importance for the social sciences is that which deals with the springs of human action, the impulses and motives that sustain mental and bodily activity and regulate conduct; and this, of all the departments of psychology, is the one that has remained in the most backward state, in which the greatest obscurity, vagueness, and confusion still reign." 1

Happily, the preceding reviews justify the belief that this situation is changing for the better. For Parmelee and Thorndike, Wallas, Veblen, and Lippmann, even in a measure Sombart and Walling, are endeavoring to explain how men act. Studies of tropisms, reflexes, instincts, and intelligence; of the relations between an individual's original and acquired capacities; of the cultural roles played by racial endowments and social institutions are vastly more significant for economics than classifications of conscious states, investigations of the special senses, and disquisitions on the relations between soul and body.

It was because hedonism offered a theory of how men act that it exercised so potent an influence upon economics. It is because they are developing a sounder type of functional psychology that we may hope both to profit by and to share in the work of contemporary psychologists. But in embracing this opportunity It will cease

economics will assume a new character. to be a system of pecuniary logic, a mechanical study of static equilibria under non-existent conditions, and become a science of human behavior.



1 W. McDougall, An Introduction to Social Psychology, pp. 2, 3.




I. Peculiar position of Great Britain, a creditor country, as regards external payments, 48. - II. Depositories opened by the Bank of England outside Great Britain, 50. — III. Obligations by foreigners not paid, 52.- IV. Embarrassments of accepting houses, discount houses, joint stock banks, 55. — V. Stock exchange closed, 58; Bank of England guaranteed by Government against loss on bills taken over, 60; the bank rate kept moderate, 60.— VI. Possibility of internal drain, 64; Bank act suspended, 65; Currency Notes issued by Government, 66; extent of additional issues, 68. VII. Conclusion,



THE peculiar relation of Great Britain to the international money market has again enabled the Bank of England to accomplish without the support of a large gold reserve what has been beyond the power of the great state banks of Europe in spite of unexampled gold hoards. The Bank of England alone met the catastrophes of August, 1914, without a suspension of specie payments and without availing herself of emergency privileges. A greater leniency than usual, supported by a guarantee from the Treasury, in regard to the character of the bills taken over from the outside market, was the only respect in which she departed from her usual courses. So happy a result may be attributed partly to an obstinate, conservative courage; but chiefly to the peculiar position of Great Britain in

1 In an article published in the Economic Journal, September, 1914, I have attempted to deal generally with the financial situation in England during the first month of the war. In this article I shall treat more particularly of the relations of the City to the Bank of England.


the international money market, referred to above. large part of London's difficulties, however, as well as her strength, arose, as we shall see, out of this same peculiarity.

In a general financial crisis, whether due to war or not, there are two separate problems, namely, due provision for the internal currency and due provision for external payments, of which the second is in general the crucial one. The question of the internal currency I postpone for the moment. It is the position of Great Britain in respect of external payments in case of sudden emergency, which is peculiar. This is a commonplace of the subject. Great Britain is a creditor nation, not only in the sense that she has large permanent foreign investments and an annual balance available for increasing them, but also in the sense that she habitually loans to foreign centers large sums of money which are repayable at short notice. It is always within her power, therefore, by refusing to renew these loans, to turn the immediate balance of indebtedness in her favor. The central bank of a country which in this second sense is on the whole a debtor and not a creditor, must clearly, if it is to be certain of always being able to meet international obligations and to maintain the local currency at parity, keep a much larger reserve of gold than a country which, even if it is temporarily in the position of debtor, can quickly turn round and become creditor.

It has

All this, as I have said, is a commonplace. been the reason and justification for the Bank of England's holding one of the smallest gold reserves in Europe, while building up on the basis of it the largest volume of business.

Broadly speaking, reasonable anticipations based on this have been borne out by the event. For the first week or two we should have felt somewhat easier in our

minds if gold reserves had been a little larger; but this psychological relief, which the courage of the Bank was fortunately able to do without, would have been the extent of the gain. Thus the fears of many former critics regarding the low level of London's gold reserves have not, on the whole, proved well-founded, even on an. occasion when the whole structure of her financial system has received a blow of maximum severity.

This then is the first salient fact. Within a week of Austria's declaring war against Servia (July 28, 1914), all the world found themselves owing money to London. There was no danger that any country would be able to take gold from the Bank of England in appreciable amounts, and most of those whose central banking authorities were able and willing to release gold found themselves under the necessity of remitting it. Altho some authorities are reputed to have believed at the outset that the Bank of England would not be able to avoid a suspension of specie payments, there was never any reasonable occasion for such a measure. Whether it is wise even for a debtor nation to suspend specie payment, so long as any substantial quantity of gold is left, may be doubted. That it is not the course for a creditor to pursue, is certain. It did not take long, therefore, to discover that the Bank of England was perfectly free from this particular danger.


The Bank's difficulties arose, indeed, from an opposite source. The other combatant countries, in spite of the enormous gold reserves which they had laboriously accumulated, suspended specie payments immediately, desiring, we can only suppose (unless they intend to reverse their policy later) to keep something in hand

wherewith to pay an indemnity. Brazil and Argentine, slow to learn the spirit of sound currency, soon prohibited the further issue of gold from their Offices of Conversion. Only India, South Africa and the United States were left, at the same time possessing much gold and prepared to part with it. And from all these countries in the early days of the war high charges for insurance rendered the carriage of gold by sea prohibitively expensive.

This state of affairs was met by the Bank in a bold and striking manner by opening depositories for the receipt of gold outside Great Britain. At Ottawa and at Johannesburg the authorities of the Colonial Governments were authorized to receive gold on behalf of the Bank of England. As part of India's gold reserve is held in London (tho quite apart from the Bank of England's reserve), immediate steps of this kind were in her case unnecessary. But it may be expected that a depository will be opened at Bombay if it is required.

Altho it has not been explicitly stated that gold received at these depositories is included in the weekly statement of the Bank of England's reserve, there is no doubt that such is the case. The Bank Act does not prescribe the location of the gold in the Issue Department. It has commonly been the practice to lodge large quantities at the Mint, outside the Bank's own walls. Tho the opening of depositories elsewhere within the British Empire constituted an unexpected extension of this principle, there was nothing in it, I believe, contrary to the pre-existing law.

The actual figures of the movement of gold into and out of Great Britain are worth notice. On July 22 the Bank of England held about £40,000,000 in gold, — a normal amount. On July 29 about £1,000,000 in sovereigns was taken for the Continent, on July 30

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