15th July 1921
WORLD WAR ONE
War Loan 5% Registered
1929-47 @ 88
R. MIDDLEMAS, Esq.
Stamped GEORGE V SIX PENCE
In August 1914 the gold reserves of the Bank of England,
and effectively of all banking institutions in Great Britain,
amounted to £9 million.
The banks feared the declaration of war
would trigger a run on the banks,
so the Chancellor David Lloyd George
extended the August bank holiday for three days
to allow time for the passing of the Currency and Bank Notes Act 1914,
by which Britain left the gold standard.
Under this Act the Treasury issued £300 million
(equivalent to £25.1 billion in 2013) of paper banknotes,
without the backing of gold,
with which the banks could repay their obligations.
Leading banker Walter Leaf described these Treasury notes as
“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”.
The first interest-bearing War Loan
was issued in November 1914 at an interest rate of 3.5%,
to be redeemed at par value in 1925–28.
It raised £333 million;
£350 million at face value as it was issued at a 5% discount.
It was revealed in 2017 that public subscriptions amounted to £91m,
and the balance had been subscribed by the Bank of England,
under the names of then governor,
It was followed by £901 million of a second War Loan in June 1915,at 4.5%.
£17.6 million of this was accounted for by conversion of the 3.5% issue,
and a further £138 million by holders of 2.5% and 2.75% Consols,
who were also allowed to transfer to the higher interest rate.
The government also pledged that if they issued War Loans
at even higher interest,
holders of the 4.5% bonds might also convert to the new rate.
In his memoirs Lloyd George stated his regret
that his successor Reginald McKenna
increased the interest rate at a time
when investors had few alternatives.
Not only did it directly increase the nation’s annual interest payments
by £100 million but it meant interest rates were higher
Compared to France,
the British government relied more on short-term financing
in the form of treasury bills
and exchequer bonds during World War I.
Treasury bills provided the bulk of British government funds in 1916,
and were available for terms of 3, 6, 9 and 12 months at an interest rate of 5%.
Although these were not formally designated as war bonds,
advertising was explicit about their purpose.
This April 1916 advertisement for 5% Exchequer bonds was typical of the time:
“Lend Your Money to Your Country.
The soldier does not grudge offering his life to his country.
He offers it freely,
for his life may be the price of Victory.
But Victory cannot be won without money as well as men,
and your money is needed.
Unlike the soldier,
the investor runs no risk.
If you invest in Exchequer Bonds your money,
capital and interest alike,
is secured on the Consolidated Fund of the United Kingdom,
the premier security of the world.”
Policy changed when Asquith‘s government fell in December 1916
The third War Loan was launched in January 1917
at a 5% discount to face value and
paying 5% interest (or 4% tax-free for 25 years),
a rate Lloyd George described as “penal”.
Holders of existing War Loans,
Treasury Bills and War Expenditure Certificates
could convert to the 5% issue.
Of the £2.08 billion raised by the 5% War Loan,
only £845 million was new money;
the rest was conversions of £820 million of 4.5% Loan,
£281 million of Exchequer Bonds and £130 million of Treasury Bills.
Labour politician Tom Johnston
would later write of the 1917 War Loan
“No foreign conqueror could have devised
a more complete robbery and enslavement of the British Nation”.
On 30 June 1932 Neville Chamberlain announced
that the Government would exercise its right to call in the 5% War Loan,
offering a choice of taking cash or continuing the loan at 3.5%.
Although they were obliged to give 90 days’ notice of such a change,
a 1% tax-free cash bonus was offered to holders who acted by 31 July.
This conversion saved the government about £23 million net per year.
On 3 December 2014 the UK Government announced
it would redeem the outstanding war loans on 9 March 2015.
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