The government needed to adapt the national economy to run with much less gold in its system, which meant persuading people to accept paper money instead of gold coins. It had to tread carefully. Nothing would be more certain to create panic than sudden, severe measures.
As a first step, appeals were made to people’s patriotism. Posters were put up in banks and other public places, quoting the Chancellor of Exchequer: ‘anyone who from selfish motives of greed or from excessive caution or cowardice goes out of his way to attempt to withdraw sums of gold and appropriate them to his own use, let it be understood he is assisting the enemies of his native land.’
There were also more tangible steps. The government started issuing its own £1 and 10 shilling currency notes, and made the notes of Scottish banks (and temporarily postal orders) legal tender. This gave banks alternatives to paying withdrawals in gold coin, although in practice they still preferred to pay gold if a customer insisted, to avoid creating the damaging impression that they couldn’t do so.
In fact, Scottish customers were already well used to banknotes, and the change did not cause them much concern. Even in the anxious first days of war, there were signs that Scottish customers actually put more money into their banks, rather than taking any out.
Behind the scenes, something else significant had changed for the Scottish banks. Apart from a very small amount for which there was a different arrangement, the vast majority of their banknotes had to be backed by gold at head office; in other words, for every pound note in circulation, there had to be a pound’s worth of gold in their vaults. The change to legal tender did not alter this requirement, except that the backing no longer had to be gold; it could be in government currency notes. It was also allowed to be held in locations other than head office. Both changes were to become significant later in the war.
In England, meanwhile, banknotes had traditionally been much less widely-used. Ordinary people were not accustomed to them, and so suspicion was greater. Bank managers were briefed by their head offices to spend time with customers, explaining the change and why it was necessary. It was a slower, more cautious process but, as in Scotland, there was little sign of hoarding, and customers did not make excessive demands for cash. The first financial crisis of the war had passed.
The economy soon settled into a war footing. Business went on as normally as possible in such extraordinary circumstances. Still, the government maintained its campaign to deepen public acceptance of paper money, frequently reminding people that ‘doing their bit’ included keeping their money in bank deposits and banknotes, leaving the gold to government.