another £1,000,000 and on July 31 a third £1,000,000, chiefly for France. On August 7, after a Bank Holiday lasting from August 3 to 6, £230,000 was taken for France. This ended the outward movement, and the tide turned strongly in the other direction. On every

single day for the rest of August the Bank bought gold, the total influx from August 7 to the end of the month amounting to the considerable sum of £18,500,000. Of this amount, which, as I have said, includes the receipts at the depositories, £7,900,000 was in United States gold coin, £7,200,000 in bars, £2,000,000 in sovereigns from the Indian Reserve in London, and £1,400,000 from South America (Argentine, Brazil and Uruguay). Nothing was received from any other source. During September the inward flow continued, tho at a reduced rate. Up to September 19 a further amount of £5,400,000 had been received, of which £2,400,000 was in United States gold coin and £3,000,000 in bars.


While the Bank of England's gold position has been on the whole in accordance with anticipations, in one very important respect the City of London was taken unawares, tho, in the light of what has happened, it would be hard to maintain that events have followed an unnatural course. From this all our chief difficulties derived their origin. No one, I think, had put to himself beforehand, with sufficient obstinacy and scientific curiosity, the questions, what will happen

if on a very large scale our foreign creditors cannot pay? what reactions would such an occurrence exert upon the whole of our internal financial system?

This, nevertheless, was the situation which, even before the actual declaration of hostilities, plainly and

threateningly disclosed itself. Not only did the citizens of combatant and enemy countries fail us, and the merchants and municipalities and governments of South American countries with whom to default was but to put on again an old and favorite suit of clothes, — but the bankers of the United States, prosperous, free from panic, and far from the scene of hostilities, were unable for the time, from the difficulties and expense of shipping gold, to remit in full what they owed us and what we depended on receiving from them. Almost all the emergency measures which it was necessary to adopt in London were directed towards abating the dangers threatened to the whole financial structure of the City by the failure or inability of foreigners generally to remit to us what they were under an obligation to remit. The clue to the difficulties of the City of London is to be found in the reactions of a breakdown in the remittance system on her internal financial structure, and in the consequent embarrassments of those elements of the money market through whose agency shortperiod loans to foreigners are chiefly contracted.

The foreign obligations immediately due to London were mainly on account of bills accepted in London, either by London houses or by the London agencies of foreign banks, or on account of stock exchange transactions carried forward there on behalf of foreign clients. There were also substantial sums on direct loan with the London agencies of foreign banks, of which the two great German institutions, the Deutsche Bank and the Discontogesellschaft, turned out to be the most important. Impending, but not so immediate, there were the usual payments due on former permanent loans, together with instalments on account of repayment of capital, and (this was chiefly important in connection with the United States) a considerable

volume of short-period loans, temporarily contracted with a view to funding later on, but due for discharge before the end of the year.

For the payment of these various forms of indebtedness as they fell due, foreign creditors had mainly relied either on renewing them on much the same terms as before, or on turning them into funded debts, or on ultimately shipping goods or international securities to meet them.

As soon as war became imminent, it was clear that London would not renew or fund debts falling due, at any rate for some time.

It was utterly impracticable to find a market for commodities to an equivalent value, even if they had been immediately available and if the dangers of the war had not restricted shipping facilities. The commercial remedy, therefore, as is always the case, had to work very gradually, and was of no use for meeting the emergencies of financiers.

The financial remedies, on the other hand, which are generally available in some degree when it is temporarily impossible to renew loans abroad, are the sale of international securities and the actual remittance of gold. The first of these was put completely out of action by the closing of the world's stock exchanges. The second was rendered impossible on any sufficiently large scale, for reasons we have discussed above. Even, therefore, where the foreign debtor was immediately solvent in his own country and able to raise there the funds required to meet his liabilities, he was unable for the time to remit them.

When the technical difficulties of remittance were overcome, there remained important cases in which foreign debtors remained unable to pay, enemies, for example, whose debts were necessarily irrecoverable

until the end of the war, and countries, of which Brazil was the chief, which had counted upon meeting their engagements from the proceeds of fresh loans and were quite unable to meet them otherwise.

In part, therefore, from the necessities of the case, and in part because London, whether wisely or not, put on the brake so suddenly as to endanger the equilibrium of the whole machine, the first, most striking, financial consequence of war was the extreme embarrassment of those elements of the money market, which were owed sums from abroad. What were the reactions of this on the City of London as a whole ?


To a certain extent individuals, firms, and institutions in England, which have surplus funds available for temporary deposit, place them direct with Angloforeign banks, having their head offices in London, and even with the agencies of foreign banks, having branch offices there. On such deposits perhaps 2 per cent at call and 4 per cent at notice can be obtained, which is appreciably more than is ordinarily allowed by the discount houses or joint stock banks. The sudden locking up of many of these deposits caused much individual inconvenience, and a good many companies which had actually declared dividends were unable to pay them on account of having lost control over the deposits which they had intended to use for this purpose, thus adding involuntarily to the general feeling of distrust.


But this was not the main source of trouble. great bulk of the floating funds of the country are placed with the joint stock banks, the assets of which may be estimated, to take a round figure, at about

£1,000,000,000. One or two of these banks have lately opened foreign departments for the direct transaction of foreign business generally, and one at least is somewhat intimately connected with American business. For the most part, however, these banks do not lend their funds abroad direct, but through the agency of one or more intermediaries.

The most important of these intermediaries are the accepting houses, who have in effect guaranteed that the bills, held by the banks in their portfolios, will be met at maturity. To a large extent, of course, the accepting houses are acting on behalf of British clients. But on an important scale the London accepting houses accept bills arising out of transactions both parties to which may be foreigners. These houses, that is to say, guarantee the bills in return for a commission, reckoning on their foreign clients' putting them in funds to meet the bills at maturity. This accepting or guaranteeing business is quite distinct from the business of advancing the capital with which the bills are carried.

When the remittance system broke down, therefore, the first people to be in trouble were the accepting houses. Their foreign clients defaulted for the time being on a wholesale scale, and as the liabilities of the accepting houses greatly exceed their free assets, they were utterly unable to meet their engagements.

The banks found themselves, therefore, with their bills, which they usually regard as amongst their most liquid assets, suddenly turned into a non-liquid asset. The total volume of bills outstanding has been estimated at £350,000,000. The amount held by the joint stock banks, apart from the discount houses and Angloforeign banks, is not separately stated. I have estimated it as standing, for the leading banks, somewhere between £100,000,000 and £125,000,000, or perhaps 15 per cent of their total assets.

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