The government’s early war fundraising efforts focused on one-off war loans, but as hostilities continued, it needed a constant cash flow obtained by continuous borrowing. Treasury bills aimed at banks were provided with a minimum denomination of £1,000. The government needed also to draw money from the general public, and in 1916 took small steps towards the introduction of mass-market continuous borrowing through war savings certificates and exchequer bonds. Both schemes, however, were relatively modest.
In October 1917 the government finally introduced a large-scale, mass-market continuous borrowing vehicle: national war bonds.
Like exchequer bonds, war bonds were interest-bearing, but they were also repayable at a premium. This meant that a customer who bought £100 5-year bonds in 1917 would receive 5% interest each year, and then in 1922 would be repaid the original investment, plus an extra 2%. 7-year and 10-year bonds were also available, and would receive larger premiums at repayment. They were available to any person, company or other organisation, provided it had at least £5 to invest.
Bonds could be used at face value to buy into war loans and other government stock, so customers weren’t locking themselves into one scheme at the expense of more attractive opportunities that might come along later. Bonds could also be used to pay death duties and excess profits duty. The latter was very valuable for companies, because negotiations over the duties payable were often protracted, and they had to keep cash at the ready until a sum was finally agreed. By using that money to buy war bonds, they could earn a healthy rate of interest while they waited.
Buy War Bonds not only 'now,' but to-morrow and next week and next month and every month till the war has at last reached the end which we mean to gain
Walter Leaf, London County & Westminster Bank's deputy chairman, 1918
Bonds could be bought at post offices for amounts over £5, or at banks for amounts over £50. As with war savings certificates, a small commission was paid on the sale of bonds, but in return the government expected banks to work tirelessly to sell them. The banks agreed not to offer any investments offering more than 3% interest so that there would be no competition for the bonds. They sent letters and circulars to any customers who might conceivably be able to buy bonds; in Williams Deacon’s Bank, this was defined as any customer who had £50 or more in his or her account, plus any customer who was known to have savings or assets elsewhere.
The banks put enormous effort into advertising, promoting and selling war bonds. They also bought them in large quantities.
The government became increasingly desperate to sell more bonds, and put corresponding pressure on the banks. In May 1918 it came up with a proposal to encourage sales by splitting the 0.125% commission payable between the bank and the clerk who made the sale. The English banks agreed, although some were unhappy about setting a precedent that seemed to turn bank clerks into salesmen. Williams Deacon’s Bank noted that it considered the development ‘wrong in principle and in the case of our bank, unnecessary’, but went along with the scheme, not wanting to rebel against the government. The Scottish banks, appalled by what they called ‘a childish idea’, refused to participate. Nevertheless, all banks maintained their efforts to sell the bonds, which became a mainstay of national finance for the remainder of the war.