USURY ON THE GREAT WAR

USURY ON THE GREAT WAR 
(Extracted from:

THE FINANCIERS AND THE NATION
by The Rt. Hon. THOMAS JOHNSTON, P.C. 
EX LORD PRIVY SEAL
With a Preface by SIDNEY WEBB 

1934

   ‘ 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 (4/10/1916).

   ‘ 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 re-opened, 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 good- will 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.'
[Banking, by Dr. Walter Leaf, Home University Library, p. 46]

   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 totalling 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 3! 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. [Appendices to the Report of the Committee on National Debt and Taxation (1927), p. 18 et seq.]
   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 [Soddy, Wealth, Virtual Wealth, and Debt (Allen & Unwin Ltd.), p. 195]. That means £100,000,000 a year upon nothing.

   The first War Loan at interest was floated in November 1914, at 3 ½ 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 4 ½ per cent, interest ; and such investors, and corporations and banking houses as had held the previous War Loan Stock at 3 ½ per cent, were permitted to transfer into the new loan at the increased rate of interest.

   Actually of the 4 ½ per cent. Loan the sum of £176,000,000 was not new loan money at all, but was a considerable portion of the old 3 ½ 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 4 ½ per cent. Loan were old holders of 2 ½ per cent. Consols and 2 ½ per cent, and 2 ¾ 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 4 ½ per cent., the holders of the new 4 ½ 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. McKenna should have thought it necessary to raise the interest rate of a Government loan to 4 ½ per cent. Maybe this corresponded to the price that was being offered for other gilt-edged securities. But in view of the increase 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 3 2/3 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.' [War Memoirs of David Lloyd George, vol. i. p. 122]
   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 4 ½ 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 5 1/3 per cent. Into this 5 per cent. War Loan tumbled the holders on £820,000,000 of the 4 ½ per cent. Loan, thus securing an extra ½ 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 3 ½ per cent to 4 ½ per cent. And not only were the 4 ½ 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 3 ½ 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 enterprises, 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.’ [War Memoirs of David Lloyd George, vol. i. p. 123]

   The 4 per cent. Tax-Free Loan of 1917 provided a similarly convenient cloak for an increased tribute to the money-lending interests. If that loan be examined it will be found that out of a total loan of £52,000,000, over £30,000,000 was conversion from previously issued and less attractive interest-rated stocks.

   But even in these hectic days there were stray warnings in the capitalist-owned press that the money maniacs were overdoing it. While the Financial News gleefully and recklessly cried : ' Money is at last coming in to its own ! ‘ the more sober Glasgow Herald (May 1916) was declaring that:
   ' rates of interest have been raised and concessions made until people have come to regard the giving of money for the prosecution of the War, not as a patriotic duty, but as a profit-making medium ; this spirit is becoming so pronounced that we have reached the stage when capital is deliberately withheld in the hope that the Treasury will ultimately offer better terms. As we have said, the Government has fostered this spirit by its system of legalized bribery.'

And again :

   ‘ The investing public have been pandered to in a manner altogether out of keeping with the times. If the process is continued much further it may well be that victory can be purchased at too high a price. ... It has been said, and not without truth, that it is easier to find men willing to risk their lives than to find capitalists willing to risk their money, unless at a high price.' [Glasgow Herald, 27/5/1916 and 4/10/1916]

   The Daily Telegraph made no bones whatever about it. War Loan Investment was, it advised its readers, no sacrifice, but a ' golden opportunity ' and a ' certain gain.' The distressed Glasgow Herald protested of the 1917 War Loan that ' It is not helping us at all to prosecute the War.' And in June 1917 The Nation declared that
   ' a huge proportion of the money loaned to the Government is inflation representing no real savings on the part of the bankers and financiers who have manufactured it themselves. This means that when the War is over . . . the propertied men in this country will be several thousand million pounds the wealthier.'

   And now we have the indisputable testimony of Mr. Lloyd George, the war-time Prime Minister, that from 1915 onwards the country has paid annually huge unnecessary sums in War Loan interest, rising to as high as £100,000,000 per year.

