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and appropriate them to his own use — let it be clearly
understood that he is assisting the enemies of his native
land, and he is assisting them more effectively, probably,
than if he were to take up arms."

The Chancellor of the Exchequer proceeded to an-
nounce the introduction into circulation of treasury notes
in denominations of pounds and half-pounds (ten shiUings)
to increase the volume of currency. These were to be
convertible into gold at sight at the Bank of England.
The government expected to have such notes to the extent
of ^3,000,000 ready to be placed in circulation Friday,
August 7th, upon the reopening of the banks, and this
supply would be increased at the rate of ^5,000, 000 daily.
The entire issue of these notes was limited in amount to
20% of the aggregate deposits of all the banks in the
United Kingdom, in other words, the approximate sum of
j^200,000,000. They were actually issued to the extent

402 The Great War

of about j^54,000,000. The government advanced them
to the banks at 5% interest. At the same time postal
money-orders were declared legal tender as an additional
contribution to the available currency.

The economic situation of Great Britain, particularly the
dependence of the country on imported supplies, makes
the continuation of regular communications by sea a vital
problem in time of war. A sub-committee of the Com-
mittee of Imperial Defense had had under examination
for more than a year a method for insuring war risks on
merchant shipping. Mr. Lloyd George went over the
whole plan on Saturday, August 1st, with a group of lead-
ing representatives of the shipping interests. Most of the
British overseas shipping was insured by three large mutual
associations. But the insurance thus provided only covered
the vessels in case of war until they reached the nearest
British port. As a result of the deliberations mentioned
the government adopted an arrangement by which it under-
took to reinsure 80% of the risk on voyages begun after
the outbreak of the war, receiving the corresponding pro-
portion of the premium, for which the maximum of about
5% was established (really five guineas per £,100). But
in actual practice the associations, which in any case were
to retain 20% of the risk, continued generally to carry the
entire insurance, and the rate fell to 3% or lower. A state
insurance office was established for insuring cargoes.

The government guaranteed the Bank against any loss
from discounting bills drawn before August 4th, and this
assurance covered the bills drawn on German and Austrian
houses. Accordingly, the Bank of England not only ex-
tended its credit once more to the discount houses, but
invited the people who held the German and Austrian
bills to turn them in and receive their cash. Two of the
joint-stock banks actually refused to rediscount these bills



having confidence in their ultimate redemption h}- the
debtors themselves.

The Germans have complacently regarded their struggle
with the British as the modern counterpart of the conflict
of the Romans and Carthaginians. But the modern nation
of shopkeepers gives proof at times of a quality of un-
daunted assurance singularly like the sturdy self-reliance
which was nourished of old on the Alban and Sabine hill-
sides. The spirit of confidence which could regard bills
on the enemy as the equivalent of cash recalls the unwav-
ering steadfastness of the Romans who competed in auction
for the field where Hannibal was actually encamped out-
side their city.

The banks opened Friday, August 7th, with the Bank
of England's discount rate at 6%. It fell to 5% the next
day. Signs of nervousness rapidly diminished. The cir-
culation of the new notes concurrently, and at parity, with
gold was remarkable evidence of confidence and stability.
With the renewed financial assistance of the banks the
dealers in bills of exchange were able to resume activity,
and this set in motion the processes of international trade
by restoring the encouragement and support of credit.

At the beginning of the war the floating indebtedness
of the United States to Great Britain amounted to about
$350,000,000. When London required all its available
resources to face the crisis and pressed its debtors abroad
for payment, the demand for London exchange rose so
high in New York that the price became practically pro-
hibitory. Gold shipments were inadequate to relieve the
situation. In this emergency the Bank of England arranged
for the transference of gold from the United States to the
care of the Canadian Minister of Finance in Ottawa, thus
avoiding the difficult)^ and danger of trans-Atlantic ship-
ments. Many neutral countries, particularly those in South


The Great War

America, were impelled to establish moratoria by the fear
that their metal reserve would be rapidly drained off into
the vortex of the London money market.

