Throughout 1916 the government focussed its domestic borrowing on short-term treasury bills. In January 1917, however, the newly-formed coalition government returned to the idea of large one-off borrowing structures. It launched the third, and largest, of the British government war loans.
The new loan was offered at a 5% discount on face value, meaning that it cost £95 to buy £100 of stock. The interest rate was 5% per annum, or 4% tax free for 25 years. Crucially, holders of existing war loan stock, treasury bills and exchequer bonds could convert to the new issue.
The Chancellor of the Exchequer met with the banks before the prospectus was issued. Like his predecessor at the time of the 1914 and 1915 loans, he outlined the loan's terms, emphasised the important role of the banks in its success, and asked for their undertaking to do everything in their power to support it. This time, however, his focus was not on asking the banks to invest directly, but on encouraging them to persuade customers to invest, including by lending them money for the purpose at favourable rates. He also secured agreement from most of them to underwrite the loan to the extent of £150m, if overall subscriptions fell below £620m. In the event this facility was not called upon.
We must not allow ourselves for one moment to think or say 'I did my bit in the last loan' - I daresay we all did, but...we have to do another bit now, and a much larger bit.
Chairman's speech at the AGM of Williams Deacon's Bank, January 1917
As before, the banks were required to market the loan to their customers. Some branches extended their opening hours to process more applications, usually on the personal initiative of local branch managers rather than on instructions from head office. Other branches in the area, not wishing to offer less, did the same. In Bolton, for example, Manchester & County Bank’s branch manager decided to follow the lead of nearby Farnworth branch by opening from 7pm to 8.30pm on two evenings a week, even though, he wrote, ‘we…don’t think it requisite.’
Banks played a vital role in processing subscriptions. On the Isle of Man, for example, our constituent Isle of Man Bank handled applications for over £507k of war loan stock, a sum representing 67% of the total raised on the island. The Royal Bank of Scotland, meanwhile, handled applications amounting to nearly £20m, a figure not far short of matching its total deposits at that time.
The January 1917 war loan raised £2,127m, but only £867m of that total, or 41%, was new money. The rest came from treasury bills, exchequer bonds and previous war loan stock being converted to the more favourable terms. Of the £900m raised by the 1915 loan at 4.5%, £820m was rolled into the 1917 loan at 5%, increasing the cost to the government without actually bringing in new money. Of course, £867m new money was itself a vast amount, around four times the entire national budget for 1913-14, and it was desperately needed, but it came at a high price.
The government continued to pay 5% interest on the 1917 loan until 1932, when investors were encouraged to convert their holding into a new 3.5% indefinite loan. Most of them did so, and the £2bn that was converted at that time remains outstanding to this day.