December, 1918
[Footnote 1: This was the latter of two articles contributed to the_Times Trade Supplement in answer to a series in which Mr ArthurKitson had attacked our banking and currency system suggested aninconvertible paper currency.]
"Boundless Wealth"--Money and the Volume of Trade--The QuantityTheory--The Gold Standard--How is the Volume of Paper to beregulated?--Mr Kitson's Ideal.
In the November Trade Supplement an endeavour was made to answer MrKitson's rather vague and general insinuations and charges against ourbankers concerning the manner in which they do their business. Nowlet us examine the larger and more interesting problem raised by hiscriticism of our currency system.
In his article in the June Supplement he told us that "if theBritish public had any grasp of the fundamental truths of economicscience they would know that a future of boundless wealth andprosperity is theirs." This is a cheery and encouraging view and, letus hope, a true one. But, that boundless wealth can only be got if wework for it in the right way. Can Mr Kitson show it to us, and whatare these "fundamental truths of economic science"? It is easier totalk about them than to find any two economists who would give anexactly--or even nearly--similar list of them.
Mr Kitson glances "ata few elementary truths." "Wealth," he says, "is the product of twoprime factors, man and Nature, generally termed labour and land. Withan unlimited, or practically unlimited, supply of these two factors,how is it that wealth is and has been hitherto so comparativelyscarce?" But is the supply of "man" unlimited in the sense of manable, willing, and properly trained to work? And is the supply of"Nature" unlimited in the sense of land, mines, and factories fullyequipped with the right machinery and served and supplied by adequate means of transport? Surely the failure In production on which MrKitson so rightly lays stress is due, at least partly, to lack ofgood workers, good organisers, good machinery, and good transport facilities. Workers who restrict output, employers who despise scienceand cling to antiquated methods, the opposition of both classes to newand efficient equipment, and large tracts, even of our own land, stillwithout reasonable transport facilities, have something to do withit. And lack of capital--this answer to the question Mr Kitson floutsbecause, he says, "since capital is wealth," to say that "wealth isscarce because capital is scarce is the same as saying that wealth isscarce because it is scarce." But is it not a "fundamental truth ofeconomic science" that capital is wealth applied to production? Wealthand capital are by no means identical. When a well-known shipbuildingmagnate laid waste several Surrey farms to make himself a deer-park,the ground that he thus abused was still wealth, but it is no longercapital because it has ceased to produce good food and is merely apleasant lounging-place for his lordship. May not the failure ofproduction be partly due to the fact that, owing to the extravagant and stupid expenditure of so many of the rich, too much work is putinto providing luxuries--of which the above-mentioned deer-park is an example--and too little into the equipment of industry with the plantthat it needs for its due expansion?
Mr Kitson's answer is much easier. According to him, instead ofworking better, organising better, and putting more of our output intoplant and equipment and less into self-indulgence and vulgarity allthat we have to do to work the necessary reform is to provide moremoney and credit. Since, he says, under the industrial era--
"All goods were made primarily for exchange or rather for sale ... itfollowed, therefore, that production could only continue so long assales could be effected; and since sales were limited by the amount ofmoney or credit offered, it followed that production was necessarilylimited by the quantity of money or credit available for commercialpurposes."
But is this so? If goods are produced more rapidly than money, it doesnot follow that they could not be sold, but only that they would havebeen sold for less money. The producer would have made a smallerprofit, but on the other hand the cheapening of the product would haveimproved the position of the consumer, the cheapening of materialswould have benefited the manufacturer, and it is just possible thatproduction, instead of being limited, might have been stimulated bycheapness due to scarcity of currency and credit, or, at least, mighthave gone on just as well on a lower all-round level of prices. On thewhole, it is perhaps more probable that a steady rise in prices causedby a gradual increase in the volume of currency and credit would havethe more beneficial effect in stimulating the energies of producers.But Mr Kitson's argument that the volume of currency and credit imposes an absolute limit on the volume of production is surely muchtoo clean-cut an assumption. This absolute limit may be true, ifcurrency cannot be increased, with regard to the aggregate value inmoney of the goods produced. But money value and volume are two quitedifferent things. If our credit system had not been developed as ithas, and we had had to rely on actual gold and silver for carrying onall production and trade, it does not by any means follow that tradeand production might not have been on something like their presentscale in the matter of volume and turnover; but the money value wouldhave been much smaller because prices would have been all round at amuch, lower level.