The following table presents a summary of the move-
ment of affairs in the Bank of England at various intervals
during the critical month beginning July 29th, the figures
representing millions of pounds.






5 19









Cash reserve





Discounts and loans

Notes in circulation . . .





Treasury accounts. . . •










These figures reveal the rapid depletion of the reserve
between July 29th and August 5th, and this tendency will
appear all the more startling if we reflect that the Bank was
open for business only three days of these seven, namely,
Thursday, Friday, and Saturday, July 30th to August 1st
inclusive. The weekly statements of the Bank of England
are drawn up every Wednesday after banking hours, and
furnish the basis on which the directors determine the bank
rate for the ensuing week every Thursday morning. After
the crest of the wave of apprehension had passed, the reserve
steadily increased throughout the month. The unusual
demand for cash is exhibited by the remarkable expansion
of discounts ; but this movenient had its counterpart in the
growth of deposits which more than offset it. The very
slight increase in the circulation of notes is in marked con-
trast with the corresponding tendency in the other bellig-
erent nations. The treasury account consists of the public
deposits of the various departments of the government

Lint waiting in the courtyard ot tlic Bank ot Englami to change notes into gold during the

first week of Atigust, 1914-

Crowds in tinanciai district, London, during tile days ot tension.

Mobilization of Financial Resources 405

which are administered by the Bank of England as the
government's banker.

During the early stages of the conflict the British gov-
ernment obtained the necessary funds for conducting its
military operations, as authorized by the extraordinary vote
of supply of August 7th, by borrowing from the Bank, and
issuing short term treasury notes. On August 19th the
government issued such notes for the sum of ^15,000,000
($72,900,000) maturing in six months at S"^^ interest, and
again on the 26th the same amount at 'iy^%.

In considering the financial resources of France we must
always keep clearly in mind the proverbial instinct of
economy of the French people, the very general distribu-
tion of the national wealth, — three-fourths of the families
are proprietors of their homesteads, — the very extensive
foreign investments, and the comparatively small excess of
imports. Financial tendencies reflect the spirit of a nation
of small capitalists. The French are very cautious inves-
tors as compared with the English. In the foreign field
they usually prefer government bonds and municipal obli-
gations with a fixed though modest return rather than
speculative securities, such as industrials, which may yield
a larger revenue, but are less trustworthy.

The ministries of finance and foreign affairs exercise a
supervision over the listing of foreign securities on the
Bourse, or stock exchange. But investors have at times
been misled and considerable French capital has been im-
mobilized in consequence of the improvidence or political
designs of these ministries, whose authorization for the
listing of securities is commonly regarded as a sort of offi-
cial stamp of approval or endorsement.

The principal function of the French banks, as of the
English, consists in supplying commercial credits, although
the range of this activity as regards the international field is

406 The Great War

very much more restricted than in London. The reports
of four leading banking houses with branches all over
France, the Credit Lyonnais, Societe Ghierale, Comptoir d'Rs-
compte, and Credit Industriel, showed aggregate deposits on
June 30, 1914, of 5,504,000,000 francs ($1,062,272,000), dis-
counts 3,540,000,000 francs ($683,220,000), advances and
loans 1,080,000,000 francs ($208,440,000), and cash reserves
602,000,000 ($116,186,000). In addition, the smaller banks
had deposits amounting to about 5,000,000,000 francs. It
appears from the figures quoted that the French banks,
like the English, carry a comparatively small reserve of
actual cash. They have recourse to the Bank of France
in case of emergency, and this central institution regu-
lates the supply of currency by its exclusive function of
issuing bank-notes, or creating paper money. The Bank
of France rediscounts the commercial paper held by
the other banks as required. That is, it discounts bills
having three signatures, those of the drawer, acceptor, and
discounting bank. The Bank of France is the banker for
the banks.

