8 SEPTEMBER 1939, Page 20


Wm remarkable smoothness the nation's financial organisation has passed from preparedness to defence, and the regulations necessary for the prosecution of war. That the transition has been smooth is due partly to the measures of preparedness which had been brought into force before war broke out, and partly to the immense strength of the financial structure. Even so, one must pay tribute to the skill and resourcefulness with which the situation has been handled by the Bank of England and the Treasury. Taking the financial decisions of the past week one may classify them as (I) defensive or adaptive, and (z) enabling. In the first category are the stringent control of gold and foreign exchange dealings and new issues of capital, the replacement of Account dealings by cash dealings on the Stock Exchange, and the Bank of England's offer of help to the acceptance houses.

Complete control of foreign exchange and bullion transactions is, of course, an essential element in national defence, and nobody will quarrel with the Treasury, requisitioning of all gold and foreign exchange holdings, subject to deductions necessary for meeting outstanding contracts or reasonable requirements for business or travelling. Nor will there be any objection to the control of the new capital market, which will clearly need to be regulated in the interests of the Government as'a potential borrower on a large scale. No general moratorium is necessary now, as it was in 1914, but the acceptance houses will welcome the help promised by the Bank of England. If required, the Bank will advance the funds for meeting at maturity approved bills accepted before September 3, a course which releases the drawers and endorsers from liability. Fortunately, the amount of acceptances outstanding in the London market is very much smaller now than in 1914, when the total was estimated at something over £350,000,000, so that the financial help will probably not run into large figures. It will be valuable, all the same, to many houses, especially those with substantial interests in the German standstill bills.

STOCK EXCHANGE POSITION Right up to the last the stock markets managed to give rein to hope, and even within three days of the actual declaration of war prices were rising in Throgmorton Street. In this instance, of course, there could be no question of inside information, since nobody had a private line to the Chancellery in Berlin. Last week's buying was based on hope that sanity would prevail and, small as it was, it could not fail to bring higher prices in such strong technical conditions. Well, the "bears" have been right, although they have been cheated of their profits, and investors must now see things through. Meantime, the Stock Exchange Committee, indefatigable as ever, has evolved temporary regulations to govern such dealings as take place between jobbers' and brokers' offices pending the reopening of the "House."

As in the last war, business is to be on a cash basis, so that there will be no fortnightly settlement. Minimum prices for gilt-edged securities are to be retained, and the Committee may amend such prices and withdraw or extend them at its discretion. Clearly, dealings must for a time be on a very restricted basis, and a market will have to re-emerge gradually as conditions become more calculable. It is obvious that there can be little inducement to buy securities just yet.

THE GOVERNMENT'S BORROWING The k500,000,000 vote of credit by Parliament is a foretaste of what we must now be prepared for in the way of defence expenditure. It comes on top of about £750,000,000 under this head already sanctioned under ordinary Parliamentary procedure for the current financial year. There was no need, therefore, for Sir John Simon to tell us that we must be prepared for a supplementary budget. What the Government's plans are I do not pretend to know, but it requires little thought to realise that even with a large Defence loan a further substantial increase in taxation must now be accepted as inevitable. The Government's problem, very broadly, is to attract to itself, for war expenditure purposes, a much larger slice of the nation's income. This it can do by inflation, by taxation or by borrowing, or, as is probable, by a judicious mixture of all three.

The inflation method has the advantage of being easy to apply, but it is dangerous in its potential results, grossly unfair in its incidence—the fixed-money-income receiving classes are badly hit—and, for these reasons I feel that whatever inflation there is will be strictly controlled. Higher taxation is, in my view, both desirable, given the necessity for the increase in defence expenditure, and certain. Heavy as the existing burden is, the limits of our taxable capacity have not yet been reached. Firstly, there is bound to be a heavy borrowing programme, although, fortunately, there is no urgency about an issue of a public loan. Despite its recent expansion the floating debt is still at a figure which permits of further substantial increases without any risk of credit inflation.

LIFE INSURANCE PROBLEMS The decision of the English and Scottish Life Assurance offices to discontinue the issue of new life insurance policies at existing premiums without a restriction covering death through war-causes is not surprising. It still leaves the prospective policy-holder free to take out a policy covering death from all non-war causes at the existing rates of premium. It leaves him free also to cover his or her war-death risk by special arrangement with the insurance company, that is, by paying an extra premium. Above all, it leaves all the existing life insurance policies unaffected, and the large majority of these contain no war restriction.

It is not difficult to see why the insurance companies have had to take action. Ever since war became a probability the companies have been covering the assured against a bigger risk than the premium really warranted. It is, if anything, surprising that they continued the issue of unrestricted policies so long. To give cover for war-death now would be to introduce an ,entirely unknown and at present incalculable factor into life insurance policies. It is obvious, for instance, that the expectation of life between men and women and between young and old is radically altered. With more experience the insurance companies will perhaps obtain the data upon which to base a quotation for the war-risk. At the moment that risk can only be covered by individual nekoiation with certain insurance companies. In the event of death through war causes under a policy taken out now, the assured's representatives would be entitled to recover only the premiums paid or the surrender vulue. The safeguards which insurance companies have now introduced are more stringent than those at the beginning of the last war, when the war-risk restriction was applied only to actual combatants. But the risks to civilians are more uncertain and perhaps more incalculable than they then were. At that time also Government arrangement, were made to assist those who had difficulty in maintaining their insurance premiums through joining the services, and it would not occasion surprise if something similar were again introduced. CUSTOS.