In times of war or other upheaval, people turn to gold. When economies wobble and governments fall, gold has always been seen as the best way to preserve wealth.
For this reason, as Europe was engulfed in financial crisis at the end of July 1914, many people and businesses sought to convert their bank balances and other assets to cash in the form of gold sovereigns. On the last business day before the outbreak of war, great crowds queued outside the Bank of England to do just that. The effect was cumulative; seeing people converting money to gold would make others rush to do the same. The Bank of England paid out £12.3m of its £26.5m gold coin reserves in 6 days, leaving it drained of gold and putting sterling at risk of collapse.
Worse still, London – as the world’s preeminent financial centre – held massive sterling deposits and other customer assets belonging to foreign people and companies, including citizens of enemy states. If these customers demanded conversion into gold, not only would Britain’s economy lose the wealth, but it would pour into the economies of Britain’s enemies.
The government needed an immediate solution to prevent a run on the banks, but it also had an eye on a longer-term problem. Britain was about to need more gold than ever before. Although it’s often said that people thought the war would be ‘over by Christmas’, many observers – even before fighting began – predicted a long and terrible war. Every last ounce of gold in the country wouldn’t be enough to pay for everything the government was going to need to buy, but the rebuilding of gold reserves in the national coffers would help to keep the currency stable, stave off uncontrollable inflation, and equip the British government to borrow the money it needed.
Britain's banks still had substantial gold holdings, which would be gradually transferred to the Bank of England over time, but there was also an estimated £70m of gold held in pockets, cash boxes and tills all over the country. If the government wanted to increase central gold stocks and prevent gold from leaving the country, it was clear that it would need to draw gold in from the wider circulating economy.