Coming to a closer view of the question, we must distinguish between the immediate effects of the war which are already in evidence and the ultimate effects which will but begin to unfold themselves after the return of peace. Some of the latter results will grow out of the immediate effects; others will be more directly due to the events following on the conclusion of the war. It will also be advisable to distinguish between the economic reactions of the war, and the broader social consequences. At such an early stage it would be presumptuous and tempting Providence to attempt to forecast the future in any detail or to try to trace the play and interplay of the various forces going towards the making of the future. This chapter will be concerned with broad tentative generalisations on quite simple lines.
One of the things which struck the intelligent working man during the early days of the war was the rapidity with which the State acted in the face of the crisis. In next to no time large measures of State control and action were put successfully into operation and those who had advocated co-operative action in the past with but indifferent success were amazed at the swiftness with which the nation can act in the hour of need. The drastic action of the State cannot be better illustrated than by the steps which were taken to meet the sudden commercial deadlock which the war precipitated. A discussion of these financial measures will at the same time enable us to understand how, through credit, war strikes at the industry and trade of the modern world.
A. STATE ACTION IN INDUSTRY AND COMMERCE
The Austrian ultimatum to Servia was followed by the paralysis of the world's international system of finance. Before the end of July many important stock exchanges were closed, and by the 31st the London Stock Exchange for the first time in its history was also compelled to close. The remittance market collapsed and with it the fabric of international trade. Widespread bankruptcy and ruin seemed imminent; so serious did the state of affairs become that moratoria were declared not only in several European countries but in parts of America, and in many continental countries specie payments were suspended. In a word, the possibility of war had thrown the delicately poised credit system of the commercial world out of gear; the declaration of war had brought it to a standstill. Into an explanation of its working it is not possible to enter; it is sufficient for our immediate purpose to realise that the foreign exchange machinery by which the supply of commodities from other countries becomes practicable on a large scale was for a time altogether unworkable. London as the financial centre of the world has immense sums owing to it and in its turn owes large sums. The ultimate effect of the collapse of credit, which depends on confidence, was that London could neither receive nor make payment. The big finance houses, who had "accepted" bills of exchange and rendered themselves liable to meet the payments for the things they represented, on the understanding that the means to pay them were to be promptly despatched, found that these means were not forthcoming; their own resources were far from sufficient to meet these payments. Utter ruin stared them in the face. At home also a run on the banks seemed probable, which would have meant ruin to large numbers of people. In this grave crisis the State acted with commendable promptness. The bank holiday was extended; State notes for 10s. and £1 were issued; a moratorium was declared, legalising the postponement of the due payment of debts, with certain exceptions; the Bank of England under a guarantee from the Government that the latter would meet the loss, began discounting, or buying for cash, approved bills of exchange accepted before war was declared, many of which are hardly likely to be met by the people liable for payment. These steps were taken swiftly and boldly and allayed the panic. But more was needed; such measures were not in themselves sufficient to put the machinery of foreign exchange into operation again and the suspension of this method of settling international indebtedness was having serious effects. To carry on international trade, and to supply ourselves with the produce on which the very existence of the community depends, without the machinery, is a thousand times more difficult than to conduct our home trade by means of direct barter. Without going into technical details, it may be said that the purchase of bills by the Bank of England, whilst relieving the last holder from loss, did not extinguish the liability of persons whose names had appeared on the bills as acceptors, endorsers and drawers. This was true of traders and commercial people not only in this country but also in other parts of the world. In the face of these liabilities, in most cases unexpected, it was hardly likely that they would increase their liabilities under new bills. Consequently the remittances coming to London shrank to next to nothing. As bills of exchange—or their equivalent—are the means by which both importers and exporters get paid for their goods, the difficulty of getting paid naturally began to have a serious effect on trade. As the figures of foreign trade during August show, cargoes were being held up. It was clear, therefore, that if this country were to continue to receive supplies of corn and meat, of cotton and wool, of hides and timber, something further must be done. The question the Government had to decide was what steps could be taken to safeguard the food of the people, and to avoid a crushing volume of unemployment through the lack of the raw materials of industry. The produce was there; what was needed was to start the flow of the particular kind of currency—"credit money"—which would expedite exchange. The course taken by the State was to advance money to the large bill bankers or "accepting houses" in London to allow of the due payment of the enormous number of bills falling due in the three months succeeding the outbreak of war. The audacity of the step will be understood when it is realised that probably something like £300,000,000 of bills fall due over a period of three months.