This contention is based on what is called the "Quantity Theory of Money." This theory Mr Kitson wholeheartedly believes, so that this isnot a point that has to be argued with him. "The value of money,"he says, "as every student of economics knows, is determined by thequantity of money in use and its velocity of circulation." Quite so.If you increase the amount of money faster than that of goods, moremoney has to be given for less goods; the value, or buying power, ofmoney is depreciated and prices go up. The present war has given anexcellent example of this process at work. All the warring Governmentshave printed acres of paper money, and have worked the credit systemwith profligate energy; and so we have a huge increase in currencyand credit, along with little or no increase (probably a decrease) inconsumable goods, and prices have soared like rockets all over theworld. In neutral countries the rise has been as bad as anywhere,because the neutrals have been choked with the gold that the warringPowers exported, putting paper in its place. So we see that the volumeof money, on the theory so emphatically expounded by Mr Kitson andendorsed by common-sense--as long as we are careful to includeall forms of money that are taken in exchange for goods in thedefinition--reflects itself at once in prices. If money does notincrease in quantity and goods do, then prices go down, and afterthe necessary adjustments are made in rates of wages and salaries,a larger trade can be done with the same amount of money at a lowerlevel of values. The volume of money thus limits the aggregate valueof trade, but not its aggregate volume. Periods of falling prices arenot encouraging to producers, and they put too much advantage into thehands of the rentier--the man who lives on fixed interest; on theother hand, they are generally believed to be in favour of the workingclasses, since reductions in wages generally lag behind the fall inprices, which means increased buying power to the wage-earner.
Mr Kitson's view that the volume of trade is limited by the quantityof currency and credit is thus based on confusion between volume andvalue. Moreover, it follows also from the "Quantity Theory of Money,"which he holds, that if he applies his remedy and multiplies currencyand credit as fast as he appears to want to, the result will be astill further depreciation in the buying power of money, and a furtherrise in prices and an increase in all the bitterness, discontent,suspicion, and strikes that the rise in prices has already causedduring the war. Is this a prospect to pray for? Surely if we want toenjoy "boundless wealth and prosperity" the way to do so is to turnout goods--things to eat and wear and enjoy--and not to multiplymoney, thereby merely depreciating its value, on Mr Kitson's ownadmission. He thinks that "nothing but an abundant supply of currencyin the shape of legal tender notes and bank credit, could have enabledus to undertake successfully such unprecedented burdens" as we haveborne during the war. But it may equally well be argued that we haveborne these burdens because we worked harder than ever before to turnout the needed stuff, organised better, used our machinery to itsfull power, and spent less of our product on luxuries; and that theabundant currency, by forcing up prices, immensely increased thecost of the war and produced industrial friction which several timesbrought us unpleasantly close to disaster.
Mr Kitson, however, uses the "Quantity Theory of Money"--the doctrinethat the value or buying power of money varies according to itsquantity in relation to that of the goods that it buys--chiefly as astick wherewith to beat the Gold Standard. He shows, very easily andtruly, that it is absurd to suppose that the value of the monetarygold standard is invariable. Thereby he is only beating a dead horse,for no such argument is nowadays put forward. The variability of thegold standard of value is acknowledged, whenever a fluctuation in thegeneral level of commodity prices is recorded. But gold is the basisof our credit system, and of those of all the economically civilisedcountries of the world, not because its value is believed to beinvariable, but because it is the commodity which is universallyaccepted, in such countries and in normal times, in payment of debts.This quality of acceptability it has got largely by custom andconvention. Mr Kitson speaks of the "selection of gold by the world'sbankers as the basis for money and credit." But it was selected ascurrency by common custom long before bankers were heard of. And itwas selected because of its permanence, ductility and other qualities,especially its beauty as ornament, which made man, eager to adornhimself, his women-kind, and the temples of his gods, always readyto accept it in payment, knowing also that, because of thisacceptability, he would always be able to exchange it into any goodsthat he wanted.
Any other commodity that earned this quality of universalacceptability could do the work of gold just as well. But until onehas been found, gold, as long as it keeps that quality, holds thefield. And bankers use it as the basis for money and credit, notbecause, as Mr Kitson says, they selected it owing to its scarcity,but because this quality of universal acceptability made it the thingin which all debts, both at home and abroad, could be paid. "Given,"says Mr Kitson, "a self-contained trading community with a certainquantity of legal tender, just sufficient for its commercial needs,and it makes no difference either to the value or efficiency of themoney or to the trade affected whether it be made of metal or paper."Quite so, but trading communities are not self-contained. Theircurrency has to be convertible into something acceptable abroad, andthat something is, at present, gold. It is possible that the worldmay some day evolve an international paper currency that will beeverywhere acceptable. But such an ideal requires a growth of honestyand mutual confidence among the nations that puts it a long way off.And how is its volume to be regulated?
