THE NEW WAR LOAN.
MR. McKENNA deserves the warmest congratulations upon his first achievement as Chancellor of the Exchequer. Not only has the scheme of the new War Loan been, as far as can yet be judged, well thought out in every detail, but it was expounded to the House of Commons in that clear and businesslike manner which a business nation expects of its Finance Minister. The case for a new War Loan is overwhelming. Since the yield of the last War Loan ceased to cover the cost of the war, the country has been living from hand to mouth on money brought in by the issue of Treasury bills. These bills are issued for short periods, and there is a liability to pay them off when they fall due. No prudent Chancellor of the Exchequer could permit this liability to go on extending indefinitely. It was absolutely necessary to take steps to assure the country possession of a sufficient sum of money to meet present needs unencumbered by a liability for repayment after a few month,' interval. The Loan which Mr. McKenna has now issued with the consent of the Cabinet and the House of Commons postpones the liability for repayment to the year 1945, while reserving to the Government an option to repay, if it should be in a position to do so, in 1925. The Loan bears interest at the rate of 41 per cent., and is issued at par. Some critics have already suggested that Ai per cent, is a needlessly liberal rate of interest. The answer is that we have to get the money, and it is worth while in the present emergency to err on the side of liberality in order to attract, if possible, money from neutral countries, and especially from America, as well as from residents in the United Kingdom. It is better to pay an extra per cent, than to run the risk of the Loan failing.
The world is eating up capital at such an enormous pace that our old conceptions of the necessary rate of interest for a British loan must be entirely revised. Very wisely Mr. McKenna has, in framing the prospectus for the new Loan, made provision for the possibility that even 41 per cent. may not in the future suffice to meet the necessities of the case. The prospectus provides that all holdings in this new War Loan will always be treated as the equivalent of cash for purposes of subscribing to any future War Loan. Consequently, if a future loan should be issued at 5 per cent, the investor in the present 4i per cent. Loan will be able at 011W to obtain the higher rate of interest. Thus investors are relieved of the uncomfortable feeling, which may to some extent have prevailed when the last War Loan was issued, that by investing at once they might be depriving themselves of the possibility of a more profitable investment at a later date. Quite justifiably Mr. McKenna also deals retrospectively with this consideration. He argues that the subscribers to the last War Loan are necessarily injured by the issue of the new War Loan at a higher rate of interest, because their present holdings are immediately depreciated. He therefore permits them to convert their present holdings at par, subject to the condition that they first of all subscribe in cash to the new War Loan. Investors in Consols are treated in the same manner. The terms are worth noting. Any person who has paid up in full for £100 of the new War Loan is entitled either (a) to convert £100 of his old War Loan into new War 1,am at the price of 95 (i.e., the price at which the old War Loan was floated) plus £5 in cash, or (b) to convert £5 of Consols into £50 of new War Loan. Similar terms are offered for 2i and 2i per cent. annuities. It will be noticed that Console are here taken at a price of 661, which is just above the minimum price at which they may be sold on the Stock Exchange.
Here again critics have suggested that the concession is unnecessarily generous ; but that criticism is based on a too purely commercial view of the situation. We have to deal with a tremendous national and financial emergency, and it is of the utmost importance to maintain British credit intact. Admittedly the investors in the old War Loan and the investors in Consols have no legal claim to the concession now made to them ; but this concession is, as Mr. McKenna justifiably boasted, a proof to the whole world that the British Government will stand by their 'creditors, and that consideration is not only of immediate value to us, but possibly of even greater future value. It may be argued that by offering to pay a high rate of interest on the Loan, and by artificially enhancing the present price of the old War Loan and Consols, we are placing a heavy burden on future taxpayers. The answer is that the tax- payer has more to gain by the maintenance of the credit of his country than he has to fear by increased taxation. It is also important to add that in two respects the State gains a financial advantage by this concession, for so far as the old War Loan is converted the liability for repayment is postponed from 1928 to 1945. Again, with regard to Consols, so far as they are converted, the State in effect acquires the right of paying them off at the price of 68; in the year 1925, whereas it is conceivable that when that year arrives the market price may be much higher.
So much for what may be called the haute finance of the Loan. There are other aspects of the new scheme which are of equal importance. For the first time in modern history a definite attempt has been made by the Govern- ment to popularize a national loan. Two steps are taken. First, bonds for .85 and £25 bearing interest at the rate of 41 per cent, are to be sold in the post offices over the counter; secondly, vouchers for sums as small as 5s. are not only to be on sale in the post offices, but are also to be made available through the agency of Trade Unions, Friendly Societies, and works offices, if these agencies will voluntarily help. One may assume that this help will be readily given, and in particular that every employer will arrange when he is paying wages to give to his employees the opportunity of buying War Loan vouchers.
The scheme for these vouchers is extremely well thought out, and Mr. McKenna very properly paid a compliment to Mr. Montagu for the part he has played in designing the scheme. The vouchers are to bear interest at the rate of 5 per cent, per annum for each completed month, which means a farthing per voucher per month. Broken months do not count, so that the rate of interest will on the average be brought down a little below 5 per cent. When a sufficient number of vouchers have been accumulated they can be exchanged into War Loan bonds. In the interval the investor in these vouchers can convert them into cash by paying them into his Savings Bank account, but will of course in that case cease to draw War Loan interest upon them. It is to be hoped that the difference between the 5 per cent, payable on War Loan vouchers and the 2i per cent, payable on Savings Bank deposits will tempt a considerable number of people to choose a permanent investment in preference to a temporary deposit. From the point of view of the State it is important to add that if this choice is applied, as it probably will be, to existing Savings Bank deposits, the taxpayer will become liable for an increased charge for interest. On the other hand, the State will be free from the liability to meet a call for money.
How much money will be obtained by thus popularizing the Loan is a matter of pure guesswork. The data do not exist for forming a definite opinion. Hitherto the tendency of the financial advisers of the Treasury has been rather to pooh-pooh any schemes for popularizing Government loans ; but it has to be remembered that great financiers have their human side, and that the City instinctively looks askance at any device for obtaining money for the Treasury otherwise than through City agencies. Much will depend upon how the new scheme is popularized by the Press, and how it is pushed by Trade Unions and Friendly Societies and individual employers. In any case, it will be an enormous advantage to the country to bring in large numbers of wage-earners as shareholders in the British Government.
With regard to the amount of the liability, Mr. McKenna was probably right in declining to ask the House for a fixed sum, although in so doing he has certainly created a new precedent. But of necessity the question of amount is complicated by the question of the extent to which present holders of old War Loan and of Consols may convert their holdings. For it is necessary that they should all be permitted to do so if they choose; but if they do all exercise that option the amount of new money raised would more than cover the immediate necessities of the State, whereas if they do not all exercise that option the total sum authorized might not be reached, and the Loan would then be described as a failure, although the State had actually received more money than it wanted. Nor is it necessary to go in detail into the figures which Mr. McKenna gave with regard to our present expenditure. Of necessity these figures are a matter of estimate. We do not know how long the war will last ; we do not know how greatly the cost of the war may be increased even a few months hence. What we do know is that at the present time the country is spending very nearly three millions a day, and that the revenue is only yielding about three-quarters of a million. Consequently two and a quarter millions at least have to be found by borrowing every day, and in the near future this sum will probably rise to two and a half millions. These are the broad facts which have to be impressed upon the country. They can be understood by everybody, and everybody who understands them ought to apply to himself the necessary inference and subscribe to the new War Loan out of any money he can possibly save.
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