TIGHTENING THE FETTERS OF FINANCE

March, 1919

The New Meaning of Licence--The Question of Capital Issues--Text ofthe Treasury Regulations--Their Scope and Effect--The Position ofthe Stock Exchange--Wider Issues at Stake--Should Capital be setFree?--The Arguments for and against--Perils of an ExcessiveCaution--The New Committee and its Terms of Reference--TheAbsurdity of prohibiting Share-splitting--The Storm in the Houseof Commons--Disappearance of the Retrospective Clause--A Sample ofBureaucratic Stupidity.

A contrast between liberty and licence is a pleasant alliterativecommonplace beloved by political writers, especially those with areactionary bias. In the light of recent events it seems to be goingto take a new meaning. Licence will soon be understood, not as theabuse of liberty, to which democracies are prone, but as a new weaponby which our bureaucracy will do away with liberty by tightening theshackles on our economic and other activities. For imports and exportsthe licence system is already familiar; if the mines and railways areto be nationalised we may have to be licensed before we can burn coalor go away for a week-end; if the Eugenists have their way a licencewill be necessary before we can propagate the species; and beforewe can get a licence to do anything we shall have to go through anexasperating process of filling in forms innumerable, inconsistent,overlapping and incomprehensible. Finance is the latest victim of thismelancholy tendency. Under the guise of an attempt to give greaterfreedom to it a system has been introduced which makes a Treasurylicence necessary, with penalties under the Defence of the Realm Act,for doing many things which have hitherto been possible for those whowere prepared to forgo the privilege of a Stock Exchange quotation.Let the story be told in official language, as uttered through thePress Bureau, on February 24th, in "Serial No. C. 10917."

"In view of the changed conditions resulting from the conclusionof the armistice, the Treasury has had under consideration thearrangements which have been in force during the war for the control of New Issues of Capital.

"The work of scrutinising proposals for new Capital Issues has beenperformed during the war by the Capital Issues Committee, the objectbeing to refuse sanction for all projects not immediately connectedwith the successful prosecution of the war. The decisions of theTreasury, taken upon the advice of this Committee, have, however,not had any binding force, beyond what is derived from the emergencyregulations of the Stock Exchange, which forbids dealings in any newIssues which have not received Treasury consent.

"While it is not possible under existing financial conditions todispense altogether with the control of Capital Issues, it has clearlybecome necessary to reconsider the principles upon which sanction hasbeen given or refused in order that no avoidable obstacles may beplaced in the way of providing the Capital necessary for the speedyrestoration of Commerce and Industry, and the development of publicutility services.

"In view of the numbers of the proposals for fresh Issues of Capitalwhich are to be expected, it is necessary to provide further machineryfor dealing with them and for making the decisions upon themeffective.

"A regulation under the Defence of the Realm Act has accordingly beenmade prohibiting all Capital Issues except under licence from theTreasury, and the Capital Issues Committee has been reconstituted withnew Terms of Reference, which are as follows:--

"'To consider and advise upon applications received by the Treasuryfor licences under Defence of the Regulation (30 F) for freshIssues of Capital, with a view to preserving Capital during thereconstruction period for essential undertakings in the UnitedKingdom, and to preventing any avoidable drain upon Foreign Exchangesby the export of Capital, except where it is shown to the satisfactionof the Treasury that special circumstances exist.'

"It will be an instruction to the Committee that, in order thatapplications may be dealt with expeditiously and to enable oralevidence to be given in support of them when desired by the applicant,that the Committee should sit by Panels consisting of three members,the decision of the Panels to be subject to confirmation by the fullCommittee.

"All applications for licences most be made, in the first instance,in writing on a Form which can be obtained from the Secretary of theCapital Issues Committee, Treasury, S.W. 1.

"Before any application is refused the Committee will give theapplicant an opportunity of giving oral evidence in support of hiscase."

The notice then proceeded to recite the terms of D.O.R.A. 30 F, ofwhich more anon. Next day came a supplementary announcement, "SerialNo. C 10938," as follows:--

"With reference to the recent announcement in the Press that allapplications for Treasury licences must be made in writing on aform obtainable from the Secretary of the Capital Issues Committee,Treasury, S.W. 1, delay will be avoided if intending applicants willstate which of the following forms they require:--

"Form No. 1. Issue by a proposed New Company to start a fresh business.

"Form No. 2. Issue by an Existing Company (other than for the purpose of capitalising profits).

"Form No. 3. Issue by an Existing Company for the purpose of capitalising profits.

"Form No. 4. Conversion of a Firm into a Limited Company which does Not involve the introduction of fresh capital.

"Form No. 5. Conversion of a Firm into a Limited Company which Does involve the introduction of fresh capital.

