Britain declares a moratorium

On Sunday 2 August 1914 the British government declared a moratorium on the payment of some financial obligations. A royal proclamation postponed by a month the due dates of bills of exchange, on which international trade relied. The next day Parliament passed an emergency act that confirmed the decision and allowed the moratorium to be extended to other kinds of payment.

The reason was the crisis that had been shaking the City of London for several days. London was the financial centre of the world, and a large part of world trade rested on bills of exchange guaranteed by London banking houses. With the outbreak of war, foreign debtors, especially from countries already at war, stopped paying their obligations. London’s banks faced a loss of liquidity and a wave of bankruptcies that could drag down the whole financial system.

The moratorium was one of a series of emergency steps taken in those days. On 31 July the London Stock Exchange was closed, and the Bank of England raised its interest rate to 8 and then to 10 per cent. The bank holiday at the beginning of August was extended by several days to give the government time to prepare further measures.

The crisis was managed by the Chancellor of the Exchequer, David Lloyd George, who in consultation with the bankers prepared a package of rescue measures. Among other things, new Treasury notes were introduced to ensure that people had cash. Thanks to these measures, panic was avoided when the banks reopened on 7 August.

The moratorium of 2 August showed how quickly the war struck the economy, even before Britain had formally entered it. It was the beginning of a financial mobilisation that in the following years allowed Britain to wage war on an unprecedented scale.