INTERNATIONAL CURRENCY

June, 1918

An Inopportune Proposal--What is Currency?--The Primitive System ofBarter--The Advantages possessed by the Precious Metals--Gold asa Standard of Value--Its Failure to remain Constant--Currency andPrices--The Complication of other Instruments of Credit--No Substitutefor Gold in Sight--Its Acceptability not shaken by the War--AFluctuating Standard not wholly Disadvantageous--An InternationalCurrency fatal to the Task of Reconstruction--Stability and Certaintythe Great Needs.

As if mankind had not enough on its hands at the present moment, anumber of well-meaning people seem to think that this is an opportunetime for raising obscure questions of currency, and trying to makethe public take an interest in schemes for bettering man's lot byimproving the arrangements under which international payments arecarried out. Nobody can deny that some improvement is possible inthis respect, but it may very well be doubted whether, at the presentmoment, when very serious problems of rebuilding have inevitably to befaced and solved, it is advisable to complicate them by introducingthis difficult question which, whenever it is raised, will require themost careful and earnest consideration.

Since, however, the question is in the air, it may be as well toconsider what is wrong with our present methods, and what sort ofimprovements are suggested by the reformers. At present, as every oneknows, international payments are in normal times ultimately settledby shipments from one country to another of gold. Gold has achievedthis position for reasons which have been described in all thecurrency text-books. Mankind proceeded from a state of barter to acondition in which one particular commodity was used as the chiefmeans of payment simply because this process was found to be muchmore convenient. Under a system of barter an exchange could only beeffected between two people who happened to be possessed each of themof the thing which the other one wanted, and also at the same time towant the thing which the other one possessed, and the extent of theirmutual wants had to lit so exactly that they were able to carry outthe desired exchange. It must obviously have been rare that thingshappened so fortunately that mutually advantageous exchanges werepossible, and the text-books invariably call attention to thedifficulties of the baker who wanted a hat, but was unable to supplyhis need because the hatter did not want bread but fish or some othercommodity.

It thus happened that we find in primitive communities one particularcommodity of general use being selected for the purpose of what isnow called currency. It is very likely that this process arose quiteunconsciously; the hatter who did not want bread may very likely haveobserved that the baker had something, such as a hit of leather, whichwas more durable than bread, and which the hatter could be quitecertain that either he himself would want at some time, or thatsomebody else would want, and he would therefore always be able toexchange it for something that he wanted. All that is needed forcurrency in a primitive or any other kind of people is that it shouldbe, in the first place, durable, in the second place in universaldemand, and, in the third place, more or less portable. If it alsopossessed the quality of being easily able to be sub-divided withoutimpairing its value, and was such that the various pieces into whichit was sub-divided could be relied on not to vary in desirability,then it came near to perfection from the point of view of currency.

All these qualities were possessed in an eminent degree by theprecious metals. It is an amusing commentary on the commonly assumedmaterial outlook of the average man that the article which has won itsway to supremacy as currency by its universal desirability, should bethe precious metals which are practically useless except for purposesof ornamentation. For inlaying armour and so adorning the person of asemi-barbarous chief, for making into ornaments for his wives, and forthe embellishment of the temples of his gods, the precious metals hademinent advantages, so eminent that the practical common sense ofmankind discovered that they could always be relied upon as beingacceptable on the part of anybody who had anything to sell. Inthe matter of durability, their power to resist wear and tear wasobviously much greater than that of the hides and tobacco and othercommodities then fulfilling the functions of currency in primitivecommunities. They could also be carried about much more convenientlythan the cattle which have been believed to have fulfilled thefunctions of currency in certain places, and they were capable ofsub-division without any impairing of their value, that is to say, oftheir acceptability. Merely as currency, precious metals thus haveadvantages over any other commodity that can be thought of for thispurpose.