[1] The necessary money was lent without security, the Government promising not to demand repayment until twelve months after the end of the war. A proportion of this advance will be in the nature of a loss, though how much it is quite impossible to say. By this measure, in the event of the bills not being met by those who have promised to pay them—the acceptors—the liability which would ordinarily have fallen upon the drawers and endorsers through whose hands the bills had passed has been removed. The State has advanced to the commercial community a huge sum of money, risking the total loss of some part of it, in order to set in motion the machinery of international exchange. Further steps, however, were taken. The general moratorium expired on November 4. Useful as it had been, it still left many traders in financial difficulties because of the impossibility of collecting debts owing to them in enemy and other countries. The Government, therefore, appointed a committee representing the Treasury, the Bank of England, the Joint Stock Banks, and the Association of Chambers of Commerce of the United Kingdom to authorise advances in approved cases to British traders carrying on an export business in respect of debts outstanding in foreign countries and colonies, including unpaid foreign and colonial accepted bills which cannot be collected for the time being. It is safe to say that no Government ever took such gigantic measures to meet a great crisis.[2] The Prime Minister, speaking at the Guildhall on November 9, 1914, summarised as follows the effects of the steps taken: "The foreign exchanges are working in the case of most countries quite satisfactorily, and the gold reserves at the Bank of England, which were 40 millions on July 22, and which had fallen on August 7 to 27 millions, now stand at the unprecedented figure of 69-1/2 millions. The central gold reserve of the country after three months of the war amounts to £80,000,000, almost exactly twice the amount at which it stood at the beginning of the crisis. The bank rate, which rose, as you know, to 10 per cent, has now come down to 5, a figure, I think, not in excess of that at which it stood this time last year. Food prices have been kept at a fairly normal level, and though trade has been curtailed in some directions, unemployment has been rather below than above the average."
[Footnote 1: Mr. J.M. Keynes (Economic Journal, Sept. 1914) estimates the aggregate value of outstanding bills in London at £350,000,000.]
[Footnote 2: In addition to these various financial measures, the State has lent Belgium £10,000,000 and the Union of South Africa £7,000,000, whilst it has also guaranteed £5,000,000 of the new Egyptian cotton loan.]
But this is by no means the only example of State action. The Government has established temporarily a State-aided system of marine insurance, by undertaking 80 per cent of the war risk, in order to encourage overseas trade. It has given substantial aid to the joint-stock banks "for the sole purpose that they might be fit to aid in every way possible the country's trade and finance."[1] It made arrangements for the direct purchase of forage and vegetables, etc., from farmers.[2] It took over the control of the railways. When, owing to panic, there was a rush for the purchase of food-stuffs, which was used to force up prices unduly, the Government intervened to prevent exorbitant charges. Particularly interesting is the action of the State regarding sugar, two-thirds of our supply of which comes from Germany and Austria. In the days immediately following the declaration of war wholesale prices were trebled. The Government, therefore, decided to take upon itself the task of ensuring an adequate supply of sugar, and a Royal Commission was appointed. The leading refiners were approached and an arrangement was made with the whole body of refiners that they should stand aside from the market for raw sugars, leaving it free for the operations of the Government. The Royal Commission pledged the refiners to buy their sugar from the Commission, i.e. from the State; sugar was to be offered to them at a fixed price, and the refiners were to sell the refined product to the dealers also at a fixed price sufficient to yield the refiners a fair profit on manufacture. As a result of the corner, a big rise in the price of sugar, which is not only an important domestic commodity but the raw material of several industries, was averted. This merits the description given of it in The Nation—"a really dashing experiment in State Socialism." [3] On the other hand, it has done nothing to increase the world's supply of sugar, but has merely commandeered a part of the existing stock. The aid of the State has been invoked in other directions. Already the Government has assisted experimental cultivation of beet in this country. The suggestion has been made that the State should build two beet-sugar factories, which would cost about £200,000 each; in this way it is suggested that our home supply of sugar would in the future be assured, and that agriculture would benefit considerably.[4]
[Footnote 1: Round Table, Sept. 1914, p. 705.]
[Footnote 2: This was done through the Board of Agriculture for the War Office. On the other hand, in the purchase of clothing, boots, blankets, etc., the War Office approached the producers directly instead of through the Board of Trade.]
[Footnote 3: It was reported in the Press on October 8, 1914, that the Home Secretary had purchased 900,000 tons of sugar at about £20 per ton, the transaction involving an outlay of about £18,000,000.]