"If none of the above Forms appears to be applicable (as, e.g., inamalgamations, sub-divisions of shares, etc.), a statement of thefacts should be submitted in writing."

Before we go on to consider the new regulation, 30 F, let us try tosee what is the real effect of the document above quoted. It wasevidently intended to be a relaxation of the control of finance.This is shown by the sentence which says that the matter was to bereconsidered "in order that no avoidable obstacle may be placed in theway of providing the capital necessary for the speedy restorationof commerce and industry, and the development of public utilityservices." And yet it was thought necessary to give legal force andattach penalties to regulations that have worked during the war quitesufficiently well to secure a much stricter control than is nowrequired. The explanation of this apparent inconsistency is probablyto be found in the desire of the Government to meet a grievance of theStock Exchange. Hitherto the only penalty that befell those who madea new issue without getting Treasury sanction was that the securitiesissued could not be dealt in on the Stock Exchange. The practicaleffect of this was that those who acted without Treasury sanctioncould only issue securities subject to this serious drawback, andso an effective but not altogether prohibitive bar was put on theprocess. If this bar was not strong enough in war-time it oughtclearly to have been strengthened long ago; if it was strong enough,then why should it be strengthened now?

From the Stock Exchange point of view it is easy to make out a goodcase for working through licence and penalty rather than through thebanning, of the securities effected, from sanction for dealings. Bythus being used as an official weapon the Stock Exchange penaliseditself and its members. By saying "no security not sanctioned by theTreasury shall be dealt in here," its Committee restricted businessin the House and drove it outside. This grievance was obvious and wasplentifully commented on during the war. If the Committee had pressedthe point vigorously it could probably have forced the Government longago to abolish the grievance by making all dealings in new issues thatappeared without Treasury sanction illegal and liable to penalty.A patriotic readiness to fall in with the Government's desires wasprobably the reason why the Stock Exchange refrained from embarrassingit, during the war, by too active protests against a grievance thatwas then more or less real; though it should be noted that even if thegrievance had been amended, the Stock Exchange would not necessarilyhave got any more business, but would only have succeeded in stoppinga very moderate amount of business that was being done by outsiders.But when all is said that can be said for the justice of the case thatcan be made by the Stock Exchange, the question still arises whetherit was advisable, at a time when relaxation of restrictions wasdesirable in the interests of the revival of industry, to draw tighterbonds which had been found tight enough to do their work. That theStock Exchange should suffer from limitations from which outsidedealers were exempt was certainly a hardship. On the other hand,since the armistice there has been a considerable expansion in StockExchange business. Oil shares, Mexican securities, industrial shares,insurance shares, and others in which capitalisation of reserves andbonus issues have been used as an effective lever for speculation,have enjoyed spells of considerable activity. With this revival inprogress, in spite of many obvious bear points, such as industrialunrest at home, Bolshevism abroad, the continuance of heavyexpenditure by the Government, and the hardly slackened growth ofthe national debt, it seems to have been scarcely necessary in theinterests of the House to have made regulations which, though perhapsdemanded by abstract justice, imposed new ties on enterprise at atime when complete freedom, as far as it was consistent with the bestinterests of the country, was most of all desirable.

How far, we have next to ask, is it necessary for the best interestsof the country to restrict the freedom of capital issues? If we lookback at the terms of reference under which the reconstituted Committeeis to work, we see that the officially expressed objects are (1)preserving capital for essential undertakings in the United Kingdom,and (2) preventing any avoidable drain upon Foreign Exchanges by theexport of capital. There is certainly much to be said for both theseobjects. When we lend money to foreigners we give them the right todraw on us now in return for their promises to pay some day; in otherwords, we make an invisible import of foreign securities, and in thepresent state of our trade balance all imports, whether visible orinvisible, need careful watching. It is also very evident that at atime when capital is scarce there is much to be said for keeping itfor essential industries, especially those which produce necessariesand goods for export, and not allowing it to be swept up by borrowerswho are going to devote it to making expensive fripperies on which bigprofits are probable.

