15: THE FINANCIERS AND THE NATION
by The Rt. Hon. Thomas Johnston, P.C., ex-Lord Privy Seal 1934; republished in 1994 by Ossian Publishers Ltd.
CHAPTER VI -- USURY ON THE GREAT WAR
‘The investing public have been pandered to in a manner altogether out of keeping with the times. . . . Victory can be purchased at too high a price.’ — Glasgow Herald (4/10/16).
‘The Imperial Democracy that held all the world beneath its sway, from the senators who bore historic names down to the humblest tiller of the soil, from Julius Caesar down to the smallest shopkeeper in a back street of Rome, was at the mercy of a small group of usurers.’ — Ferrero, Greatness and Decline of the Roman Empire, vi. 223.
WHEN the whistle blew for the start of the Great War in August 1914 the Bank of England possessed only nine millions sterling of a gold reserve, and, as the Bank of England was the Bankers' Bank, this sum constituted the effective reserve of all the other Banking Institutions in Great Britain.
The bank managers at the outbreak of War were seriously afraid that the depositing public, in a panic, would demand the return of their money. And, inasmuch as the deposits and savings left in the hands of the bankers by the depositing public had very largely been sunk by the bankers in enterprises which, at the best, could not repay the borrowed capital quickly, and which in several and large-scale instances were likely to be submerged altogether in the stress of war and in the collapse of great areas of international trade, it followed that if there were a widespread panicky run upon the banks, the banks would be unable to pay and the whole credit system would collapse, to the ruin of millions of people.
Private enterprise banking thus being on the verge of collapse, the Government (Mr. Lloyd George at the time was Chancellor of the Exchequer) hurriedly declared a moratorium, i.e. it authorized the banks not to pay out (which in any event the banks could not do), and it extended the August Bank Holiday for another three days. During these three or four days when the banks and stock exchanges were closed, the bankers held anxious negotiation with the Chancellor of the Exchequer. And one of them has placed upon record the fact that 'he (Mr. George) did everything that we asked him to do.' When the banks reopened, the public discovered that, instead of getting their money back in gold, they were paid in a new legal tender of Treasury notes (the £1 notes in black and the 10s. notes in red colours). This new currency had been issued by the State, was backed by the credit of the State, and was issued to the banks to prevent the banks from utter collapse. The public cheerfully accepted the new notes ; and nobody talked about inflation.
Not since 1697 had the State itself issued paper money. In that year, 1697, notes in the denomination of £5 were issued direct to the public without the intervention of the finance houses ; and these notes were not backed by gold but were legal tender for the payment of taxes. In 1914, however, the State issue of money was upon a colossal scale; the legal tender was not limited to the payment of taxes, but was complete for all purposes, and the issue was made with the goodwill of the bankers and indeed at their plea and intercession. Had that new money not been issued, the private banking houses of Britain would have been compelled to default to their creditors in a week's time. Dr. Walter Leaf, late Chairman of the Westminster Bank and an ex-President of the Institute of Bankers, has enlightened us as to the real effect of the issue of Treasury notes under the Currency and Bank Notes Act of August 6, 1914.
‘The amount and manner of the issue’ he declares, ‘was left to the absolute discretion of the Treasury. This was essentially a War Loan, free of interest, for an unlimited period, and, as such, was a highly profitable expedient from the point of view of the Government.’1
He proceeds to argue that, to some extent, this State issue of Treasury notes was covered by the gold coinage which patriotic people exchanged for the notes; but there was no provision whatever in the Currency and Bank Notes Act of 1914 for any gold backing, and, in any event, the amount of gold coin reserved for pretended security against Treasury notes total- ling some three hundred million pounds was, at its maximum, only twenty-seven million pounds. The three hundred million of new money issued by the Treasury in 1914 was therefore, in effect, a War Loan, free of interest. But, alas, when the War was over, the Treasury, by a Minute issued on December 15, 1919, announced that its policy was to be a gradual reduction in these Treasury notes; and it proceeded year by year to take the notes off the Market, on the plea that the notes so cancelled were not covered either by gold or by Bank of England notes. Between the years 1920 and 1926, there was a progressive reduction in Treasury notes from £320,600,000 to £246,902,500.
To return, however, to the early war period, no sooner had Mr. Lloyd George got the bankers out of their difficulties in the autumn of 1914 by the issue of the Treasury money, than they were round again at the Treasury door explaining forcibly that the State must, upon no account, issue any more money on this interest free basis; if the war was to be run, it must be run with borrowed money, money upon which interest must be paid, and they were the gentlemen who would see to the proper financing of a good, juicy War Loan at 31/2 per cent, interest, and to that last proposition the Treasury yielded. The War was not to be fought with interest-free money, and/or/with conscription of wealth; though it was to be fought with conscription of life. Many small businesses were to be closed and their proprietors sent overseas as redundant, and without any compensation for their losses, while Finance, as we shall see, was to be heavily and progressively remunerated.
