CHAPTER XXII

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.