This question is all-important, whether the currency be national orinternational. Mr Kitson speaks of a currency "just sufficient" forthe community's commercial needs. Who is to decide when the currencyis just sufficient? The Government? A sweet world we should live in,if among other party questions, Parliament had to consider multiplyingor contracting the currency every year or every month, with all theinterests that would be affected by the consequent rise or fall inprices, lobbying, speech-making, and pulling strings to work theoracle to suit their pockets. And, according to Mr Kitson's view, thatthe volume of trade is limited by the supply of currency, this volumewould then depend on the whims of the House of Commons, half themembers of which would probably be innocent of a glimmering ofunderstanding of the enormously important question that they weredeciding. The gold standard, which makes the course of prices depend,more or less, on the chances of digging up a capricious metal from thebowels of the earth, has its obvious drawbacks; but it is a clean andsensible business compared with making them depend on the caprices ofParliament, complicated by the political corruption that would be onlytoo likely to follow the putting of such a question into the hands ofour elected and hereditary representatives and rulers.
Such, however, seems to be the Promised Land to which Mr Kitson wantsto lead us. Thus he propounds his remedy. "The remedy is surelyobvious. Divorce our legal tender from its alliance with goldentirely, so that the supply of money and credit for our home trade isno longer dependent upon our foreign trade rivals. Base our currencyupon the national credit ... treat gold as a commodity only, for thesettlement of foreign trade balances."
This passage in his article in the September Supplement tells uswhat to do. Keep gold, out of deference for foreign prejudice, for thesettlement of foreign trade balances, but make as much paper money asyou like for home use. As our legal tender money is to be "divorcedentirely from its alliance with gold" it clearly cannot be convertibleinto gold. So that apparently we shall have a paper pound and a goldpound (the latter for foreign use) with no connection between them.This stage of economic barbarism has been left behind now even bysome of the South American republics. The paper pound, based on thenational credit, can be multiplied as fast as our legislators thinkfit. If they do not multiply it fast enough, Mr Kitson will tell themthat they are strangling trade, because the volume of productionis limited by the amount of money available. At the same time bankcredits will be multiplied indefinitely because, as was shown in theNovember Supplement, Mr Kitson supports a view that the averagebusiness man holds (according to him) that he ought to have a legalright to as much credit as he wants. With the Government printingpaper to please its supporters, with the banks obliged by law to givecredit to every one who asks for it, and with prices soaring on everyaddition to currency and credit, what a country this will be to livein, and what a life will be led by those who have to compile andwork out the index numbers of the prices of commodities! Some of us,perhaps, will prefer the jog-trot conservatism of Lord Cunliffe'sCurrency Committee, who in their recently issued report[1] (whichevery one ought to read) recommend that gold should not be used forcirculation at present, but that endeavours should be made towardsthe cautious reduction of our swollen paper currency, and that itsconvertibility into gold should be maintained.
[Footnote 1: Cd. 9182, 2d.]
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Thursday, June 19, 2008
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.
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.
THE REGULATION OF THE CURRENCY
February, 1919
Macaulay on Depreciated Currency--Its Evils To-day--The Plight of theRentier--Mr Goodenough's Suggestion--Sir Edward Holden's Criticisms ofthe Currency Committee--His Scheme of Reform--Two Departments or Onein the Bank of England?--Not a Vital Question--The Ratio of Notesto Gold--Objections to a Hard-and-fast Ratio--The Limit on NoteIssues--The Federal Reserve Act and American Optimism--Currency andCommercial Paper--A Central Gold Reserve with Central Control.
Everyone has read, and most of us have forgotten, the great passage inMacaulay's history which describes the evils of a disordered currency."It may well be doubted," he says, "whether all the misery which hadbeen inflicted on the English nation in a quarter of a century by badKings, bad Ministers, bad Parliaments and bad judges was equal to themisery caused in a single year by bad crowns and bad shillings....While the honour and independence of the State were sold to a foreignPower, while chartered rights were invaded, while fundamental lawswere violated, hundreds of thousands of quiet, honest and industriousfamilies laboured and traded, ate their meals and lay down to rest incomfort and security. Whether Whigs or Tories, Protestants or Jesuitswere uppermost, the grazier drove his beasts to market, the grocerweighed out his currants, the draper measured out his broadcloth,the hum of buyers and sellers was as loud as ever in the towns, theharvest-time was celebrated as joyously as ever in the hamlets, thecream overflowed the pails of Cheshire, the apple juice foamed in thepresses of Herefordshire, the piles of crockery glowed in the furnacesof the Trent, and the barrows of coal rolled fast along the timberrailways of the Tyne. But when the great instrument of exchange becamethoroughly deranged, all trade, all industry, were smitten as with apalsy.... Nothing could be purchased without a dispute. Over everycounter there was wrangling from morning to night. The workman and hisemployer had a quarrel as regularly as the Saturday came round. On afair-day or a market-day the clamours, the reproaches, the taunts, thecurses, were incessant; and it was well if no booth was overturned,and no head broken.... The price of the necessaries of life, of shoes,of ale, of oatmeal, rose fast. The labourer found that the bit ofmetal which, when he received it was called a shilling, would hardly,when he wanted to purchase a pot of beer or a loaf of rye bread, go asfar as sixpence."