As each war loan became exhausted the lenders upon the first lower interest War Loans were permitted to transfer into the later higher interest Loans, and usurers’ interest upon credit was added to the national burden, so that to-day that burden is insupportable and the nation staggers along, cutting the bread and cheese of its poor, and starving the social services in a vain attempt to meet the charges incurred in the Great War Loan ramps.
The report of the Cunliffe Committee (1927) relates the story of the progressive piling up of our War Debt burdens.2
But it is in nowise a complete chronique scandaleuse of usury in war-time ; nor did its authors so intend it to be. We find in its pages no reference to or hint of the magical process by which, while the nation struggled almost at death's door for its very existence, and while masses of the fittest of our manhood were daily being blown into bundles of bloody rags, our banking fraternities continued to create for themselves a great volume of new credit and to lend that • credit to us at interest, and indeed at progressively increased interest ; no reference to the fact that by this manufacture of bankers' credit some portion, variously estimated in amount, of what now stands as the public debt, was simply fabricated for private ends and was not a bona-fide loan of real wealth to the nation. Professor Soddy has estimated that the , bankers actually created £2,000,000,000, no less, of this bank credit, and lent it out to us at 5 per cent.3 That means £100,000,000 a year upon nothing.
The first War Loan at interest was floated in November 1914, at 31/2 per cent., and the investors were only required to subscribe £95 for each £100 of scrip. The total amount of the loan was £350 millions, but as there were not three hundred and fifty millions of money in the country, what the State received was credit — the pledged credit of individuals and corporations and banking houses (the same banking houses which, as we have seen, three months earlier had been begging the Treasury notes on loan from the Government to save their precious banking system from bankruptcy).
The second War Loan was issued at par in June 1915 at 41/2 per cent. interest; and such investors, and corporations and banking houses as had held the previous War Loan Stock at 31/2 per cent, were permitted to transfer into the new loan at the increased rate of interest.
Actually of the 41/2 per cent. Loan the sum of £176,000,000 was not new loan money at all, but was a consider- able portion of the old 31/2 per cent. Loan silently ‘jumping the counter’ on to the higher rate. And, in addition to that, the holders of no less than £138,000,000 of the new 41/2 per cent. Loan were old holders of 21/2 per cent. Consols and 21/2 per cent. and 23/4 per cent. Annuities, who also had been permitted to transfer into the higher rate of interest yield. These conversions at the higher rate of interest meant a clear gift of at least £4,000,000 a year in extra interest to the money-lenders.
But the story of this great finance ramp of June 1915 is incomplete without a reference being made to the pledge extracted from the State by the finance houses and banks that, should there be any subsequent issue of War Loan at a still higher rate of interest than 41/2 per cent., the holders of the new 41/2 per cent. Loan (£901,000,000 in amount) would be entitled to convert at a higher scale, and this, as we shall see in a moment, the great bulk of them succeeded in doing.
Mr. Lloyd George has publicly declared that the increased rate of
interest offered in the War Loan of June 1915 was quite unnecessary.
He says :
‘Looking back, I cannot help regretting that Mr. McKcnna should have thought it necessary to raise the interest rate of a Government loan to 41/2 per cent. Maybe this corresponded to the price that was being offered for other gilt-edged securities. But in view of the in- crease in our nominal capital reserves due to war inflation and to the restriction of an overseas market for investment money, which was also one of the effects of the War, there can be little doubt that the Government could have continued to obtain as much money as it required by , voluntary investment, without raising its interest rate beyond the level of 32/3 per cent. at which my first loan had been negotiated. Investors would have had to take this, for lack of an alternative. And if they had been unwilling to do so, there would have been a clear and popular ground for the conscription of capital for war purposes — a step which would have been an appropriate corollary to the conscription of man-power which we were soon to introduce.' 4
We must note another, even more amazing and more impudent, of the methods of debt and interest concoction in these delirious war-times. The banks actually issued circulars to thousands of their customers inviting them to apply for a portion of the new War Loan and to borrow credit from the banks for that purpose at 3 per cent. The customer was to put up no money for his War Loan, no margin, no securities. The bank was to supply the credit, or rather was to back the customer's credit and was to charge the customer 3 per cent. interest for so doing ; but the State was pledging itself to pay 41/2 per cent. interest on the War Loan which the customer was purchasing with his 3 per cent. money. The customer, after allowing for his Income Tax, &c, was clearly 1 per cent. per annum in pocket on the deal.
