"DOLLAR SECURITIES MOBILIZATION. - In the British system of war finance, 1915-7, an important part was played by the mobilization of securities. During the World War enormous supplies of war materials of all descriptions had to be purchased by England from abroad, and in addition, owing to the withdrawal of labour from production in the Allied countries, abnormal quantities of goods had to be obtained from the same sources.
The exchange facilities available were entirely inadequate for the purpose of making the payments necessitated by these purchases, and artificial methods had to be adopted to provide in suitable foreign currencies the funds required. The natural procedure was by borrowing, and by the realization of such assets as were marketable in the creditor countries.
Though in some instances, and more particularly in the early days of the war, it was possible to effect loans abroad on the credit of the borrowing countries, it was found necessary to a large extent to provide collateral security in addition. The various securities quoted on the Stock Exchange and others of similar nature held in the Allied countries formed the natural and most fruitful field for obtaining suitable collateral and for providing the assets most readily marketable abroad.
Before the introduction of any official control a considerable amount of securities of the United States of America and other foreign countries was sold abroad, on account of the relatively high prices obtaining and the favourable terms on which the proceeds could be remitted home, owing to the fall in exchange rates which had already taken place. Even after the introduction of official action these natural sales continued, though necessarily in decreased volume. The funds provided by means of these sales and from loans effected abroad without collateral security supplied in the main the necessary sums to pay for the purchases made, but as the demand for goods and raw material became more insistent the British Treasury found it necessary to take official action. In July 1915 instructions were given to the Bank of England to purchase American dollar securities by private treaty or through the London Stock Exchange and forward them to New York for sale. By this means securities of the nominal value of $233,000,000 were obtained before the end of the year and the pressing requirements of the Treasury were satisfied.
By Dec. 1915, however, it had become apparent that this somewhat haphazard method of purchasing available securities was not altogether satisfactory nor likely to achieve the desired results, and it was therefore decided to adopt a more comprehensive scheme. Accordingly, the Treasury appointed a committee, known as the American Dollar Securities Committee, with a permanent secretary of the Treasury as chairman, the deputy governor of the Bank of England as deputy chairman, and four members, two of whom were nominated by the Bankers' Clearing House and two by the Committee of the London Stock Exchange. The management was placed in the hands of Mr. (afterwards Sir) George May, the secretary of the Prudential Assurance Company.
In order to obtain some idea as to the volume and class of securities available a circular letter was sent to all the larger investors, such as insurance companies, banks and trust companies, asking them to submit lists of American dollar securities held by them, with a view to a possible sale or loan to the Treasury. Active operations were begun in Jan. 1916, at the National Debt Office in Old Jewry, by the issue of a list of 54 selected American dollar bonds which the Treasury was prepared to purchase. The prices offered were based on the current New York closing quotations of the previous evening, the New York percentage price being converted into the London sterling price at the existing rate of exchange with accrued interest.
In illustration of the procedure adopted it may be mentioned that the official prices were not only posted up at the London Stock Exchange but by a special arrangement were telephoned by the General Post-Office to all the provincial stock exchanges at about to A.M. This enabled the country stockbrokers to deal promptly with the committee by means of a short telegram stating the amount they wished to sell and quoting the official number assigned to the particular security. Such bargains held good provided that the telegram was handed in at the provincial post-office not later than 2 o'clock (later extended to 4 o'clock) on the day of the quotation. As regards London dealings, the bargains were booked over the counter at the National Debt Office. To facilitate delivery of securities a branch of the Bank of England was installed in Old Jewry and on the Bank's officers devolved the duty of accepting the securities in good order and paying the purchase money. It is interesting to note that brokerage was paid by the Treasury and not by the seller, while unstamped bonds were accepted on the same terms as those hearing the English stamp. In the early days of the scheme payment was made at the seller's option in British Government Exchequer bonds then being issued. In this way the double purpose was served of obtaining the means of securing a credit in New York and increasing subscriptions for British Government securities. Additional lists of bonds and shares for which daily prices were quoted were published from time to time, while special prices were made for suitable securities not appearing in a published list. Since it was essential for the Treasury to obtain the largest possible credits in New York at the earliest possible date negotiations were entered into with large holders of securities, and bulk prices were quoted for large and comprehensive blocks.