  By January 1917 the position was that

£176,000,000 of the loan issued in November 1914 at 3 ½ per cent, had been, in the year 1915, gradually raised to 4 ½ per cent.

£138,000,000 of 2 ½ per cent, and 2 ¾ per cent. pre-War loans had been gratuitously raised to 4 ½ per cent, in the year 1915.

£820,000,000 of 4½ per cent, money (including presumably the two conversions above noted totalling £404,000,000 already raised to the rate of 4½ per cent.) were gradually further raised in 1917 to 5 per cent.

£130,000,000 of Treasury Bill money and £280,500,000 of Exchequer Bond money had also converted from lower rates into the higher 5 per cent, interest rate.

If we accept 3 ½ per cent, the outbreak-of-war rate for money and that is Mr. Lloyd George's figure as the normal and non-profiteer rate, then these successive bribes down to 1917 meant, upon the most conservative computation, a net increase of £30,000,000 per annum in the nation's toll to its money-lenders. Nor does the fact that in the year 1932 part of this money was reconverted to a 3 ½ per cent, rate, disguise, in the slightest degree, the shameless money ramps that were permitted for seventeen years onwards from 1915.
   Whoever else made economic sacrifices during the War, the rentier class, as a class, did not.
   The man who invested £10,000 in British Government Stock before the War would have received interest of £325 per annum. By October 1915 he would have received £450 per annum. After allowing for the increased Income Tax from 1s. 3d. to 3s. 6d. per £1, he was in 1915 better off by £67 per annum. And while the Income Tax rate rose in subsequent years, so too and more, did the war loan interest rise to meet it. For example, the man with 100,000 sunk in Consols in 1913-14, earning 2 ½ per cent, got £2500 of an investment income. Upon this sum he had to pay Income Tax and Super Tax amounting to £137, 1s. 8d., leaving him with £2362, 18s. 4d. In 1918-19 the same man with his £100,000, by that time yielding 5 per cent., or 5000, would pay from his 5000 an Income Tax and a Super Tax amounting altogether to £1787, 10s., leaving him with £3212, 10s., or an increase in his net income of £849, 11s. 8d. after paying his taxation. It is true, of course, that this man's death duties had increased as also had his local rating and his cost of living, but these charges had equally increased for other classes whose income was not secured upon the national taxes.

   In post-War years there appears another form of money-lending to the State to which attention must be drawn the form known as Savings Certificates. These Certificates have had various interest yields, usually, however, running about 4 per cent, per annum, and each investor is authorized to hold as many as 500 certificates and is exempted from all Income Tax upon them. By this method a man, his wife, and say five of a family may each hold 500 certificates, or a sum-total of £3500 upon which all Income Tax is evaded on the interest yield.

   By June 1919 we came to what was gleefully described as the Joy Loan. The rate of interest was nominally 4 per cent., but the investor had only to pay £80 for each £100 of stock, so that the yield was 5 per cent., and holders of the previous 4 ½ per cent. War Loan, various Exchequer Bonds, and the first three series of National War Bonds were accepted at par. The total issue of the loan was £409,000,000, but £120,000,000 of this sum was simple conversion from a lower rate of interest and really meant an annual increase of over half a million sterling for the taxpayer to meet in interest. More important, perhaps, was the proviso that fixed these rates until the year 1960, so that although, as the Manchester Guardian sapiently observed, the interest rate for money might fall after the War, the nation would be tied up to the rate of 5 per cent., and this, indignantly declared the Guardian :
   ‘will mean a gift of thousands of millions of pounds unearned increment to the investor out of the taxpayer's pocket . . . from the point of view of the English people this is the most burdensome and vicious loan in English History.' [Manchester Guardian, 13/6/1919]

   And the comment of the Nation (Radical) [Nation, 21/6/1919] was no less indignant :

   ' To find large numbers of these men and their ill-gotten money planted permanently on their country and sucking each year an interest higher than that paid to current thrift will act, we feel sure, as a dangerous social irritant in the body politic.'

   The Joy Loan, moreover, was made more joyous still by a clause decreeing that stock costing £80 was to be accepted in payment of Death Duties as if that Stock were the equivalent of £100 - a clear gift of over 17 per cent, to the heirs of the patriotic lenders.