It is indeed difficult to write in cold blood of these financial
dodges, arranged between the City and the Treasury and committed
upon a nation in extremis. In March 1916 the Bank of England,
without any apparent sense of shame, issued press advertisements which ran
' IF YOU CANNOT FIGHT '
‘If you cannot fight, you can help your country by investing all you can in 5 per cent. Exchequer Bonds. . . . Unlike the soldier, the investor runs no risk.’
Yet all these efforts surely paled before the shameless greed of the third great War Loan in January 1917. No foreign conqueror could have devised a more complete robbery and enslavement of the British Nation. The rate of interest in War Loan was jumped to 5 per cent, (or at the option of the investor, 4 per cent, free of Income Tax until October 1942) and the holders of previous War Loans and Treasury Bills and War Expenditure Certificates were invited to come in and convert their old stock into the higher rates of booty, and for each £100 of Stock in the new loan, only £95 had to be subscribed, so that the rate of interest really had been raised to 51/3 per cent. Into this 5 per cent. War Loan tumbled the holders on £820,000,000 of the 41/2 per cent. Loan, thus securing an extra 1/2 per cent, or £4,000,000 in addition to the increases which many of them had secured when the rate of interest was previously jumped from 31/2 per cent to 4 1/2 per cent. And not only were the 41/2 per centers permitted to convert into the 5 per cent. War Loan, but the holders of £130,000,000 of Treasury Bills and £280,500,000 of Exchequer Bonds also converted. The new 5 per cent. Loan of £2,075,750,000 secured only, in fact, £844,750,000 of new loans, the balance being paper conversions from old lower interest Stocks, whereby the converters were enabled to dig deeper into the national pocket than they had hitherto done.
But that was not the sum-total of the iniquitous ramp which the lackeys of the money interest imposed upon us with the 5 per cent. Loan of 1917. The investors were made exempt from all British Income Tax upon their interest payment if they chose to go and live abroad. Mr. Lloyd George has himself testified that this 5 per cent. Loan was raised at ‘a penal figure,’ and he continues :
‘The same rate governed subsequent borrowings, which by the end of the War had added a further £4,000,000,000 to our National Debt. It cost the country a dozen years of remorseless deflation and concomitant depression to bring interest rates down again to a level that would enable this vast sum to be reconverted to 31/2 per cent. Throughout the interval, not only was the country taxing itself to pay a sum ranging at one time as high as £100,000,000 a year more than it would otherwise have done, but the high yield of a gilt-edged Government security kept up rates all round, and made money dearer for all enter- prises, industrial, commercial, and national. It would be hard to estimate the sum-total of the price paid by the nation in every department of affairs for the decision of Mr. McKenna in 1915 to increase the rate of interest paid by the Government on its war-time borrowings. His action had, no doubt, the fullest authorization from the leading circles of banking and finance. But the country has since then had ample evidence that these circles are by no means to be reckoned as infallible advisers.' 5
Doubtless there were many millions of money lent patriotically to the State, money whose owners were disturbed and ashamed at the profiteering in finance which made riot during and after the War. The Rt. Hon. Stanley Baldwin, for example, who was Financial Secretary to the Treasury, and saw at first hand the roguery and ravenous greed of Finance while the Nation was in extremis, anonymously handed over £150,000, representing 20 per cent, of his fortune,6 to the State to clear his conscience, and to set an example.
But the controllers of the Money Power, the men who cold-bloodedly raised their demands upon their fellow-countrymen with every German advance in the field and with every German U-boat campaign at sea ; the men who organized the creation of hundreds of millions of unnecessary debt, the men who inflated rates of interest ; the men who, as the price of providing credits to free us from the threat of German slavery, enmeshed us in an interest burden of a million pounds per diem — it is they whose war-time plunderings I have sought to record in the foregoing pages. The machinations of the organized Money Power during the stress of war surely provide the most convincing of evidence that the nation must be the sole creator of money, and the guardian and banker of the savings and thrift of its citizens, if well-being and security are ever to be the common lot of men.
1 Banking, by Dr. Walter Leaf, Home University Library, p. 46.
2 Appendices to the Report of the Committee on National Debt and Taxation (1927), p. 18 et seq.
3 Soddy, Wealth, Virtual Wealth, and Debt (Allen & Unwin Ltd.), p. 195.
4 War Memoirs of David Lloyd George, vol. i. p. 122.
5 War Memoirs of David Lloyd George, vol. i. p. 123.
6 Encyclopaedia Britamica, ii. 986.