So far, however, we have only considered the needs of man forcurrency; that is to say, for a medium of exchange for the timebeing. It is obvious, however, that any commodity which fulfils thisfunction, that is to say, is normally taken in payment in the exchangeof commodities and services, also necessarily acquires a still moreimportant duty, that is, it becomes a standard of value, and it is onthe alleged failure of gold to meet the requirements of the standardof value that the present attack upon it is based. On this point thedefenders of the gold standard will find a good deal of difficulty indiscovering anything but a negative defence. The ideal standard ofvalue is one which does not vary, and it cannot be contended thatgold from this point of view has shown any approach to perfection infulfilling this function. It could only do so if the supply of itavailable as currency could by some miracle be kept in constantrelation with, the supply of all other commodities and services thatare being produced by mankind. That it should be constant with eachone of them is, of course, obviously impossible, since the rate atwhich, for example, wheat and pig-iron are being produced necessarilyvaries from time to time as compared with one another. Variations inthe price of wheat and pig-iron are thus inevitable, but it can atleast be claimed by idealists in currency matters that some form ofcurrency might possibly be devised, the amount of which might alwaysbe in agreement with the amount of the total output of saleable goods,in the widest sense of the word, that is being created for man's use.

It need not be said that this desirability of a constant agreementbetween the volume of currency and the volume of goods coming forwardfor exchange is based on what is called the quantitative theory ofmoney. This theory is still occasionally called in question, but is onthe whole accepted by most economists of to-day, and seems to me tobe a mere arithmetical truism if we only make the meaning of the word"currency" wide enough; that is to say, if we define it as includingall kinds of commodities, including pieces of paper and creditinstruments, which are normally accepted in payment for goodsand services. This addition of credit instruments, however, is acomplication which has considerably confused the problem of goldas the best means of ultimate payment. Taken simply by itself thequantitative theory of money merely says that if money of all kinds isincreased more rapidly than goods, then the buying power of money willdecline, and the prices of goods will go up and vice versa. This seemsto be an obvious truism if we make due allowance for what is calledthe velocity of circulation. If more money is being produced, but thelarger amount is not turned over as rapidly as the currency which wasin existence before, then the effect of the increase will inevitablybe diminished, and perhaps altogether nullified. But other thingsbeing equal, more money will mean higher prices, and less money willmean lower prices.

But, as has been said, the question is very greatly complicated bythe addition of credit instruments to the volume of money, and thiscomplication has been made still more complicated by the fact thatmany economists have refused to regard as money anything except actualmetal, or at least such credit instruments as are legal tender, thatis to say, have to be taken in payment for commodities, whether theseller wishes to do so or not. For example, many people who areinterested in currency questions would regard at the present moment inthis country gold, Bank of England notes, Treasury notes, and silverand copper up to their legal limits as money, but would deny thistitle to cheques. It seems to me, however, that the fact that thecheque is not and cannot be legal tender does not in practice affector in any way impair the effectiveness of its use as money. As amatter of fact cheques drawn by a good customer of a good bank arereceived all over the country day by day in payment for an enormousvolume of goods. In so far as they are so received, their effect uponprices is exactly the same as that of legal tender currency. Thisfact is now so generally recognised that the Committee on NationalExpenditure has called attention to the financing of the war by bankcredits as one of the reasons for the inflation of prices which hasdone so much to raise the cost of the war. It is, in fact, beinggenerally recognised that the power of the bankers to give theircustomers credits enabling them to draw cheques amounts in fact toan increase in the currency just as much as the power of the Bank ofEngland to print legal tender notes, and the power of the Governmentto print Treasury notes.

Thus it has happened that by the evolution of the banking systemthe use of the precious metals as currency has been reinforced andexpanded by the printing of an enormous mass of pieces of paper,whether in the form of notes, or in the form of cheques, whicheconomise the use of gold, but have hitherto always been based on thefact that they are convertible into gold on demand, and in fact haveonly been accepted because of this important proviso. Gold as currencywas so convenient and perfect that its perfection has been improvedupon by this ingenious device, which prevented its actually passingfrom hand to hand as currency, and substituted for it an enormous massof pieces of paper which were promises to pay it, if ever the holdersof the paper chose to exercise their power to demand it. By thismethod gold has been enabled to circulate in the form of papersubstitutes to an extent which its actual amount would have madealtogether impossible if it had had to do its circulation, so tospeak, in its own person. From the application of this great economyto gold two consequences have followed; the first is that theeffectiveness of gold as a standard of value has been weakened becausethis power that banks have given to it of circulating by substitutehas obviously depreciated its value by enormously multiplying theeffective supply of it. Depreciation in the buying power of money, anda consequent rise in prices, has consequently been a factor whichhas been almost constantly at work for centuries with occasionalreactions, during which the process went the other way. Anotherconsequence has been that people, seeing the ease with which pieces ofpaper can be multiplied, representing a right to gold which is only inexceptional cases exercised, have proceeded to ask whether there isreally any necessity to have gold behind the paper at all, and whetherit would not be possible to evolve some ideal form of super-paperwhich could take the place of gold as the basis of the ordinary paperwhich is created by the machinery of credit, which would be madeexchangeable into it on demand instead of into gold.