From some of the evils thus dazzlingly described we are happily freein these times. We are not cursed with a currency composed of coinswhich are good, bad and indifferent, with the result that the publicgets the bad and indifferent while the nimble bullion dealers absorband export the good. There is nothing to choose between one piece ofpaper and another, and all that is wrong with them is that there aretoo many of them. But the general result as it affects the labourerwho wants to purchase a pot of beer or anyone else who wants to buyanything is very much the same. A bit of metal that is called ashilling has about the value of a pre-war sixpence and a bit of paperthat is called a Bradbury fetches half as much as the pound of fiveyears ago. Compared with what other peoples are suffering from thesame disease arising from the same surfeit of money in one form oranother, this nuisance that we are enduring is not too terriblysevere. It has entailed great hardship on a class that is smallin number, namely, those who have to live on fixed incomes. Thesalary-earner and the rentier have borne the brunt, while thewage-earner and the profit-maker have been able to expand theirearnings, in paper, at least to a point at which the depreciation ofcurrency have left them no worse off. Seeing that the wage-earnersare those who do the dreariest and dirtiest jobs, and that theprofit-makers are those who take the risks of industry and theenormous responsibility of organising enterprise, they are the classeswhom it is clearly most desirable to encourage. The rentier in thesedays gets less than no sympathy, but we make a great mistake if wethink that we can with impunity crush him between the upper and nethermillstone of fixed income and rising prices. With his help we haveequipped industry at home and abroad. We can, if we choose, bydepreciating the currency still further, lessen still more the rewardthat we pay him for that benefit. He may kick, but he cannot abolishthe equipment with which he has already provided industry. But ifwe make his life too hard he can strike like the rest of us, and byrefusing to provide for any further expansion in industrial equipment,he can hold up production until we have devised some new method oflaying up capital. Currency depreciation is good for the debtor andbad for the creditor; if it goes too far it kills the creditor andreduces business to chaos.
We are a very long way from the chaos to which many of our Continentalneighbours have already reduced their monetary systems; but thereis fortunately a very general feeling that we are a country with areputation and a prestige on this point; and the business world isgrowing restive concerning the delay on the part of those responsiblein putting an end to a state of things which may have been justifiedby the war's exigencies (though there is much to be said for the viewthat in fact it only added to the war's difficulties) but isnow clearly as out of date as the censorship, which, like it,nevertheless, continues to flourish. This state of things arises fromthe arrangement tinder which an unlimited supply of legal tendercurrency can be manufactured by the Government, which encouraged tocontinue the system by the fact that each note issued is in effect aloan to itself without interest. At the meeting of Barclays Bank onJanuary 27th, Mr. Goodenough demanded that the issue of currency notesby the Government should be stopped forthwith, and that if it werenecessary to provide more currency it would be better for the banksto be allowed to issue notes themselves. This suggestion involves, ofcourse, a complete reversal of the principles on which our monetarysystem has grown up, since it has long been based on a note-issuingmonopoly in the hands of the Bank of England. But these aretopsy-turvy days, in which greyheaded precedent is very justly at aheavy discount; and Mr Goodenough's suggestion very practically getsover a big difficulty that stands in the way of stopping the streamof Bradburys. This difficulty lies in the fact that if the banks werepulled at by their customers for currency and could not supply themwith Bradbury notes, they would be forced to take notes from the Bankof England, with a bad effect on the appearance of its reserve. Ifthe business of issuing notes were put into the hands of the clearingbanks, their power to do so would be limited by the extent of theirassets, or of such of their assets as were thought fit to rank asbacking for their notes. In other words, the note-issuing businesswould once more have to be regulated on banking principles andcontrolled by the price asked, for advances, instead of expressingthe helplessness and improvidence of an impecunious and invertebrateGovernment. In this manner the new departure might be a convenienthalfway-house on the way from chaos back to sanity. But probably it istoo revolutionary and goes too straight in the teeth of the Bank ofEngland's privilege to receive much practical consideration; and thereis the question whether the public would take the new paper readilyand whether it could be made legal tender.