The scheme was successful from the outset, as will be seen from the fact that securities to the value of over £40,000,000 sterling were obtained in the first ten weeks of its operation.
During the first months of the Committee's existence no securities had been taken on loan, but towards the end of March 1916 a deposit scheme, subsequently known as scheme A, was introduced. Briefly the scheme was as follows: Securities were to be deposited for a period of two years from the date of deposit, the lender to receive all interest and dividends on the securities deposited by him, plus an additional z of i % per annum on the nominal amount. During the currency of the loan the lender was entitled (I) to have his securities sold in New York free of expense, the proceeds being paid to him in London at the current sterling rate of exchange, or (2) to obtain the release of his securities in New York against payment to the Treasury agent there of a sum in dollars equivalent to their American value, a similar sum in sterling being paid to the depositor in London.
The Treasury was also prepared in most instances to purchase for sterling the deposit certificates in London at the current American prices of the securities deposited. Though there was no intention to realize the deposited securities except in an emergency, the right to do so was reserved to the Treasury as otherwise the securities would have been useless as collateral for loans in New York.
In Aug. 1916 a further loan scheme, B, was brought into force. It differed from the previous scheme in that (1) deposit was for a period of five years from a fixed date, instead of two years from the date of deposit; (2) under it were included many colonial and foreign stocks and bonds in addition to the purely American securities; and (3) the right to realize securities as given under scheme A was limited to American securities having a market value in New York. Power was given to depositors under scheme A to transfer to scheme B, and this option was in most cases exercised.
The securities purchased were sold immediately a suitable opportunity offered, and those remaining unsold, together with deposited American dollar securities, were used for short borrowing as required. The main use, however, to which the deposited securities were put is illustrated by the particulars of a typical loan floated in the United States of America prior to the entry of that country into the war: - UNITED KINGDOM 3 5 year 51% Notes Dated Nov. r 1916. Amount of loan.. $30o,000,000 Collateral. .. .. 360,000,000 Composed of $ 59,5 00, 000 Australasian.
2 5,5 00, 000 South African.
20,000,000 Argentine and Chilian.
25,000,000 British Railway Debentures. 180,000,000 U.S.A. dollar securities and Canadian.
Up to May 27 1916, rather less than five months after the formation of the Committee, the amount paid for securities purchased exceeded £51,000,000 sterling, while the nominal amount of securities deposited on loan was about £8,000,000. Since these figures, however, were not sufficient to provide the funds required, the Chancellor of the Exchequer stated in Parliament that powers would be taken to impose a special tax of 2S. in the £1 on the income of all securities that the Treasury, by means of special lists, declared its willingness to purchase. The necessary authority of Parliament was granted. Relief from the additional tax was only obtainable by selling or loaning the specified securities to the Treasury. The effect was immediate. In the first two weeks following the announcement the purchases exceeded £23,000,000 sterling and the deposits £15,000,000 sterling. In course of time the purchases greatly decreased but the deposits, mainly owing to the introduction of scheme B, assumed very large proportions. For example, during the month of Sept. 1916, the securities taken in on loan amounted to about £10o,000,000. The enormous requirements of the Treasury are emphasized by the fact that in spite of the large amounts of securities purchased and deposited a still more drastic step had to be taken.
On Jan. 24 1917, a regulation issued under the Defence of the Realm Act came into force, by which the Treasury was given power to requisition securities. The first order under this regulation was issued on Feb. 17 1917, and required owners or custodians of specified securities to deliver them up in return for an amount of compensation based on the current market values. Holders of securities not ordinarily resident in the United Kingdom and certain other holders were exempted from the terms of the order. The compensation was payable within seven days of the transfer, and power was given to reduce its amount in case of late delivery. Altogether four such orders were issued, the number of securities included being 1,076. On March 1 1918 deposit scheme B was closed to new deposits, except in regard to securities subject to the extra 2S. tax and which had not previously been included in the list of requisitioned securities.
A little later, when the securities under scheme A began to fall due for return, depositors were given the option to extend the term to five years. Nearly all such depositors availed themselves of this offer.