It is difficult to say how far the events of the war have contributedto the agitation for the substitution for gold of some other form ofinternational currency. It would seem at first sight that the positionof gold at the centre of the credit system has been shaken owingto the fact that in Sweden and some other neutral countries theobligation to receive gold in payment for goods has been for the timebeing abrogated. The critics of the gold standard are thus enabledto say, "See what has happened to your theory of the universalacceptability of gold. Here are countries which refuse to accept anymore gold in payment for goods. They say, 'We do not want your goldany more. We want something that we can eat or make into clothes toput on our backs.'" This is certainly an extremely curious developmentthat is one of the by-products of war's economic lessons. But I do notfeel quite sure that it has really taught us anything new. All thathas ever been claimed for gold is that it is universally acceptablewhen men are buying and selling together under more or less normalcircumstances. It has always been recognised that a shipwrecked crewon a desert island would be unlikely to exchange the coco-nuts or fishor any other commodities likely to sustain life which they could find,for any gold which happened to be in the possession of any of them,except with a view to their being possibly picked up by a passingship, and returning to conditions under which gold would reassume itsold privilege of acceptability.

During the war the shipping conditions have been such that manycountries have been hard put to it, especially if they were contiguousto nations with which the Entente is at present at war, to get thecommodities which they needed for their subsistence. The Entente, withits command of the sea, has found it necessary to ration them so thatthey should have no available surplus to hand on to the enemy. Theyhave very naturally endeavoured to resist these measures, and in orderto do so have made use of the power that they exercise by their beingin possession of commodities which the Entente desires. Theyhave shown a tendency to say that they would not part with thesecommodities unless the Entente allowed them to have a largerproportion of things needed for subsistence than the Entente thoughtnecessary for them, and it was as part of this battle for largerimports of necessaries that gold has been to some extent looked uponaskance as means of payment, the preference being given to thingsto eat and wear rather than to the metal. These wholly abnormalcircumstances, however, do not seem to me to be any proof that goldwill after the war be any less acceptable as a means of payment thanbefore. The Germans are usually credited with considerable sagacity inmoney matters, with rather more, in fact, I am inclined to think, thanthey actually possess; they, at any rate, show a very eager desire tocollect together and hold on to the largest possible store of gold,obviously with a view to making use of it when the war is over inpayment for raw materials, and other commodities of which they arelikely to find themselves extremely short. America also has shown astrong tendency to maintain as far as possible within its borders theenormous amount of gold which the early years of the war poured intoits hands. While such is the conduct of the chief foreign nations, itis also interesting to note that one comes across a good many peoplewho, in spite of all the admonitions of the Government to all goodcitizens to pay their gold into the banks, still hold on to a smallstore of sovereigns in the fear of some chain of circumstances arisingin which only gold would be taken in payment for commodities. On thewhole, I am inclined to think that the power of gold as a desirablecommodity merely because it is believed to be always acceptable hasnot been appreciably shaken by the events of the war.

This does not alter the fact that, as has been shown above, gold,complicated by the paper which has been based upon it, cannot claimto have risen to full perfection as a standard of value. Inprimitive times the question of the standard of value hardly arises.Transactions are for the most part carried out and concluded at once,and any seller who takes a piece of metal in payment for his goodsdoes so with the rough knowledge of what that piece of metal will buyfor him at the moment, and that is the only point which concernshim. The standard of value only becomes important when under settledconditions of society long-term contracts bulk large in economictransactions. A man who makes an investment which entitles him to 5per cent. interest, and repayment in 30 years' time, begins to be veryseriously interested in the question of what command over commoditieshis annual income of 5 per cent. will give him, and whether therepayment of his money at the end of 30 years will represent therepayment of anything like the same amount of buying power as hismoney now possesses. It is here, of course, that gold has failedbecause, as we have seen, the process has been a fairly steady one ofdepreciation in the buying power of the alleged standard and a rise inthe prices of other commodities. This means to say that the investorwho has accepted repayment at the end of 30 years of the amount thathe lent, be it L100 or L10,000, has found that the money repaid to himhad by no means the same buying power as the money which he originallyinvested.