Sir Edward Holden, in one of those masterly surveys of world financewith which he now instructs the shareholders of the London Joint Cityand Midland Bank, assembled at their annual meeting, gave much of hisattention to an attack on the report of Lord Cunliffe's Committee onCurrency. This was only to be expected, since the Committee had maderecommendations on lines which were largely conservative and didnot embody any of the reforms or changes which had been previouslyadvocated by Sir Edward. Being on this occasion chiefly critical, hedid not make very clear in his latest speech the precise proposalsthat he favours. For them we have to go back to his speech of a yearago, as reported in the _Economist_ of February 2, 1918, p. 171, wherehe stated that "if the Bank (of England) had been working on the sameprinciples as other national banks of issue, there would have beenlittle ground for anxiety," and that these principles are:--
1. One bank of issue and not divided into departments.
2. Notes are created and issued on the security of bills of exchangeand on the cash balance, so that a relation is established between thenotes issued and the discounts.
3. The notes issued are controlled by a fixed ratio of gold to notesor of the cash balance to notes.
4. This fixed ratio may be lowered by the payment of a tax.
5. The notes should not exceed three times the gold or the cashbalance.
As will be remembered, the Cunliffe Committee recommended that thedivision of the Bank of England into an Issue Department and a BankingDepartment, should be retained; that the old principle by which abovea certain fixed limit all notes should be backed by gold, should alsobe retained, but that if at any time a breach of this rule shouldbe found necessary it should be possible, with the consent of theTreasury, and that Bank rate "should be raised to a rate sufficientlyhigh to secure the earliest possible retirement of the excess issue."Since it was formerly only possible to exceed the limit on thefiduciary issue by a breach of the law, under the Chancellor of theExchequer's promise to get an indemnity for it from Parliament, andsince Treasury tradition insisted on a 10 per cent. Bank rate wheneversuch a breach was permitted or contemplated, it will be seen that theCunliffe Committee proposed some considerable modifications in oursystem and hardly justified Sir Edward's assertion that it "proposedthat the Bank should continue to work under the Act of 1844 asheretofore."
At first sight there seems to be a good deal of difference between SirEdward's ideal and Lord Cunliffe's, but is not the difference toa great extent superficial? Whether the Bank be divided into twodepartments, each presenting a separate account, or its whole businessbe regarded as one and stated in one account, seems to be rather atrifling question. And the arguments put forward for their severalviews by the two champions are not strikingly convincing. Sir Edwardwants only one account, because he thinks the consequence would be astronger reserve and fewer changes in bank rate. But a mere change ofbookkeeping such as the amalgamation of the two accounts would notmake a half-pennyworth of difference to the extent of the Bank'sresponsibilities and its ability to meet them, and it is on variationsin these factors that movements in bank rate are in most casesdecided. On the other hand, Lord Cunliffe and his colleagues arguethat the main effect of putting the two departments into one would beto place deposits with the Bank of England in the same position asregards convertibility into gold as is now held by the note. On thispoint Sir Edward's answer is telling: "In reply to this statement, Isay that the depositors at the present time can always get gold bydrawing out notes from the reserve and taking gold from the IssueDepartment. There seems to be little difference between the depositorsattacking gold direct and attacking the gold through the notes in thereserve. If the Bank cannot pay the notes when demanded the wholemachinery stops." Quite so. The notion that the holder of a Bank ofEngland note has now a stronger hold over the Bank's gold than thedepositor seems to be baseless. He can exercise his hold more quicklyperhaps, though even this is doubtful. Since banknotes are notlegal tender at the Bank of England, it is not quite clear that thedepositor would even have to take the trouble to go first to theBanking Department for notes and then to the Issue Department forgold. He might be able to insist on gold in immediate payment of hisdeposit. Still less convincing is the Committee's argument that "theamalgamation of the two departments would inevitably lead in the endto State control of the creation of banking credit generally." Theirreport might have explained why this should be so, for to the ordinarymind the chain of consequence is not apparent. On the whole it is hardto see much good or harm to be achieved by changing the form of theBank return. It might make the Bank's position look stronger, but itcould not make it really stronger. Nor would it really impair thestrength of the note-holder's position as against the depositor,because even now there is no essential difference. It would substitutea more businesslike and simple statement for a form of accounts whichis cumbrous and stupid and Early Victorian--a relic of an age whichproduced the crinoline, the Crystal Palace and the Albert Memorial. Onthe other hand, to alter a statistical record merely for the sake ofsimplicity and symmetry is questionable. Unless we are getting moreand truer information, it is a pity to make comparisons between oneyear and another difficult by changing the form in which figures are given.