   The Victory Bonds (£100 Bonds for every £85 and an interest rate of 4 per cent.) issued at the same time raised £359,500,000, of which £71,500,000 was simple conversion from lower interest-yielding War Loans.

  The few isolated protests against these proceedings went unheeded, and year after year the Financial Interests openly looted additional millions from the National Treasury. When in the summer of 1921 a load of National War Bonds was being converted into an additional burden to the State, The Times was constrained to utter a solemn protest and warning, Under the heading of ' Financial Folly ' its leading article declared that :
  ' There is being enacted before our eyes at this moment a most extraordinary performance in finance : and yet the spectacle seems visible only to a few... the Government... offering holders of £632,000,000 of 5 per cent. National War Bonds an opportunity, quite unsought, of exchanging each £100 into amounts of 3 ½ per cent. Stock, varying from £160 to £163. [This refers to the first Conversion Loan, 1921] In other words, they are being asked to receive from the taxpayer £4,000,000 more in interest and between three and four hundred millions of additional capital when the loan is redeemed.' [The Times, 13/5/1921]

   By this time saner elements in the City had come to the conclusion that the limits of interest raising and capital conversion into increased plunder of the national debt had, at last, been reached. The public would stand no more of it. Yet new vistas of profit opened up to the rentier class when Wall Street and London City agreed to begin a policy of price deflation. The idea was that the bankers were to call in loans and overdrafts : they were to compel manufacturers to throw their goods hurriedly upon the markets so as to raise cash for the repayment of their bank loans. At the same time the Government were to throw their surplus War Stores in clothing, &c., upon the markets, thereby intensifying the glut in the markets and making a fall in prices inevitable. As the prices of consumable goods fell, wages were to be broken.

  But while prices were to crash the rates of War Loan interest were fixed, and the bankers foresaw that every fall in the price of potatoes and wheat and cheese and boots and coal would mean that War Loan interest would be able to purchase increasing quantities of these commodities. If prices, let us say, fell by half, the value of interest would be doubled. In other words, a fall in prices by half would double the value of the War Loans. As the nation would pay off the loans or meet the interest upon the loans it would require to yield up double the quantity of consumable wealth to the money-lending class.

   Mr. Bonar Law early saw the alarming possibilities of this new financial policy, and bravely warned the House of Commons of what it would mean to the taxpayer and the National Debt. ’We had borrowed,’ he said, ' £8000 millions ; we should probably require to pay £16,000 millions.’ [Hansard, 2/5/1922] Sir Henry Strakosch has estimated that the fall in prices during the four years 1925-8 added silently no less than £1,300,000,000 to the capital value of the National Debt, [Supplement to the Economist, 5/7/1930] and Mr. J. M. Keynes has declared that a fall in prices to pre-War level (and some prices are already below pre-War level) would make the British National Debt 40 per cent, greater than it was in 1924, and double what it was in 1920. [The Nation, 20/12/1930. The policy of deflation has of course a similar effect upon municipal debt, feu duties, and all forms of fixed money contracts.]
   Nevertheless, this policy of deflation and price and wage deduction, with its appalling social consequences in poverty and unemployment, was relentlessly pursued. And not until 1932 did any British Government even pretend to set a limit to the toll of the money-lenders. In that year the Treasury, reversing the policy it had consistently buttressed since 1915, appeared with a loan conversion scheme which reduced the rate of interest upon £2,000,000,000 of Government Stock.

   The scheme, however, was voluntary ; five per-centers were invited to exchange into a new 3 ½ per cent, loan to correspond with the rate for money prevailing in 1932 ; but the appeal had to be sweetened with a bribe of cash down to be paid immediately to those who would accept the new terms ; and even so, the 5 per cent, rate of interest had to be paid until December 1932.

   The bribe, in fact, cost £20,000,000. or nearly a year of the saving to be derived from the Conversion Scheme. And the bankers insisted upon receiving a fee of 5s. per £100 for rubber stamping any application for Conversion Loan which went to the State through their hands.
   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, [Encyclopaedia Britannica, ii. 986] 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.