The variable movement of affairs in the business world,
at one time impetuous, at another languid, requires a mone-
tary circulation which is flexible, which can be adapted
to the oscillating course of commercial activity. In the
French, as in most of the other continental banking sys-
tems, the paper currency, as supplied and regulated by the
central bank, is the elastic element by means of which an
otherwise rigid medium of exchange is adjusted to the
fluctuating volume of business. This function of supplying
elasticity to the currency is indispensable at the outbreak
of war, when the financial requirements of the government
rise suddenly to a maximum in executing the military
mobilization, while at the same time the demands of the
public, as we have already noted, are unusually great.

Mobilization of Financial Resources 407

The intense anxiety preceding the war produced a for-
midable assault on the reserves of the Bank of France.
The aggregate discounts increased from 1,541,000,000
francs ($297,413,000) to 2,444.000.000 francs ($471,692,000)
during the week ending July 30th, while the circulation
of notes advanced from 5.911.000,000 ($1,140,823,000) to
6.683.000.000 ($1,289,819,000), nearly touching the legal
maximum, which at that time was 6,800,000,000 francs
($1,312,400,000). Nevertheless, the hank retained the enor-
mous metallic reserve of 4,500,000,000 francs ($868,500,000),
of which more than 4,000,000,000 francs were in gold.

The most disturbing factor in the monetary situation of
the Bank of France was, of course, the demand made upon
it by the state. Discounts of commercial paper may rea-
sonably be regarded as resources but one step removed
from cash. But capital advanced to the state was "locked
up" for the time being. It was rendered incapable of
speedy realization, and therefore withdrawn from the
monetary forces which could be marshalled to face the
sudden crisis. But by agreement the state could call on
the Bank for advances up to the amount of 2,900,000,000
francs ($559,700,000).

The French government was authorized by a law of
August 5, 1914, "to take in the general interest, by decree
of the Council of Ministers, any measures necessary to
facilitate the execution, or suspend the effects, of commer-
cial or civil obligations." The same enactment raised the
legal maximum for the Bank's circulation of currency to
12,000.000,000 francs, and relieved the institution from the
obligation of redeeming its bank-notes in gold or silver,
giving them, in other words, enforced currency, and thus
abrogating specie payments.

A decree issued on the 9th in accordance with this law
postponed for thirty days the maturity of all obligations

408 The Great War

falling due during the month of August. In consequence
of this, the Bank of France ceased to receive cash in pay-
ment of its commercial loans or discounts. But, on the
other hand, it was relieved from the excessive strain on its
liquid resources which the continued redeeming of its
bank-notes in cash would have entailed. Raising the legal
maximum of circulation, which was not excessive in con-
sideration of the circumstances and the bank's very large
reserve, greatly expanded the institution's capacit)^ for meet-
ing the extraordinary demands which the situation laid
upon it.

The financial situation in Germany and its evolution
during the war present features of very great interest.
The economic position of Germany has been exceptional.
The displacement of Germany's commercial relations with
other countries has been very much greater than the dis-
turbance in the foreign intercourse of France or the United
Kingdom. For a much greater percentage of Germany's
trade had formerly been conducted with her present oppo-
nents, and her direct communications by sea were largely
cut off in consequence of the partial blockade to which she
was subjected. The adjustment of her industrial activity
to the restricted field and altered requirements presented
almost superhuman difficulties. Germany was thrown back
almost exclusively upon her own resources. The currents
of credit and exchange contracted their course within the
national territory. Some features of the general economic
development of Germany made the problem of adaptation
to war conditions as interesting as it was trying.

The Germans had not increased their foreign invest-
ments very rapidly for a number of years. The amazing
industrial development of the country had absorbed nearly
all the growth in capital, as it had furnished employment
for the considerable increment of the population. The

Mobilization of Financial Resources 409

Germans had even pushed forward their domestic indus-
trial devek)pment faster than their capacity to accumulate
savings or increase their liquid capital. The German in-
dustrial fabric was built up on credit to an unusual degree,
and the very intimate administrative connection between
the great industrial and financial concerns (the interlocking
directorates) was a natural corollary of this situation. Be-
sides. Germany had become largely dependent on French
and English loans to finance the current movement of her
domestic trade. The inflation of credit and apparent in-
stability of the financial edifice had reached such a state, a
few years ago, as to occasion serious apprehension.