A more essential difference between the two policies lies in SirEdward's advocacy of a ratio--three to one--between notes and gold,and the Committee's support of the old fixed line system. By thelatter, if gold comes in, notes to the same extent can be created,and if gold goes out notes to the amount of the export have to becancelled. Under Sir Edward's policy the influx and efflux of goldwould have an effect on the note issue which would be three times theamount of the gold that came in or went out. This at least is thelogical effect of his statement that "the notes should not exceedthree times the gold or the cash balance." This law does not seem tobe quite consistent with his view that the fixed ratio of gold tonotes may be lowered by the payment of a tax; but presumably the taxwould come into operation before the three to one part was reached,and at three to one there would be a firm line drawn. On thisassumption the Committee's argument is a very strong one. "If,"says its report (Cd. 9182, p. 8), "the actual note issue is reallycontrolled by the proportion, the arrangement is liable to bring aboutvery violent disturbances. Suppose, for example, that the proportionof gold to notes is actually fixed at one-third and is operative.Then, if the withdrawal of gold for export reduces the proportionbelow the prescribed limit, it is necessary to withdraw notes in theratio of three to one. Any approach to the conditions under which therestriction would become actually operative would then be likely tocause even greater apprehension than the limitation of the Act of1844." Certainly if, during a foreign drain, for every million of goldthat went out, another two millions of credit, over and above, hadto be cancelled, it is easy to imagine a very jumpy state of mind inLombard Street and on the Stock Exchange. Sir Edward and the Committeeseem to be agreed as to a limit on the note issue, but of the twolimiting systems the old one advocated by the Committee, thoughapparently more severe, would seem to have much less alarmingpossibilities behind it.
A point on which the commercial world does not seem to have made upits mind, however, is whether there should be a limit at all. Underthe old Act there was a limit which could only be passed by a breachof the law. Under the Cunliffe proposal the limit could be passedwith the consent of the Treasury. Sir Edward has not told us of whatmachinery he proposes for the passing of the limit which he lays down;but in view of the great apprehension that an approach to the limitpoint would, as shown by the Committee, produce, it is clear thatthere would have to be a way round. In Germany there is no limit; youpay a tax on the excess issue and go on merrily. In America it wouldseem that the German system has been taken for a model. In his speechon January 29th Sir Edward quoted Senator Robert Owen, who was theprincipal pioneer of the Federal Reserve Bill through the Senate, asfollows:--"The central idea of the system is elastic currency issuedagainst commercial paper and gold, expanding and contracting accordingto the needs of commerce.... It is of great importance that the volumeof these notes should contract when the commerce of the country doesnot require the notes to be circulation, and the reserve board canrequire them to be returned by imposing a tax upon the issue....
Under the reserve system a financial panic is impossible. People willnot hoard currency nor hoard gold when they know that they can getcurrency or get gold when required.... America no longer believesa financial panic possible, and therefore the business men, beingperfectly assured as to the stability of credits, do not hesitate toenter manufacturing and commercial enterprises from which they wouldbe deterred under old conditions of unstable credit." Well, let ushope the Senator is right and that America is right in believing thata financial panic is no longer possible there. But one cannot helpfeeling that such a belief may be rather dangerous in the minds ofpeople so ready to take rose-coloured views as our American cousins.The Federal Reserve system has worked beautifully in a period inwhich American finance has had nothing to do but rake in the enormousprofits of American production at the expense of warring Europe andlend part of them, to be spent in America, to the Allied belligerents.It may work equally well if and when the problem to be faced isdifferent, but it will be interesting to see--for those of us who liveto see--what sort of a tax will be needed to "require" America, in oneof its holiday moods, to return currency that it thinks it needs andthe Federal Reserve Board regards as redundant.
