become unrealizable and frozen partly, perhaps, owing to the action of the banks themselves, which were said to have increased the pressure of realization on the Stock Exchange by ruthless calling-in of loans, thus compelling their customers to sell securities pledged. This freezing process de- veloped rapidly. The market in foreign exchange was already in a demoralized condition, and the consequence was that for- eigners who owed money to England were unable to remit it, however hard they might try.
It has already been explained that, owing to the great inter- national acceptance business which London has developed, the London banks and accepting] houses accepted bills drawn by foreigners against shipments of goods from all parts of the world to England or in many cases from one oversea country to another, while a certain number of bills were also drawn, not against shipments of goods at all, but sometimes in anticipation of such shipments and sometimes merely in order to create credit against the wealth and prestige of the parties. The solvency of the London accepting houses thus depended to a certain extent on the ability of foreign customers to remit funds for meeting bills of exchange at their due date. Even when bills had been accepted on behalf of an English customer, who had arranged the credit for a foreigner, the position was almost equally unpleasant, because the British customer might be unable to supply the acceptor with the necessary funds if the foreign drawer was un- able to remit. Thus the break-down of the machinery of foreign exchange inflicted a twofold blow upon the banks, because it raised considerable doubt concerning the value of the bills of exchange, which, as has already been shown, formed an asset on the highly liquid nature of which they had been wont to rely, and it also affected them as large acceptors themselves.
With their investments thus locked up by the closing of the stock market and their loans against securities an unrealizable asset and many of their bills of exchange a doubtful quantity, the London banks found themselves faced with an abnormal demand for cash on the part of the public. An extra demand for cash is, of course, usual during the last days of July, when many people are preparing to start for a holiday of many weeks and a still greater number are taking advantage of the Bank Holiday at the
beginning of August for a few days' change. And some witnesses of this crisis have maintained that the public did not lose their heads and run upon the banks, but only asked for their usual cash requirements for the holiday; in some cases, however, bankers have admitted that the public were certainly taking more than usual, in the belief or delusion that their money would be safer in their own keeping than in that of the banks. And there is at least no doubt that the banks, very naturally frightened by the freezing of their assets, forgot or ignored the old banking tradition of meeting an abnormal demand for cash with the ut- most readiness to pay it out in whatever form the public wished, and met the demands of their customers wholly or partly in Bank of England notes. This they were quite entitled to do, since Bank of England notes are legal tender, but since these notes were for sums of not less than five pounds they were an obviously inconvenient form of currency for holiday makers and there was consequently a crowd of applicants at the Bank of England wanting to change notes into gold.
One effect of the crisis which marked the beginning of the war was thus to cause a heavy drain on the Bank of England both for notes and gold, with the result that in the two weeks from July 24 to Aug. 7 the reserve of its banking department was reduced by nearly 20 millions and was brought down below 10 millions, though for many years previously 20 millions had been regarded as its danger-point. During the same period the Bank's stock of bullion in both departments was reduced by 12 j millions. At the same time demands upon it for advances and discounts were on a very large scale and its holding of other securities rose by nearly 32 millions. It was thus evident that special measures had to be taken for suspending the usual restrictions on the Bank's power to do business, and preparations were made for a suspen- sion of the Bank Act, because it limited the amount of notes which the Bank was empowered to issue against securities. According to precedent this suspension could only be granted if Bank rate were raised to 10%, and consequently the public, whose nerves on the subject of finance were already sufficiently on edge, were startled by a rocket advance from 3 to 8 in Bank rate on Friday, July 31, and a further advance to 10% on Satur- day, Aug. i. This development was the more terrifying because movements in Bank rate on any other day but Thursday, or of more than i % at a time, are quite exceptional. At the same time the belief that the Bank of England would always meet a crisis by lending freely was disproved by its action in refusing to lend money to bill-brokers who were being pressed by the banks to repay the loans and advances on which they relied as part of their working resources, though this refusal on the part of the Bank of England to provide emergency credit was only main- tained for a very short time.
These chaotic conditions clearly had to be met with stronger measures than a mere suspension of the Bank Act. It has already been shown that five-pound notes are of very little use for ordinary currency purposes and that paper money of a smaller denomination was required in order to check the demand for gold. The measures taken included the prolonging of the August Bank Holiday for four days, during which, by reassuring statements from leading politicians of both parties, the publics' nerves, which had been unnecessarily shattered by too much respect for precedent, were soothed into composure. The Cur- rency and Bank Notes Act of 1914 was passed, which suspended the Bank Act of 1844 by empowering the Bank of England and other banks of issue to issue notes " in excess of any limits fixed by law " so far as temporarily authorized by the Treasury and subject to any conditions attached to that authority. According to its published weekly returns the Bank of England never took advantage of this authority, its fiduciary issue being never shown above the 18,450,000 authorized under the terms of the Bank Act (1844). But it was stated by Mr. Asquith in Parliament in Nov. 1915 that there had been an excess issue of 3,043,000 above the legal limit during the crisis. The most important provision of the 1914 Act, however, was that which allowed an issue of i and IDS. currency notes by the Treasury which were to be legal tender in the United Kingdom for the payment of any
