London Stock Exchange reopens

On Monday 4 January 1915 the London Stock Exchange opened its doors again. The exchange, closed on 31 July 1914 at the height of the panic before the outbreak of war, had been shut for more than five months. It was returning to business on terms agreed with the government that severely restricted freedom of trading.

Five months’ break

The biggest problem during the closure was the unfinished settlements from the last days of July. Brokers and jobbers had bought securities with money borrowed from banks against those same securities. When prices fell sharply and the exchange came to a halt, the value of the collateral melted away. Had the banks called in the loans, the brokers would have had to sell securities at any price, which would have sent prices plunging and caused a wave of bankruptcies. At the end of October such loans still amounted to about £80 million. On 31 October the government announced a scheme under which the Bank of England advanced money to the lenders under a Treasury guarantee. The collateral was valued at the prices of 29 July, the last pre-war settlement day, and repayment was not to be demanded until a year after the conclusion of peace.

Dealing in securities did not, however, cease altogether. Brokers gathered in the street outside the closed exchange building and did business unofficially, and the financial press published the prices obtained. Meanwhile the state began to use the financial market to pay for the war. In November 1914, while the exchange was still closed, the government issued the first war loan, for £350 million. Once the panic had subsided, the moratorium had expired and the question of the outstanding loans had been settled, the reopening of the exchange could be considered.

Strict rules

The exchange, which before the war had been the world’s most important capital market, began working in entirely new conditions. All transactions were for cash only. The traditional fortnightly settlement system, which had allowed securities to be bought on credit and payment to be deferred, was suspended. Minimum prices, below which they could not be sold, were fixed for many securities, not only government bonds. This was meant to prevent a sharp fall in prices immediately after the reopening.

Another rule was aimed at the enemy. A security could be delivered to a buyer only if a bank, a broker or another reliable person certified that it had been in Great Britain since at least 30 September 1914 and had not been the property of an enemy national since the outbreak of war. In this way Germans and their allies could not turn their securities into cash in London. The rule also made it harder to bring into the country securities bought cheaply abroad and resell them at a profit. From 18 January new issues of securities required the consent of the Treasury, which wanted capital to go above all to the needs of the war.

A market in the service of war

The reopening of the exchange is regarded as the last step in recovering from the financial crisis that shook the City of London in the summer of 1914. No large bank or finance house had failed, but the financial market never returned to its pre-war freedom. The minimum prices, adjusted several times, were kept until 3 July 1916. Control of issues, restrictions on dealings with foreign countries and successive war loans meant that the City, which before the war had financed the whole world, became above all a source of money for the British state at war.