Another point on which Sir Edward lays great stress, in his attackon the Bank Act of 1844 and the Committee which supports its mainprinciples, is the beauty of the bill of exchange as backing for anote issue, as opposed to Government securities. "There is," he says,"no automatic system for the redemption of currency notes as would bethe case if they were issued against bills of exchange, which in duecourse would have to be paid off." Again, "it seems to me that notesshould not be issued against Government securities which may or maynot be paid off, but against bills of exchange which must be met atdue date." This advantage about a bill of exchange is a very realone to the individual holder who can always put himself in funds byletting the contents of his portfolio "run off"; but is there muchin it as a safeguard against excessive issue of currency in times ofexuberance? In such times bills that fall due are pretty sure tobe replaced by new ones drawn against fresh production--sinceover-production is a common symptom of commercial exuberance--oragainst a resale of the goods on which the original bills were based.As long as anyone who can show produce can be certain to get creditand currency, the notion that the maturing of bills of exchange can berelied to restrict currency expansion within safe limits is surely adangerous assumption. The principle of a fixed limit, to be broken incase of real need, but only after some ceremony has been gone throughgiving notice of the fact that a crisis has been reached, seems ratherto be required by the psychology of speculative mankind. But even ifSir Edward's preference for bills of exchange as backing for notes hasall the merits that he claims that is no reason for urging the repealof the Bank Act to secure their use. Because the Bank Act does notforbid it: it merely says, "there shall be transferred, appropriatedand set apart by the said governor and company to the Issue Departmentof the Bank of England securities to the value of," etc. It is thepractice of the Bank to put Government securities into the IssueDepartment, but the terms of the Act do not compel them to do so, andif an excess issue were needed they would seem to be empowered to putany bills that they discounted into the assets held against the noteissue. On the whole the terms of the Act leaving them freedom in thematter, except with regard to the "Government debt" of L11 millions,which is specially mentioned as to be transferred to the IssueDepartment, seem to be preferable to a special stipulation in favourof bills of exchange.
But the most important difference between Sir Edward Holden and theCunliffe Committee seems to be in their attitude towards the goldreserve and the relation between the Bank of England and the rest ofthe items that compose the London money market. The Committee, workingto restore the conditions which made our market the centre of theworld's finance, endeavoured to give back the control of the centralgold reserve to the Bank of England by suggesting, among other things,that the other banks should hand over their gold to it. They omittedto discuss the serious question of the greater difficulty that theBank is likely to find in future in controlling the price of money inthe market, owing to the huge size that the chief clearing banks havenow reached. But a central gold reserve under central control wasevidently the object at which they aimed. Sir Edward will have none ofthis. He says that if this were done the position of the Joint Stockbanks would be weakened, though he does not explain why, since theywould obviously hold notes in place of their gold and so would be ableto meet their customers' demands, now that the latter are accustomedto the use of notes for pocket money. He points out that "the goldwhich was held by the Joint Stock banks before the war proved mostuseful.... At the beginning of the war the banks paid out gold,satisfied the demands of their customers for small currency, and thuseased the situation until currency notes became available." He seemsto have forgotten that the banks, or most of them, refused to partwith their gold, paid their customers in Bank of England notes which,being for L5 at the smallest, were of little use for pocket money, andso drove them to the Bank to get gold; and we had to have a prolongedbank holiday and a moratorium. Sir Edward is in favour of three goldreserves, one to be held by the Government, one by the clearing banks,and one by the Bank of England. If there were differences between thethree controllers of the reserve at a time of crisis the consequencemight be disastrous.
In view of the admiration expressed by Sir Edward for the new Americansystem which is so clearly based on central control it is ratherillogical that he should be so strongly in favour of independence onthis side of the water. His opinion is that "the policy of the JointStock banks ought to be to make themselves independent of the Bank ofEngland by maintaining large reserves in their vaults." Independenceand individualism are a great source of strength in most fields offinancial activity, but in view of the great problems that our moneymarket has to face there seems to be much to be said for co-operationand central control, at least until we have got back to a normal stateof affairs with regard to the foreign exchanges.
Macaulay on Depreciated Currency--Its Evils To-day--The Plight of theRentier--Mr Goodenough's Suggestion--Sir Edward Holden's Criticisms ofthe Currency Committee--His Scheme of Reform--Two Departments or Onein the Bank of England?--Not a Vital Question--The Ratio of Notesto Gold--Objections to a Hard-and-fast Ratio--The Limit on NoteIssues--The Federal Reserve Act and American Optimism--Currency andCommercial Paper--A Central Gold Reserve with Central Control.
