Oxford University Press, 2013
xviii + 302 pages + 8 B/W figures + 3 tables, £20.00 RRP
Whether Richard Roberts would appreciate having his fast-moving book compared to Dan Brown’s The Da Vinci Code, or the latest series of Kiefer Sutherland’s 24 is a matter of debate, but it is actually meant as a compliment. Mervyn King, in his somewhat egotistical Foreword, describes it as ‘a jolly good read’ and this at least he got right.
The publication of Saving the City is timely for two reasons. The centenary this year of the outbreak of the First World War has been hard to miss, although most of the coverage has related to the causes, including the BBC’s excellent 37 Days, and the tragic human cost. Quite right too. Roberts, however, reminds us of the now almost forgotten financial crisis that coincided with the outbreak of that war, at a time when the global financial crisis of 2008 is still fresh in our memory.
There can be little doubt that in 1914 the country’s political leadership was woefully unprepared for the impact of the events of July and August on the City of London, then the world’s leading financial centre by some margin. To the general public and the press the closure of the London Stock Market was arguably the most obvious consequence, but the money and foreign exchange markets were also badly affected. Perhaps for the first time the interconnectedness of financial institutions that had previously been largely assumed to operate independently became apparent. Apart from the Stock Exchange’s brokers and jobbers, several of whom were ‘hammered’, the accepting houses, discount houses and, to a lesser extent, the joint-stock banks, were all under serious threat.
How had this happened? The key factor was the degree to which trade and finance had become internationalised during the Victorian and Edwardian eras. Ironically, the extent of this internationalisation has caused many leading financiers to assume that war on a large scale was no longer possible, due to the probably catastrophic financial consequences. By 1914 London was ‘an international creditor on a vast scale’. When the shutters came down in Continental Europe, remittances in settlement of trade bills and purchases of securities simply ceased, leaving London counterparties with gaping wounds in their balance sheets. As a result of the closure of the stock market, illiquidity was exacerbated by the inability of lenders to sell securities that they had accepted as collateral for their loans. With the increasing probability of permanent default on loans rather than merely late payment, problems of liquidity were superseded by those of insolvency. Firms with impeccable credentials were faced with the prospect of bankruptcy – as Frederick Huth Jackson, senior partner of Huth & Co. and a member of the Court of the Bank of England, told the eminent financial journalist and political adviser Sir George Paish in late July, they and seven other of the leading accepting houses ‘are going to declare ourselves insolvent next week’. Alarm was raised further when queues of people appeared around the Bank of England wishing to convert banknotes into gold.
Roberts explains with considerable wit and clarity how the crisis was contained. Public and business confidence was restored by increasing Bank Rate (temporarily) to 10%, issuing low denomination (£1 and 10/-) banknotes and other measures (the government was prepared to suspend the 1844 Bank Charter Act if necessary). The accepting houses were granted a temporary moratorium on redeeming bills of exchange, which was subsequently extended and enlarged to a general moratorium on debts. The Postponement of Payments Act to authorise the bills moratorium was largely drafted by Huth Jackson, who only days earlier had forecast the imminent closure of his firm. He later helped draw up the plan for wartime maritime insurance and well deserves a biography. The Stock Exchange was closed, a private initiative, and did not reopen until January 1915, thereby relieving member firms of the need to settle bargains for which clients’ money would clearly be unforthcoming.
One of the Government’s motives for granting the bill moratorium was to ensure that trade finance remained available when required, but trade patterns were severely disrupted by the war and the London commercial bill and finance bill markets never really recovered. On the other hand the increased issuance of Treasury Bills to finance the war effort kept the discount market participants busy. In time the trade finance provided by sterling acceptance business (‘the bill on London’) was replaced in part by dollar acceptance business in New York and guilder acceptance business in Amsterdam, with both of these cities gaining in importance as financial centres at the expense of London. Another consequence of the decline in the bill market was a significant increase in the use of ‘cable transfers’ between banks to settle international transactions. Payments from abroad of sterling debts slowed up even from countries where local credit availability was not a problem, mainly because of the extent to which sterling appreciated against almost all other currencies, including the French Franc and the US Dollar. Fortunately most of these currencies, other than the Russian Rouble, recovered with a few months, so formal intervention in the foreign exchange markets was avoided. The bills moratorium was soon replaced by a ‘cold storage’ scheme, whereby the Bank of England purchased doubtful bills, under a Treasury guarantee.
When the London Stock Exchange reopened in January 1915 only one firm was hammered and normal trading levels were quickly re-established. One of the first new issues was the Government’s £350 million of War Loan, the disgraceful circumstances of which Roberts describes in detail.
So who came out of the crisis well? You should read the book to find the answer, but it will come as little surprise that John Maynard Keynes was one of many who felt the clearing banks had failed to live up to the level of ‘public spirit’ expected of them. Plus ça change … The experience of London was far from unique and many of the measures adopted by the Bank of England and the Treasury had to be adopted by other central banks and governments.
Financial history does not have to be boring and this book is an excellent example of how it should be written.
Saving the City: The Great Financial Crisis of 1914 is available via Amazon.