The

was a not altogether undesirable symptom. minds of those in authority should be equipped beforehand, but it is not a bad thing that their measures should be improvised. Altho I was inclined to criticize the plan actually adopted when it was first adumbrated, I believe this plan, as it eventually worked out in practice, was better than what would probably have been devised, if, necessarily without reference to the precise circumstances of the moment, a plan had been arranged in advance by some Committee.

This plan was for an issue of £1 and 10s. notes, not by the Bank of England as was generally expected, but by the Treasury. The notes bore the signature, not of Sir John Nairne the Chief Cashier of the Bank of England, but of Sir John Bradbury the Permanent Secretary to the Treasury. They were declared unrestricted legal tender and were encashable for gold only at the head office of the Bank of England as the Government's agent. The public made no trouble about accepting the notes; at first indeed, through motives of curiosity and as a result of a newspaper campaign in their favor, the demand for them in place of sovereigns was in excess of what the printing presses could supply.

These notes are quite outside the Bank Act and have no relation to the Bank of England's note issue or reserve. They do not appear anywhere in the Bank of England's weekly returns and are the subject of a separate statement by the Treasury. Their issue

obviated the necessity of any excess issue of notes by the Bank of England, altho as matters turned out the latter would have been small in any case, as the volume of Currency Notes only exceeded the Bank of England's reserve of unissued bank notes for a few days.

The most interesting feature, however, of these Currency Notes, as they are called, is their method of

regulation. By the Currency and Bank Notes Act, 1914, the Treasury is given extraordinarily wide powers. According to Clause 2," Currency Notes may be issued to such persons and in such manner as the Treasury direct," and there are no specific rules whatever governing the reserve, if any, to be held against them. The actual course followed by the Treasury has been as follows.

In the first instance the Currency Notes were issued as a loan to the Scottish and Irish Banks of Issue, the joint stock banks, the Post Office Savings Banks, and the Trustee Savings Banks. The loans were at the rate of 5 per cent and were, in virtue of a provision in the act, regarded as a floating charge in priority to all other charges on the whole of the assets of these institutions, which were not required to deposit any specific security. The Treasury announced that they were prepared to issue these loans to the banks for an amount up to 20 per cent of their liabilities on current and deposit accounts.

Thus several important objects were served at the same time. The banks were reassured as to their capacity to meet any reasonable claims on the part of their depositors, their depositors were reassured by the appearance of a sufficient supply of serviceable legal tender money, the Bank of England's stock of gold was conserved, and the necessity of an excess issue of bank notes, with the ill effect of this on the appearance of the Bank return and of the Bank's reserve, was avoided.

The only danger lay in an excessive use of the new facilities. As a matter of fact the additional issues of currency were on a very moderate scale. The principal figures are given below. In addition, some new silver coinage (not to an important amount) was issued from

the Mint, and, for a short time pending this, postal orders were legal tender.

During the same period the net amount of gold passing into the Bank of England from abroad was £19,254,000.

Unfortunately it is impossible to distinguish between what was taken by the banks to strengthen their tillmoney at their 9,000 branches, and what went into the active circulation. The above figures are for the two taken together. It is probable, however, that a considerable part of the total issues of £37,500,000 remained with the banks, which naturally desired to have rather more cash in hand than usual. A part of the remaining issues were due to the large cash payments made by the War Office. The figures show that there can have been no significant amount of hoarding by private persons. Compared with the enormous issues of paper currency abroad, the above figures are very small.

As we have seen, the notes were issued in the first instance to the banks. But when a few days later they were put in funds at the Bank of England through the great volume of pre-moratorium bills discounted there under the Treasury's guarantee, they no longer had need of the Currency Note loans as well. Accordingly they paid off these loans by transferring credits at the Bank of England from their own names to the Public Deposits. The notes, which had been issued

to the public over the counters of the banks and the post offices, remained nevertheless in circulation.

The question soon arose, therefore, as to what, within their unfettered discretion, the Treasury was to do with these credits at the Bank of England. At the date of issue of the first Currency Note return, £11,400,000 had been repaid in this way and was left standing, for the moment, to the credit of what was termed the "Currency Note Redemption Account" at the Bank of England. By the date of the next return, a week later, £11,000,000 was represented by "Government Securities," i. e. had been taken in aid of the Exchequer balances; but, as the repayments by the banks had continued, there was still £5,900,000 to the credit of the Redemption Account at the Bank of England. During the next week the important step was taken of "earmarking," i. e. removing from the Bank of England's reserve into a separate account, £3,000,000 in gold. On September 16 (the date of the latest return available at the time of writing) the balance sheet stood as follows:

Notes outstanding, £27,416,932. Advances to Bankers...

£1,514,200

Probably more gold will be "earmarked" in the near future, and the fiduciary character of the issue gradually diminished.

VII

This completes a brief and necessarily incomplete account of the main factors influencing the relation of the Treasury and the Bank of England to the rest of the money market and the City of London generally.

Much detail has been omitted and, in particular, the difficulties of the stock exchange have received but cursory notice.

On the whole it may be fairly maintained that the financial system of the City has stood the shock to which it has been subjected. The errors which have been made have been due to over-timidity and a failure on the part of some, especially in the early days, to credit this system with the high degree of stability it has actually shown. The only real, substantial trouble has been the position of the bill market and the difficulties of the accepting houses. The main object of most of the other emergency measures has been to allay fears which, with more knowledge and more courage on the part of those who felt them, need not have arisen.

Those who were most at fault in this respect were, in the opinion of many (tho they have their defenders), the joint stock bankers. I must not pause now to consider the root causes of this, which are to be sought in the play of personalities and factors of historical growth. We wanted, in the first week of August, some one of the calibre of the late Mr. Pierpont Morgan to bully the bankers and tell them where their duty (and at the same time their interest) truly lay. However, this was a passing phase. The staunchness of the Bank of England, the traditions of which have needed amazingly little adaptation to fit them to new circumstances, and the practical good sense and sanity of the Treasury, prevented permanent harm from being done. We in Great Britain look forward to the financial future with confidence.

KING'S COLLEGE, CAMBRIDGE, ENGLAND.

J. M. KEYNES.