Run

Think of Britain, whose people have long been the world's bankers, as a bank in itself. What happened last week, what has been happening since June, was a run on that bank, which could not be stopped. Britain the Bank, with great resources in goodwill and foreign investments,* did not have the gold to meet the cash demands of her international depositors. While there still was enough gold in the vaults to assure the Government's foreign obligations, the directors, otherwise the National Cabinet of Ramsay MacDonald, refused to pay out gold to private individuals who demanded it. Britain came off the gold standard.

Steps In The Run. Britain's immediate money troubles go back to 1925, when to uphold British prestige Winston Spencer Churchill, moon-faced Conservative Chancellor of the Exchequer, put the pound back on a gold basis. It had fallen as low as $3.15 in December 1921. If Britain's international banking was to resume shop, the pound had to be restored to its old value ($4.8665) to protect British foreign investments. So the pound was forced to par. Interest rates at London were fixed high to attract foreign deposits. A $200,000,000 credit was obtained in New York. It was never used. Britain's sheer determination to restore sterling's prestige was a chief factor in doing so. Par was reached when the Treasury contracted to sell gold to all comers. To prevent hoarding of gold sovereigns, pound notes were not redeemable at their face value in gold, but if a Briton could collect about $8,000 worth of paper money he could get a 400-oz. gold bar. Economists now agree that this move was made before the nation as a whole was ready for it. It was a move to benefit British banking and prestige. But it harmed British industry.

British industry was being heavily taxed to pay interest on the nation's War debt. But the War had cost British industry its primary markets in the Dominions and South America, where the U. S. entered, and India, which Japan began to penetrate. That made the harder taxes harder to pay. The rise in sterling was a handicap to industry in its foreign trade. Little capital was available, little desire evident to rationalize industry. And industry needed rationalizing. No sooner had sterling been restored than troubles began:

Coal. Coal strikes and government subsidies to coal operators during 1925 caused governmental budget deficits in 1926-27.

Dole. The Unemployment Insurance Act, or Dole, was passed in 1920 and later liberalized. By 1928 unemployment had increased so rapidly that the Dole alone was costing the country $100,000,000 a year. The cost last year was nearly five times that much.

Deposits & Loans. To help industry, the Bank of England began fostering low interest rates. This drove money out of England. Foreign deposits began to be reduced. Domestic capital went out in loans to Germany, to South America, to the Dominions. Some $600,000,000 was loaned to Germany. In June, when Germany could not pay, Britain was forced to dig deep into her reserves.

Scandals. Three financial scandals in two countries further strained British resources. The machinations of Clarence Hatry in London in 1929 ruined hundreds of British investors (TIME, Oct. 21, 1929. et seq.). Baron Kylsant's performances with the Royal Mail Line represented an aggregate loss of some $15,000,000 to little stockholders (TIME. July 29. 1929. et seq.). And the failure of the Banque Oustric in Paris last year burned so many French bankers' fingers that they began to withdraw French gold balances from London. They needed the cash.

Withdrawals. France had other reasons for withdrawing gold from England. She wanted the whip hand in continental politics, especially in negotiations with Germany. The withdrawals of the Oustric period ($15,000,000) soon were dwarfed. U. S. and Dutch bankers followed France's example. France saw danger ahead and stopped its withdrawals. Others did not. By the end of July, the gold drained from the Bank of England totalled $160,000,000. The New York Federal Reserve Bank and the Bank of France loaned Britain $243,000,000. That went too. Ramsay MacDonald resigned as Laborite Prime Minister and headed a coalition cabinet. France and New York arranged $400,000,000 more credit and that was exhausted while Chancellor Snowden was making drastic efforts to balance the budget. Last week the British Atlantic Fleet mutinied in protest at their prospective wage cut (see p. 20) and next day London learned that Britain's gold reserves were down to -L-59,742,000. Scot MacDonald rushed up to London and summoned the House of Lords (Commons were already sitting) to an emergency session.

