Under a gold standard regime, exchange rates were understood to be self-regulating courtesy of the ‘price–specie flow’ mechanism. Expansions or contractions in the money supply from trade surpluses or deficits would bring about stability in exchange rates without threats to the gold standard and with minimal or no need for changes in interest rates. Government intervention in foreign exchange markets was thought to be unnecessary.
However, during the First World War, several countries departed from a gold standard. Also, changes in trade and financial flows, and their volumes, meant that without intervention, the system of fixed exchange rates would be untenable. Large swings in currency values would have had negative consequences for Britain, whose currency would surely sink if not supported, making much needed imports, many critical for wining the war, more expensive. To prevent this outcome, the country mobilized its investors’ U.S. dollar-denominated securities holdings through an entity charged with finding dollars in British investment portfolios, the American Dollar Securities Committee.
During the First World War, Britain had to import weapons and other goods from abroad, especially from the United States. This required the raising of sufficient U.S. dollars to pay for the purchases. Buying dollars on the open market was limited by illiquidity and the risk of depressing the exchange rate which would make the imports more expensive. One way to accumulate more dollars would have been by trade, but Britain was bound to run trade deficits given it needed war-related goods and its own export industries shrank during the war as war-related production was prioritized.
Another option was borrowing money in dollars. However, after an attempt to raise an American bank loan on the government’s credit nearly failed, it became clear that large-scale borrowing from the United States needed to be done on collateral. Further borrowings were initially secured by gold kept in Ottawa or Montreal and later by American securities previously held by U.K.-based investors. So, the government had to marshal the American securities holdings of its investors to sell or borrow against in New York for dollars.
In July 1915, Britain’s Treasury instructed the Bank of England to purchase U.S. dollar-denominated securities, either in private transactions or on the London Stock Exchange, and sell these securities in New York. Some $40 million (or £8.5 million) worth of dollar securities were acquired by the Bank of England on behalf of the Treasury from the Prudential Assurance Company to secure a U.S. dollar advance from J.P. Morgan. Another $28 million in bonds of the U.S. Steel Corporation, held by the Scottish Carnegie Trusts, were acquired by the government. The dollar securities holdings of St. Andrews University and the Church of Ireland were also put in government hands.
By year end, some $233 million was raised in the form of securities which were then transported to America. Eventually, some months would see a weekly pace of £8 million worth of shares and bonds sent to America in shipments scheduled for twice a week, with a member of the Bank of England’s staff accompanying each shipment. To conceal securities, not so much to prevent a loss as to prevent knowledge of these shipments from moving share and bond prices, the certificates would be packed into barrels and the unoccupied space filled with sawdust.
To improve the raising of sufficient amounts of dollars, the American Dollar Securities Committee was formed in December 1915. It was comprised of representatives from the Treasury, the Bank of England, the Bankers’ Clearing House, and the London Stock Exchange. Almost as soon as it was created, the committee sent a survey to large investors, namely insurance companies, banks, and trust companies, asking them to each list their holdings of dollar-denominated investments.
In January 1916, a list of fifty-four securities was drawn up indicating the instruments the Treasury was willing to purchase at their market prices. Payment would be made in sterling at current exchange rates or, at the option of the seller, in 5% Exchequer Bonds. Within ten weeks, some £40 million of dollar securities were purchased from their British holders.
In March 1916, the list of desired securities grew to 256 and a scheme was devised for taking possession of dollar securities on loan as well. The list of securities the committee was prepared to borrow was comprised of 778 names. These borrowed securities would in turn be used as collateral for dollar loans in the United States. A lender could deposit his securities with the Treasury and earn interest of between 0.5% and 1.0% beyond keeping any interest or dividends on the security for himself during the life of the loan. The lender could always opt to sell the security at any time or withdrawal his securities in New York. Depositors would receive a certificate representing the deposit and these could be traded in London.