There remains a very big other side to both these questions. All overthe world there is a demand for goods which have not been produced,or only in greatly reduced quantities, during the war. This demand isonly effective in so far as willing buyers can pay; some of them havethe needful cash in hand or waiting in London or elsewhere to be drawnon, but a great number of would-be buyers want to be financed, andwill have to be financed by somebody if the needs that they feel areto be translated into actual purchases. In other words, in order thatthe wheels of industry are to be set turning as fast as they might, ifthey had a full chance, somebody has to lend freely. Now, it is surelymost of all important in the national interest that those wheelsshould begin spinning as fast as possible, and the question is whetherwe are more likely to serve that interest best by keeping a meticulouseye on the course of exchange and buttoning up our pockets to foreignborrowers or by leaving capital free to seek its market, knowing thatevery time we give the foreigner the right to draw on us we stimulateour export trade, because his drawing must finally mean a demand on usfor something--goods, securities or gold--and goods are what peopleare in these times most anxious to take. If we are going to leave allthe financing to be done by America and fear to import promises to paylest they should be followed by demands on our gold, shall we not berather in the position of Barry Lyndon, who was given a gold piece byhis mother when he went out into the world, with strict injunctionsalways to keep it in his pocket and never to change it? Regard for ourgold standard is most necessary, but the gold standard is not an endin itself, but merely an important part of a machine which only existsto serve our industry. If we are so careful of the machine, which isa mere subsidiary, that we check the industry which it is there toserve, we shall be like the dandy who got wet through because he hadnot the heart to unfurl his beautifully rolled-tip umbrella.

Again, it looks very sound and sensible to keep capital for purposesthat are essential, but, on the other hand, it is so enormouslyimportant to set industry going as fast as possible that almost anyone who will do anything in that direction is entitled to be given achance. In war-time, when labour and materials were so scarce thatthey could not turn out all the munitions that were necessary, such arestriction was clearly inevitable. Now, when labour and materials arebecoming more plentiful, and the scarce commodity is the pluck andenterprise that will take the risks involved by getting to work on apeace basis, it may be argued that any one who will take those risks,whatever be the stuff or services that he proposes to produce, shouldbe encouraged rather than checked. It is again a question of thebalance of advantage. If we are going to be so careful in seeing thatcapital is not put to a wrong use that we take all the heart out ofthose who want to make use of it, we shall do more harm than good. Ifby leaving capital free to go into any enterprise that it fancieswe can give a start to industry and promote a spirit of courage andenterprise among its captains, it will be well worth while to do soat the expense of seeing a certain amount of capital going into theproduction of articles that the community might, if it made a morereasonable use of its purchasing power, very well do without. The samequestion arises when we consider the desire of the Government, notexpressed in the above statement, but very freely admitted by Mr BonarLaw, in discussing it in the House of Commons, to keep capital to belent to it rather than expended in, perhaps unnecessary, industry.Here, again, it is clearly in the interest of the taxpayer thatGovernment loans should be raised on the most favourable termspossible. But if, in order to do so, we starve industry of capitalthat it needs, and so check the production on which all of us,Government and citizens alike, ultimately have to live, we shallbe scoring an immediate advantage at the expense of futureprogress--spoiling a possibly brilliant break by putting down thewhite ball for a couple of points.
There is thus a good deal to be said for setting capital free, beforewe have even arrived at the most serious objection to regulating itunder Treasury licence. This objection is the exasperation, delay anduncertainty involved by this control. Even if we had an ideally wiseand expeditious body to decide about capital issues it might not bethe best thing to set it to work. But when we remember that in orderto see that the wrong sort of issue is not made, all issues willhave to pass through the terribly slow-working process of officialselection before the necessary licence is finally granted, it beginsto look still more likely that we should do well to run the risk ofletting a few goats through the gate, rather than keep all the sheepwaiting outside for months, with the probable result that many of themmay lose altogether their chance of final salvation. It will be notedfrom the official statement that the arbitrary methods of the oldCommittee are to be modified. It has long been a by-word among thosewho had dealings with it; they abused it in quite sulphurous languageand were wont to quote it as an example of all that bureaucratictyranny is and should not be, thereby doing some injustice to ourbureaucrats, seeing that the Committee was manned not by officials butby business men, clothed pro hac vice in the thunder of Whitehall.The new Committee is to sit by panels of three, so as to expeditematters, and so as to allow applicants the privilege of giving oralevidence. This is an innovation that will save some exasperation, butit will hardly accelerate matters, especially as the decision of thepanels will be subject to confirmation by the full Committee, so thatall the work will have to be done twice over. There is thus muchreason to fear that delay, so fatal in business matters, will be aninevitable offspring of the efforts of the new Committee, and the listof different forms on which applications are to be made, given above,shows that all the paraphernalia of red tape will dominate theproceedings.

Now for the terms of the new Regulation under the Defence of the RealmAct.