What They Did. The Cabinet voted unanimously, and the bill was rushed through both houses of Parliament, that Winston Churchill's gold conversion act of 1925, requiring the Bank of England to sell its 400-oz. bricks at a fixed price, be suspended "for the time being." Britain returned to the financial arrangement she had had through the War and until 1925. In the House of Commons, Edward of Wales listened tensely, leaning over the clock in the Peers' Gallery. Wrote Scot MacDonald:

"His Majesty's Government is securing a balanced budget and the internal position of the country is sound. This position must be maintained. It is one thing to go off the gold standard with an unbalanced budget and uncontrolled inflation. It is quite another thing to take this measure not because of international financial difficulties, but because of excessive withdrawals of borrowed capital."

Immediate Effects. London and New York received word of this great step with comparative calm. There were no bank runs, no rush to the stores to convert money in goods for hoarding. Bankers filled the papers with the sort of optimistic statements that doctors make to very sick patients.

Said David Lloyd George: "If the nation remains steady and united we shall pull through all right."

Lord Beaverbrook, publisher of the Daily Express, beamed: ''Nothing more heartening has happened in years. The fact remains that we are rid of the gold standard, rid of it for good and all, and the end of the gold standard is the beginning of real recovery in trade."

Even John Pierpont Morgan broke his iron rule and consented to be interviewed in London. Said he: "This step seems to me to be the second necessary stage in the work of the National Government, the first being the balancing of the budget. The completion of the Government's work will be the restoration of trade in this country. This being the case it seems to me a hopeful and not a discouraging event."

London headlines announced FOOD PRICES WILL NOT RISE. GOOD NEWS FOR BRITISH INDUSTRY.

But. Stock exchanges were closed all through the world except in Paris, Spain, the U. S. and Canada (see p. 45). The pound sterling dropped from its gold value of $4.86 to $3.75 and closed in the neighborhood of $4.30. New York bankers took pride in telling each other how they had had chances to sell sterling short, but did not do so.

Sterling. Sterling simply means the unit of currency in Britain, anything that is legal tender. Traditionally, it comes from the Easterlings or traders of the German Hanseatic League who issued coins of such uniform weight and excellence that they were held at a premium. With the gold standard removed, how far would sterling collapse? Sir Josiah Stamp, director of the Bank of England, put the matter neatly: 'The consequences of the Government's action will depend upon the extent of world confidence in Britain henceforth. If you have anything saved in sterling what are you going to do with it? Keep it or sell it? If you keep it in the belief that Britain will restore the gold standard later, then everything will be all right. But if you get panicky and decide to sell your pound, then naturally the result will be that the pound will depreciate."

Prime Minister Richard Bedford Bennett of Canada announced that no matter what Britain did, Canada would remain on a gold basis. Nevertheless Canadian dollars dropped 5-c- in New York exchange during the day. Lord Willingdon, Viceroy of India, signed a decree in Simla taking the rupee off a gold basis with the pound. By British statute a rupee is worth one shilling sixpence. The rupee prepared to follow the shilling up and down the tables of foreign exchange.

Courses. Hanging over every British head last week was the memory of Germany in 1921 and the collapse of the mark. That was the most improbable worst that could happen. To stave it off there were two possibilities. Britain could revalorize the pound at some easier figure, $4.50, $4 or $3.50--whatever the world would pay. Or, trusting to the world's belief in British stability, Britain could let equilibrium in the pound be restored by natural balances, by limiting imports and building up foreign balances. A depressed currency naturally acts as an invisible tariff wall to cut imports. It also stimulates exports by attracting foreign buyers anxious to profit from a low rate of exchange. With the crisis not two days old it seemed certain that there would be no artificial attempt to peg the pound.

"Wait And See." At the Treasury it was unofficially announced that Britain would adopt a "wait and see" policy. If sterling settled down in the neighborhood of $4.40 there might be an effort to bring it eventually back to the old gold standard rate. If it goes a great deal lower, no such effort will be made. But until sterling finds its level, the great international bank that is Britain will not be so great. The U. S. and France, with the world's gold in their vaults, will have to lead world finances.

*There was still between $17,000,000,000 and $22,000,000,000 of British money invested abroad. Much of it is in real estate, but at least $5,000,000,000 is in securities which can be easily converted.

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