War Loans were propped up by Bank of England
New research shows WW1 government scheme was a failure
New research into Britain’s World War 1 War Loan scheme has revealed that it was much more of a failure than previously realised.
In August 1914 the then Chancellor of the Exchequer, David Lloyd George, took the UK out of the gold standard and from November issued War Loans at an interest rate of 3.5%, to be redeemed between 1925 and 1928. A second tier followed in June 1915, offering 4.5%, again to raise money to protect the economy in wartime, and a third in 1917.
Now, detailed analysis of restricted access Bank of England ledgers by researchers at Queen Mary University London (QMUL) has revealed the scheme was ‘a spectacular failure’, to the extent that the Bank of England had to fund half the shortfall in secret.
As part of the project the research team was granted exclusive access to ledgers in the Bank of England which show that the government’s first War Loan scheme of 1914 raised less than a third of its £350 million target. The £91 million that was raised publicly came mostly from a tiny group of wealthy financiers, companies, and private individuals.
QMUL researcher Norma Cohen said: ‘The fundraising effort was such a failure that the establishment felt compelled to cover it up. The truth would have led to a collapse in the price of outstanding war loans, which would have endangered future capital raising. Had it come to light, it would have been a propaganda coup for the Germans.’ To hide the fact that the Bank was forced to step in, the bonds were classified as holdings of ‘Other Securities’ in the Bank’s balance sheet, rather than as holdings of government securities.
The failure of the scheme was in stark contrast to public perceptions, thanks to a propaganda effort. The Financial Times reported on 23 November 1914 that the scheme was ‘over-subscribed by £250 million’.
The Bank of England’s chief cashier Sir Gordon Nairn later formally swore a statement that all £350 million of the original War Loans had been sold to the public – this was not true