The secret German report dealing with the augmenta-
tion of Germany's military strength, dated March 19, 1913,
as published in the French Yellow Book, contains the
following significant passage:

"Preparation must be made for the war from a financial
point of view. There is much to be done in this direction.
The distrust of our financiers must not be aroused, but,
nevertheless, there are many things which it will be im-
possible to conceal."

The process of financial preparation which is here con-
templated was really under way already. It is reported
that during the last Moroccan crisis in 1911 the Kaiser
asked a number of prominent financiers whether they were
prepared to finance a war with a great power and received
a negative answer. Dissatisfied at their vmfavorable reply,
he is said to have remarked: "The next time that I shall
have occasion to ask this question, gentlemen, I expect a
different response from you."

A central bank and the other financial institutions of a
country which stand in intimate relation with it may be
compared with a military base and outlying forts forming
a common system of defense. The currency, which

410 The Great War

constitutes the forces of financial warfare, is distributed from
the central bank, as base, to the other banks, as peripheral
fortresses, and the latter appeal to the former for their
necessary reinforcements. An aggressive incursion, in case
of financial panic, must first be resisted by the outlying posi-
tions, which may successfully repulse the attack, if their
forces are capable of prompt mobilization. But if their re-
sources are scattered and dissipated, they must have imme-
diate recourse to the base of supplies ; and this was precisely
what happened in Germany in 1911, when the forces on
the outer line of defense were so attenuated that the appeal
for reinforcements was sent in from all sides at the first cry
of alarm. The great Berlin banks were maintaining at that
time cash reserves amounting to only about 7% of their
deposits. The very strained condition of international rela-
tions in September, 1911, created a condition of intense un-
easiness and occasioned heavy withdrawals from the banks,
which appealed at once to the Imperial Bank for succor.

The paper circulation of the Imperial Bank is limited by
statute to three times its liquid reserve; or, in other words,
the reserve must be equivalent to at least 33y^% of the cir-
culation. As this reserve is made up partly of treasury
notes we cannot designate it, in an inclusive sense, as a
metallic reserve. In addition to the Imperial Bank in Ber-
Hn, Bavaria, Saxony, Wiirttemberg, and Baden have each
retained their central banks authorized to issue paper cur-
rency. But the circulation of these minor institutions is
relatively so small that we can safely leave them out of
account in surveying the monetary situation.

The exceptional inroads in September, 1911, brought the
reserve of the Imperial Bank down to 45% of its circula-
tion of paper. If a war had broken out at that time, the
bank would have had a legal margin for the expansion of the
currency of only 800,000,000 marks (less than $200,000,000);

Mobilization of Financial Resources 411

and a conservative estimate placed the iniinediate reciuire-
ments of the jjovernment in case of a great war involving
general mobilization at about three times that amount.

During the following three years, however, a remark-
able process of strengthening and reinforcement was car-
ried out through the persistent initiative of the Imperial
Bank, which is virtually an organ of the imperial govern-
ment. It is largely owing to the untiring efforts of Herr
Havenstein, President of the Imperial Bank, that Ger-
many's financial solidity has disappointed the expectation
of her foes throughout so many months of the world-
struggle. Herr Havenstein's fame deserves recognition
by as valid a title as that of the military chiefs of the Gen-
eral Staff; and it is a curious fact, that in a commercial age
it is still necessary to insist that a position of equal distinc-
tion should be attributed to those whose function is to
preserve as to those whose business is to destroy.

Herr Havenstein inaugurated his program by summon-
ing the leading bankers to a conference in February, 1912,
where he urged the necessity of fortifying their reserves,
and of liberating themselves from dependence on tem-
porary loans negotiated abroad. This was the beginning
of a continuous, untiring effort to turn the banks from
the improvident course to which their natural inclination
had addicted them. For an increase in their liquid reserve
meant a corresponding curtailment in the volume of their
business. Natural cupidity prompted them to stretch every
inch of canvas without regard for danger. In his endeavor
to convert the banks to a full sense of responsibility for
their ultimate salvation, Herr Havenstein was only partially
successful. But the practice of the Imperial Bank itself
set them an admirable example.