"1. The following regulation shall be inserted after Regulation 30 EE:--

"30 F. The following provisions shall have effect in respect of new capital issues and to dealings in securities issued for the purpose of raising capital:

"(1) No person shall, except under and in pursuance of a licence granted by the Treasury--

"(a) issue, whether for cash or otherwise, any stock, shares or securities; or

"(b) pay or receive any money on loan on the terms express or implied that the money is to be or may be applied at some future date in payment of any stock, shares or securities to be issued at whatever date to the person making the loan; or

"(c) sub-divide any shares or Debentures into shares or Debentures of a smaller denomination, or consolidate any shares or Debentures of a larger denomination; or

"(d) renew or extend the period of maturity of any securities; or

"(e) purchase, sell or otherwise transfer any stock, shares or securities or any interest therein, or the benefit of any agreement conferring a right to receive any stock, shares or securities, if the stock, shares or securities were issued, sub-divided or consolidated, or renewed or the period of maturity thereof extended, or the agreement was made, as the case may be, at any time between the 18th day of January, 1915, and the 24th day of February, 1919, and the permission of the Treasury was not obtained to the issue, sub-division, consolidation, renewal or extension or the making of the agreement, as the case may be.

"(2) No person shall except under and in pursuance of a licence granted by the Treasury--

"(a) buy or sell any stock, shares or other securities except for cash or when the purchase or sale takes place in any recognised Stock Exchange, subject to the rules or regulations of such exchange.

"(b) buy or sell any stock, shares or other securities which have not remained in physical possession in the United Kingdom since the 30th September, 1914.

"(3) A licence granted under this regulation may be granted subject to any terms and conditions specified therein.

"(4) If any person acts in contravention of this regulation, or if any person to whom a licence has been granted under this regulation subject to any terms or conditions fails to comply with these terms or conditions, he shall be guilty of a summary offence against these regulations.

"(5) In this regulation the expression 'securities' includes Bonds, Debentures, Debenture stock, and marketable securities."

It will be seen at once that the terms of this document, on anyinterpretation of them, go far beyond the intentions expressed in whatmay be called the official preamble and in the new Committee's termsof reference. One of the clauses seems, with all deference to itsaugust composers, to be merely silly. This is (1)(c) forbiddingsub-division of securities. If a L10 share is split into ten L1 shares this operation cannot make the smallest difference to thesupply of capital for essential industries or cause any drain on theForeign Exchanges. I am assured by those who have delved into theofficial intention that the reason for the objection of the oldCommittee to splitting schemes, on which this new prohibition isbased, was that splitting made shares more marketable and popular andso more likely to compete with War Bonds. But a mere sale of shares,split small and so popularised, does not absorb any capital. That onlyhappens when, money is put into some new form of industry. If A, whoholds ten L20 shares, is enabled to dispose of them to B because theyare split into 200 L1 shares, then, A instead of B has got the moneyand has to invest it in something. The amount of capital available forinvestment is not diminished by a halfpenny. This regulation is justa piece of short-sighted tyranny which exasperates without doing thesmallest good to anybody.

More serious, however, was clause (1)(e) under which any securitiesthat have been issued, split, consolidated or renewed without Treasurysanction since January, 1915, were not to be dealt in, in future,without a licence. The result of this clause, if it had stood, wouldhave been that all loans under which such securities had beenpledged would have had to be called in because the collateral becameunsaleable, except after all the ceremonies had been gone throughand a licence had been got. It was also possible to argue that theprohibition to renew or extend the maturity of any security meant thatno loans of any kind could be renewed, and that no commercial billscould be renewed, without a licence. It is true that No. 5 paragraphsays what the expression "securities" includes, but it does not statedefinitely that bonds, Debentures, Debenture stock and marketablesecurities are the only things included. It was a pretty piece ofdrafting, and raised a pretty storm in the House of Commons onFebruary 27th, when a somewhat lurid picture of its effects was drawnby Sir H. Dalziel and Mr Macquisten. Mr Chamberlain not being thenlegally a member of the House, it fell to the lot of Mr Bonar Law toexplain that the Government had really meant to give greater freedom,in making new issues, that the evils anticipated had not beenintended, that he hoped the House would not judge the Government tooharshly for not making unsanctioned issues illegal from the beginning,and that a new Order would be issued removing the retrospective effectof the new regulation. And so amendment was promised of a measurewhich would have had very awkward and unjust effects. It may be arguedthat it would only have affected people who had done, during the war,what they were asked not to do, namely, make issues without Treasurysanction. If the old Committee had been a reasonable and expeditiousbody this argument would have had great weight. But, in view of itscaprices and dilatoriness, there was a good deal of excuse for thosewho decided to do without Treasury sanction and take the consequenceof being unable to market their securities on the Stock Exchange.To propose to add a new penalty and cause the cancelling of all thefinancial arrangements made in connexion with such issues during fouryears was simply piling blunder on blunder. Luckily, the protests ofthe Government's own supporters sufficed to undo the worst of themischief; but the whole affair is only another argument in favour ofthe earliest possible ridding of finance and industry from controlthat is so clumsily exercised.