re-discount, and the increase during this week would have been greater if it had been physically possible for the staff of the Bank of England to deal with a greater volume of documents. By September 2 this movement had spent itself. The money market had been relieved by this time of the greater part of the bills, the payment of which at maturity was held in most doubt. The banks also were beginning to feel the burden of keeping so much money idle at the Bank of England, their inflated balances there earning them no interest at all. The rate for short loans in the open market was driven down by this weight of floating funds to a very low level, and it came to be realized that bills could be kept without risk until a date nearer their maturity before being sent in to the Bank of England, and that such delay brought with it a saving at the rate of 5 per cent per annum. Through these causes the volume of bills brought to the bank between September 2 and September 16 was less by about £8,000,000 than the volume of old bills falling due and paid off.

The bank rate was raised from 3 per cent to 4 per cent on July 30. This small change did nothing to check the rush for accommodation which had begun a few days earlier, as the action of the joint stock banks was forcing the rest of the market to realize their bills at any cost. Accordingly on the following day, Friday, July 31, the bank rate was rushed up to 8 per cent and on Saturday, August 1, to 10 per cent. These unprecedented movements served no useful purpose, and only caused a great fright by raising unfounded apprehensions that accommodation would be cut off altogether. When the Bank reopened, after the prolonged Bank Holiday, the mistake was at once corrected, the rate being lowered to 6 per cent on August 7 and 5 per cent on August 8.

Apart from its effect on the profits of individuals and on the business world's subjective feelings of confidence or of the want of it, the precise level of the bank rate possessed during August little of its usual significance. Movements of the bank rate are normally directed towards influencing the action of the discount market in taking up bills, and thus correcting any undesirable tendencies in the exchanges or in the balance of immediate foreign indebtedness. During August such in

direct pressure was was not required, the discount market was doing no business in any case. It may be remarked that the interest allowed by the banks on deposit accounts and the rates for bank bills in the open market did not stand in their usual relation to bank rate. Bank rate simply represented the price charged by the Bank of England, in this case little more than an agent for the Treasury, for taking over from the banks and discount houses the bills of which these institutions did not like the look.

The volume of the "other deposits " at the Bank of England cannot be substantially reduced, until the bills, which swell the "other securities," or (under the new arrangements) the Bank of England's loans to the accepting houses, are paid off. Other transactions, unless they involve a drain of cash from the bank of England, merely affect the names to the credit of which the other deposits stand. At present the banks are showing excessive caution rather than the reverse. They must be careful in the future not to allow their swollen credits at the Bank of England to lead them to create, on the strength of these, too large a superstructure.

VI

All that we have said so far has been connected, directly or indirectly, with the international monetary position of London. We must now turn to the strictly domestic question of the internal currency.

The number of bank offices in Great Britain and Ireland is about 9,000. The amount of cash held by the banks, at the outbreak of war, in excess of normal tillmoney requirements, cannot, according to my estimate, have exceeded £20,000,000 and probably fell short of this. From their internal reserves, therefore, the banks could not strengthen their till-money by an average of more than about £2,000 per branch office. The total reserve of the Bank of England stood, when war began, at about £27,000,000, or, say, £3,000 per bank office. It has always been clear, therefore, that a serious run on the banks by their depositors could not possibly be met without the issue of an emergency paper currency. As a matter of fact, the British depositor never showed any inclination to run on his bank. newspapers told him that it would be foolish and unpatriotic to do so; and a combination of phlegm, habit and public spirit kept him to his normal courses. The very small reserves mentioned above, if they had been used boldly, would have been more than ample to meet all the extra demands for currency.

The

The Post

Office Savings Banks, it may be remarked, cheerfully remained open for withdrawals even during the prolonged Bank Holiday from August 1 to 7 without suffering to any important extent.

The joint stock banks, however, felt themselves to be in a weak position and were not willing to credit their depositors with as much good sense as the latter actually

showed. As early as July 31st the banks themselves began to run on the Bank of England, and with the utmost foolishness to make unnecessary difficulties about supplying applicants with gold. On July 31st and the following day there were queues of persons outside the Bank of England waiting to cash £5 notes which had been forced on them against their will by their bankers. The Bank of England of course changed these notes into sovereigns as quickly as was physically possible.

August 2 was a Sunday, and August 3 happened to be the day of the usual August Bank Holiday. It was clearly desirable in the circumstances to make arrangements for the issue of some form of emergency paper currency. For this purpose, therefore, and to allay the fears of the banks, the Bank Holiday was prolonged until August 7. When the banks reopened on that day, they had been protected against unreasonable demands on the part of their depositors as it turned out, unnecessarily by the general Moratorium Proclamation; and two forms of emergency paper currency had been authorized.

The first of these was of the old fashioned kind: the Bank of England was authorized to exceed its fixed fiduciary issue. The circulation of bank notes, that is to say, might exceed the gold held against them by more than the statutory maximum of £18,450,000. This measure is commonly described as a Suspension of the Bank Act," altho it in no way permits the Bank to suspend specie payment, the bank's obligation to redeem its notes in gold on demand remaining in full force.

As things turned out, the Bank of England never had occasion to avail itself of this permissive power. The fiduciary issue never exceeded £9,000,000 and was,

On

therefore, well within the normal maximum. The suspension was merely precautionary. It is to be noticed, however, that for the first time parliamentary authority for such a step was taken in advance. former historic occasions the Prime Minister and the Chancellor of the Exchequer have promised the Governor of the Bank an act of indemnity. This time whatever may have been the assurances given to the Governor privately during the first week of the crisis — a clause was inserted in the Currency and Bank Notes Act, 1914, as follows; - "The Governor and Company of the Bank of England and any persons concerned in the management of any Scottish or Irish bank of issue may, so far as temporarily authorized by the Treasury and subject to any conditions attached to that authority, issue notes in excess of any limit fixed by law."

The avoidance of an excess circulation of bank notes is mainly to be attributed, however, to the second form of emergency paper currency authorized. This was of an altogether novel type. £5 notes obviously cannot take the place of sovereigns as the chief circulating medium in the country. £1 and possibly 10s. notes were, therefore, necessary. Altho every one who had thought about these questions at all knew that £1 notes must be required in any severe crisis, no steps had been taken to print any such notes in advance, or even to decide who was to issue them or what form they were to take. The absence of any notes ready printed was the occasion of a very inconvenient delay. Further, when the notes appeared, they were printed on un-gummed postage stamp paper (of which alone a sufficient quantity existed suitably watermarked) and were of so rough an appearance (no part being engraved) that some amateurs amused themselves by forging one or two "as a memento." This unreadiness, however,