Its purchases of gold from abroad were twice as great in
1913 as in 1911. At the same time an unobtrusive but

412 The Great War

effectual scheme for educating the public indirectly to the
use of paper money was set on foot, so that a far larger
portion of the gold coinage of the country could fiow into
the coffers of the Imperial Bank and repose quietly in its
vaults. Some authorities advocated the eventual with-
drawal of all the gold from circulation and the substitution
of paper, which would not be an entirely inconceivable
evolution. How long, we wonder, after gold had every-
where been withdrawn from circulation and human con-
tact into the vaults of treasuries and central banks, to serve
as an invisible pledge for the solvency of paper currency,
would the inveterate and deeply-fixed habit of thought
endure which regards the yellow metal as the absolute
standard of value? And could the orderly adjvistment of
relative commercial values be maintained, if their common
instrument of measurement were reduced to a virtually
theoretical scale, or an abstract formula ? The present rever-
ence for gold as the corporeal essence of value may be likened
to a sort of commercial idolatry, of vital importance in the
actual organization of business, but, in spite of its long-
established character, not eternally indispensable. At all
events, the effect of the great world-contest upon monetary
arrangements may demand attention as well as its results in
the political condition of the nations.

Captains of industry like Krupp and Thyssen, the steel-
kings of Germany, adopted the practice of paying their
employees in paper money and the Prussian railway ad-
ministration followed their example.

By what lowly indications can the imminence and prog-
ress of mighty historical movements be observed if only
we possess the clairvoyance to apprehend their significance,
to read the signs that are patent all about us ! Who of us
in accepting United States currency ever examines it to
ascertain whether it is made up of gold or silver-certificates,

Crowd waiting to draw money from the Imperial Bank, Berlin.

An officer of infantry readint; the annoiincenient ot war in Be

Mobilization of Financial Resources 413

treasury-notes, or bank-notes? How many of us are con-
scious of tliese distinctions in our paper money? We may
reckon ourselves fortunate in that it is of such uniform
soundness that we are relieved from an annoying pre-
occupation in regard to the significance of its varied
types. The recollection of some of us who have lived in
Germany might now substantiate the rapid increase in
paper money which has taken place in recent years in that
country. Our memory may now confirm the statement
that before 1906 there were no bank-notes of smaller
denominations than one hundred marks ($23.80). Perhaps
we experienced a half-conscious sensation of surprise the
first time that we received a five, ten, or twenty-mark
bank-note. The sense of satisfaction in the thought of a
purseful of glittering gold pieces remained just as vivid,
although the reality became imperceptibly rarer. The
possession of the new twenty-mark bank-note probably
conveyed no meaning besides its buying power. The form
and material had no intrinsic significance for us. And yet
such monetary phenomena are the palpable indications by
which financial weather-prophets scrutinize the future.

Part of the program for financial preparation was incor-
porated in the revenue bill which was passed in 1913,
concurrently with the bill for increasing the military estab-
lishment. The measures enacted at that time augmented
the means for the rapid expansion of the currency in
case of emergency. It will be recalled that a treasure of
120,000,000 marks (nearly $30,000,000) in gold had been
preserved in the Julius Turm in the fortress at Spandau since
1871. This hoarding of the unemployed gold has some-
times been characterized as the survival of a primitive, bar-
baric instinct, as a relic of mediaevalism. But the truth of
the matter is, that the Spandau treasure served as part of the
nation's metallic reserve, as a basis for issuing currency in

414 The Great War

the form of treasury-notes. It was a reserve hedged about
with more stringent legal safeguards than the metallic re-
serve in the Imperial Bank. On the basis afforded by it
the government issued treasury-notes, Reichskasse7ischeine,
to the full value of the 120,000,000 marks. By the law of

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