In the first weeks of the war, the government funded its war spending through advances from the Bank of England, but by late autumn 1914 it needed new funds in order to repay treasury bills that were due for redemption. It started planning what would become the first in a series of war loans.
The loan was to be unprecedented in scale, offering £350m of stock. It paid 3.5% interest and was repayable between 1925 and 1928. Stock was issued at a 5% discount, meaning that investors could expect an annual return of just over 4% over the expected lifetime of the loan - a very attractive rate for a government-guaranteed investment. The Bank of England offered loans at 1% below bank rate for the purpose of buying war loan stock, making it possible, and financially attractive, to borrow money in order to lend it to the government.
Although the government would later broaden its attentions to smaller investors, the first loan was aimed at wealthy people and institutions, who could afford the minimum subscription of £100 (equivalent to over £8,000 today). The support of Britain's commercial banks would be instrumental in reaching these potential investors. As well as being major investors themselves, they counted among their customers almost all the people the government hoped to attract.
By early November 1914 the banks knew that a war loan was being planned, but did not yet know exactly what the terms would be, or what involvement would be asked of them. They began internal discussions about how much they might invest, and met with competitors, both formally and informally, to discuss the situation.
On 16 November 1914, the day before the loan prospectus was published, Chancellor of the Exchequer David Lloyd George met with representatives of all the banks in the boardroom of our constituent London County & Westminster Bank. He needed to secure the banks' firm commitment in advance of the launch, because it was essential that the loan should be seen to sell well. Anything less might suggest - to allies and enemies alike - that Britain lacked confidence.
This meeting of bankers is most anxious to assist His Majesty’s Government in any way in its power in the issue of the proposed war loan, and recommends that banks should subscribe, firm or underwritten, an amount equal to 10% of their current and deposit accounts in the United Kingdom... [and] that in particular they will place the whole machinery of their head offices and branches free of charge at the service of the Government
Resolutions of the war loan meeting of bankers, 16 November 1914
At the meeting, Lloyd George emphasised the patriotic importance of the loan, and asked for the support of all those present. He also unveiled the full terms of the loan, prompting a flurry of telegrams as attendees relayed details to their respective head offices, and awaited final authorisation to participate.
As resolved at the meeting, nearly all the British banks subscribed 5% of their deposits to the loan, and underwrote the same amount again. They agreed to encourage customers to invest too. In later years, extensive marketing campaigns would accompany loan issues, but in 1914 the loan was mostly promoted on an ad hoc basis, by branch managers writing or talking to customers about the benefits of participating. This was a new departure for bank managers, who weren't used to encouraging customers to withdraw money and invest it elsewhere. Nevertheless, as a London County & Westminster Bank head office circular explained, 'there are patriotic and other motives to be considered.'
As well as promoting the loan, banks were responsible for handling and submitting applications. In compensation for the administrative costs involved, they received a commission of 1s 8d per £100 subscribed, or 0.08%.
In fact, the loan was not a success. Its scale had been shaped by the government's need, rather than the market's capacity to lend. Its terms were confusing, and it was put together without properly planning the timing or presentation. It only attracted £91m from the general public. The banks were called upon to contribute almost their full underwriting as well their intended investment, bringing their total allocation to £106m. The Bank of England took £40m, but this still left a shortfall of £113m. The Chancellor of the Exchequer announced publicly that the loan had been over-subscribed, and had particularly attracted smaller applicants, but this was far from the whole truth. In fact, a discreet way had been found for two Bank of England officials personally to buy the remaining stock, funded by covert loans from the Bank. The 1914 war loan had been kept from looking like a failure, but in reality it had only raised around half of its nominal target.