Within limits this tendency of the standard of value towardsdepreciation has possessed considerable advantages, probably muchgreater advantages than would have followed from the contrary processif it had been the other way round. If we can imagine that thecurrency history of the world had been such that a constantlydiminished quantity of currency in relation to the output of othercommodities had caused a steady fall in prices, it is obvious thatthere might have been a very considerable check to the enthusiasm ofindustry. It has indeed been contended that the scarcity of preciousmetals which, with the absence of an organised credit system, producedthis result during the later Roman Empire was a very important causeof the decay into which that Empire fell. I do not feel at allconvinced that this effect would necessarily have followed the cause.It seems to me that the ingenuity of enterprising man is such that theproducer might, and probably would, have found means for facing theprobability of depreciation in price. But it is always an emptypastime to try to imagine what would have happened "if things hadbeen otherwise." What we do know is that a period of rising prices,especially if the rise does not go too fast, stimulates the enterpriseof producers, and sets business going actively, and consequently itmay at least be claimed that the failure of the gold standard tomaintain that steadiness of value which is an obvious attribute ofthe ideal standard has at least been a failure on the right side, bytending to depreciation of the value of currency, and so to a rise ofthe prices of other commodities. Obviously, people will tuck up theirsleeves more readily to the business of production and manufacture ifthe course of the market in the product which they hope to sell someday is likely to be in their favour rather than against them.
And when all is admitted concerning the failure of the existingstandard of value, the question is, what substitute can we find whichwill carry with it all the advantages that gold has been shown topossess, and at the same time maintain that steadiness of value whichgold has certainly lacked? We hear airy talk of an internationalcurrency based on the credit of the nations leagued together topromote economic peace. It is certainly very obvious that thediplomatic relations of the world require complete reform, and thesystem by which the nations at present settle disputes betweenthemselves has been found by the experience of the last four years tobe so disgusting, so barbarous and so ridiculous that all the mostcivilised nations of the world are determined to go on with it untilit is stopped for ever. Nevertheless, obvious as it is that some kindof a League of Nations is essential as a form of international policeif civilisation is to be rescued from destruction, it is very doubtfulwhether such an organisation could, at least during the firsthalf-century or so of its existence, be called upon to tackle sodifficult a question as that of the creation of an internationalcurrency based on international credit. In the first place, what willbe required more than anything else after the war in economic matterswill be the elimination of all possible reasons for uncertainty; somuch uncertainty and difficulty will be inevitable that it seems to meto be almost criminal to add to those uncertainties by an outburst ofeloquence on the part of currency reformers if there were any dangerof their recommendations being accepted. It will be difficult enoughto know where the producers of the world are to get raw material, findefficient labour, and then find a market for their products, withoutat the same time upsetting their minds with doubts concerning somekind of new-fangled currency that is to be created, and in which theyare to be made to accept payment, with the possibilities of changesin the system which may have to be effected owing to some quiteunforeseen results happening from its adoption. The gold standard,with all its failures, we do know; we also know that something may bedone some day to remedy them if mankind can produce a set of rulerscapable of approaching the question with all the knowledge andexperience required; but to substitute this system at a time of greatuncertainty for one which might or might not work would seem to betempting Providence in an entirely unnecessary manner at a time whenit is above all necessary to get the economic ship as far as possibleon an even keel.

If the proposed substitute is to succeed it will have to be at leastas acceptable as gold, and at the same time its quantity must be soregulated as to be at all times constant in relation to the output ofcommodities. Can we pretend that the economic enlightenment of mankindhas yet reached a point at which such a currency could be produced andregulated by the Governments of the world and be accepted by theircitizens?