Before the end of May 1916, some £51 million in securities had been purchased and £8 million placed with the Treasury on deposit. Both bonds and shares were sought by the Treasury. This program was expanded to other foreign and colonial securities and not only American ones. Still, the efforts were insufficient. The Chancellor of the Exchequer warned the British cabinet that the government would run out of dollars before the start of the final quarter of 1916.
Defence of the Realm Act
To raise even more in foreign securities, in May 1916 the government introduced a tax of 10% on the income earned from foreign securities which the Treasury was willing to purchase but which remained in private hands. This was quite effective at encouraging more holders to part with their investments. The rate of weekly sales and deposits quadrupled. Within just two weeks, some £23 million in securities were sold to the Treasury and a further £15 million deposited. From there, the volume of securities deposited continued to rise though sales fell. This was not yet enough.
Legislation passed at the start of the war, the Defence of the Realm Act, had given the government latitude in requisitioning materials for the war. In January 1917, a rule was issued under the authority granted by the act that compelled holders to part with their securities if requisitioned by the Treasury. In February, the first securities were requisitioned under the Defence of the Realm Act. Over one thousand securities were slated to be handed over to the state. The option to merely deposit the securities was discontinued a few months later and purchases made up the rest of the committee’s actions thereafter.
Still further schemes were arranged by the American Dollar Securities Committee though. In one, the committee arranged with Canadian provinces and municipalities to purchase and cancel their sterling bonds in London in exchange for their issuance of new Canadian dollar securities to be handed over to the government for sale in the United States. As with other approaches, the plan was a way of raising U.S. dollars by means of liquidating British-held securities rather than by trade or borrowing.
The committee made an arrangement similar to the above with American industrial companies with U.K. debts and also encouraged British companies to borrow in dollars in the U.S. and receive loan proceeds in sterling from the Treasury. In one of the larger maneuvers, a $40 million Canadian Pacific Railway bond was created and deposited with the American Dollar Securities Committee in lieu of the company raising a sterling bond. Again, this provided a means of raising U.S. dollars for the Treasury.
Between all of these programs, from the start of the war to its end the Treasury had purchased £216 million worth of securities and received £406 million on deposit with which to use as collateral for foreign loans. Over 2,000 distinct securities were purchased or borrowed by the state. This included approximately £285 million in dollar securities; most of the rest was made up of the British-held sterling-denominated securities of overseas issuers.
Foreign Securities Holdings
The First World War changed Britain’s role in the international financial system. At its start, the United Kingdom was the largest creditor country and British investors held large amounts of foreign securities. The development of railways in America owed much to British investment. Investors in the U.K. owned perhaps around £500 million in American securities before the war, of which perhaps £400 million, or virtually the entirety of the securities suitable for sale or use as loan collateral, was disposed of during the war, some by traditional means but most of it through the American Dollar Securities Committee.
The official exchange rate was maintained for much of the war. However, British investors held approximately £450 million less in foreign securities after the war than before. This was a factor in the coming diminution of Britain’s role as an international creditor during the inter-war years.
The American Dollar Securities Committee and the mobilization of U.S. dollar-denominated securities during the First World War was an inevitable outcome of the trade and financial consequences of the war. Britain could not fund its imports of war materials with exports of other products or sufficient international borrowing. So, another part of the capital account, the less talked about half of a country’s balance of payments, had to fill the gap, namely the divestiture of foreign investments. While not subject to nearly the same attention as other wartime financial statistics, this development explains a lot about how Britain’s financial role in the world changed so abruptly with the war.
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1. “Foreign Investments of Britain Proved Their Value During The War.” The Americas, Dec. 1920, pp. 30–31.
2. May, George Ernest. “Dollar Securities Mobilization.” Encyclopædia Britannica, 1922.
3. Osborne, John. “Chapter IV – Foreign Exchanges.” The Bank of England 1914-21 (Unpublished War History), 1926.
4. Wormell, Jeremy. “Overseas Borrowing and the Anglo-French Loan.” The Management of the National Debt of the United Kingdom, 1900-1932, Routledge, London Etc., 2000, pp. 150–186.