In addition to the purchase and loan schemes which have been described above, the American Dollar Securities Committee undertook various operations for the purpose of placing dollars at the disposal of the Treasury in America. In this connexion may be instanced arrangements with various Canadian provincial and municipal authorities for the purchase of their sterling securities in London for cancellation and the issue, in place thereof, of Canadian dollar securities for sale in America. Similar plans were adopted in the case of certain American industrial companies. Further, arrangements were made with certain British corporations to issue their own loans in America and place the dollars obtained at the disposal of the Treasury, the latter looking after the American loan and providing the English company with sterling in London. As an instance, reference may be made to the issue by the Central Argentine railway of a $15,000,000 loan in America.
The labour involved in connexion with the operations and more particularly with the loan scheme, was of considerable magnitude, and it was necessary to adopt every device in order to lessen the work, which in the main had to be carried out by a staff collected in a time of emergency. In the early days an agreement was entered into with the agents of over £ioo,000,000 bearer securities, the coupons of which had to be encashed in London, to pay the coupons on deposited securities, plus the additional z % per annum, and for this purpose they were supplied with schedules giving such information as would permit of the calculations and payments being made. In Sept. 1917 this procedure was discontinued, and thereafter the work was taken over by the National Debt Office.
With regard to the registered stocks on deposit, much duplication of work was avoided by the railway companies and other paying agents undertaking to keep the Treasury register and pay the increased interest as it fell due. By this means it is estimated that the authorities were relieved from the preparation, etc., of about 350,000 dividend warrants each year. Further, certain approved agents were appointed to accept deposits of amounts of less than $5,000 each, the securities being handed over in bulk to the Committee; payment of interest on the aggregate amounts was made to such agents, who in turn distributed the sums received amongst the individual depositors.
The United States of America was naturally the chief source of supply, both for munitions of war and for goods, and therefore the financial arrangements already referred to were mainly directed to the provision of dollars in order to effect the necessary payments. In a smaller degree, however, payments had to be made to other countries, and certain of the securities obtained by the Committee were used to meet these obligations.
The United Kingdom was, of course, preeminent as the holder of foreign securities, and she therefore played by far the greater part in the efforts made towards mobilization in the Allied interests. But France also held a considerable amount and had a deposit scheme of her own, though on nothing like the same scale as that of the United Kingdom. In her scheme no purchases of securities were made, but a considerable volume of private sales to the United States of America was effected, both direct and through London, and to a certain extent purchases of French holdings were made by the American Dollar Securities Committee through the medium of the banks of France and England.
The total amount of securities dealt with under the British mobilization scheme, including those bought by the Bank of England prior to the appointment of the American Dollar Securities Committee, was as follows: Purchases Deposits .
Total These particulars purchases consisted $680,000,000 $241,300,000 £ 27,800,000 £ 4,100,000 Fl. 5,400,000 Similarly the deposited $197,800000 $303,600,000 £ I 15,100000 £172,000,000 £ 17,500,000 Fr. 8,500,000 Kr.8, I oo,000 Fl. 4,400,000 The total number of different securities dealt with was 2,027.
The total amount of American dollar securities which passed through the hands of the Committee was thus approximately £285,000,000. In addition securities to the value of probably £100,- 000,000 were sold direct to America through the ordinary channels, making in all, say, about £400,000,000. Various estimates have been made from time to time of the amount of American securities held in Great Britain before the war. The data available on which to base any such estimate are very vague and uncertain in their nature, and the present writer is inclined to believe that any such estimates can only be regarded as more or less intelligent guessing. In his opinion the total amount of American securities held in Great Britain before the commencement of hostilities was certainly not greater than £600,000,000 and probably nearer £500,000,000.
The operations of the Committee undoubtedly achieved the purpose for which it was formed, as during its existence the rate of exchange practically remained constant at about 4.76k dollars to the 1. Although securities were purchased and taken on loan after the Americans came into the war the amounts obtained were not great, and it is believed that practically all available American securities suitable for sale or collateral for loans had been dealt with.
It is difficult to see what course could have been taken in order to obtain the necessary credits abroad in sufficient amount when these securities had been exhausted, but speculation on this point would be idle since the necessary credits became available after and on account of the entry of the Americans into the war. (G. E. M.)
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