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.

II

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

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 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.

source.

III

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