Everyone has read, and most of us have forgotten, the great passage inMacaulay's history which describes the evils of a disordered currency."It may well be doubted," he says, "whether all the misery which hadbeen inflicted on the English nation in a quarter of a century by badKings, bad Ministers, bad Parliaments and bad judges was equal to themisery caused in a single year by bad crowns and bad shillings....While the honour and independence of the State were sold to a foreignPower, while chartered rights were invaded, while fundamental lawswere violated, hundreds of thousands of quiet, honest and industriousfamilies laboured and traded, ate their meals and lay down to rest incomfort and security. Whether Whigs or Tories, Protestants or Jesuitswere uppermost, the grazier drove his beasts to market, the grocerweighed out his currants, the draper measured out his broadcloth,the hum of buyers and sellers was as loud as ever in the towns, theharvest-time was celebrated as joyously as ever in the hamlets, thecream overflowed the pails of Cheshire, the apple juice foamed in thepresses of Herefordshire, the piles of crockery glowed in the furnacesof the Trent, and the barrows of coal rolled fast along the timberrailways of the Tyne. But when the great instrument of exchange becamethoroughly deranged, all trade, all industry, were smitten as with apalsy.... Nothing could be purchased without a dispute. Over everycounter there was wrangling from morning to night. The workman and hisemployer had a quarrel as regularly as the Saturday came round. On afair-day or a market-day the clamours, the reproaches, the taunts, thecurses, were incessant; and it was well if no booth was overturned,and no head broken.... The price of the necessaries of life, of shoes,of ale, of oatmeal, rose fast. The labourer found that the bit ofmetal which, when he received it was called a shilling, would hardly,when he wanted to purchase a pot of beer or a loaf of rye bread, go asfar as sixpence."
From some of the evils thus dazzlingly described we are happily freein these times. We are not cursed with a currency composed of coinswhich are good, bad and indifferent, with the result that the publicgets the bad and indifferent while the nimble bullion dealers absorband export the good. There is nothing to choose between one piece ofpaper and another, and all that is wrong with them is that there aretoo many of them. But the general result as it affects the labourerwho wants to purchase a pot of beer or anyone else who wants to buyanything is very much the same. A bit of metal that is called ashilling has about the value of a pre-war sixpence and a bit of paperthat is called a Bradbury fetches half as much as the pound of fiveyears ago. Compared with what other peoples are suffering from thesame disease arising from the same surfeit of money in one form oranother, this nuisance that we are enduring is not too terriblysevere. It has entailed great hardship on a class that is smallin number, namely, those who have to live on fixed incomes. Thesalary-earner and the rentier have borne the brunt, while thewage-earner and the profit-maker have been able to expand theirearnings, in paper, at least to a point at which the depreciation ofcurrency have left them no worse off. Seeing that the wage-earnersare those who do the dreariest and dirtiest jobs, and that theprofit-makers are those who take the risks of industry and theenormous responsibility of organising enterprise, they are the classeswhom it is clearly most desirable to encourage. The rentier in thesedays gets less than no sympathy, but we make a great mistake if wethink that we can with impunity crush him between the upper and nethermillstone of fixed income and rising prices. With his help we haveequipped industry at home and abroad. We can, if we choose, bydepreciating the currency still further, lessen still more the rewardthat we pay him for that benefit. He may kick, but he cannot abolishthe equipment with which he has already provided industry. But ifwe make his life too hard he can strike like the rest of us, and byrefusing to provide for any further expansion in industrial equipment,he can hold up production until we have devised some new method oflaying up capital. Currency depreciation is good for the debtor andbad for the creditor; if it goes too far it kills the creditor andreduces business to chaos.
We are a very long way from the chaos to which many of our Continentalneighbours have already reduced their monetary systems; but thereis fortunately a very general feeling that we are a country with areputation and a prestige on this point; and the business world isgrowing restive concerning the delay on the part of those responsiblein putting an end to a state of things which may have been justifiedby the war's exigencies (though there is much to be said for the viewthat in fact it only added to the war's difficulties) but isnow clearly as out of date as the censorship, which, like it,nevertheless, continues to flourish. This state of things arises fromthe arrangement tinder which an unlimited supply of legal tendercurrency can be manufactured by the Government, which encouraged tocontinue the system by the fact that each note issued is in effect aloan to itself without interest. At the meeting of Barclays Bank onJanuary 27th, Mr. Goodenough demanded that the issue of currency notesby the Government should be stopped forthwith, and that if it werenecessary to provide more currency it would be better for the banksto be allowed to issue notes themselves. This suggestion involves, ofcourse, a complete reversal of the principles on which our monetarysystem has grown up, since it has long been based on a note-issuingmonopoly in the hands of the Bank of England. But these aretopsy-turvy days, in which greyheaded precedent is very justly at aheavy discount; and Mr Goodenough's suggestion very practically getsover a big difficulty that stands in the way of stopping the streamof Bradburys. This difficulty lies in the fact that if the banks werepulled at by their customers for currency and could not supply themwith Bradbury notes, they would be forced to take notes from the Bankof England, with a bad effect on the appearance of its reserve. Ifthe business of issuing notes were put into the hands of the clearingbanks, their power to do so would be limited by the extent of theirassets, or of such of their assets as were thought fit to rank asbacking for their notes. In other words, the note-issuing businesswould once more have to be regulated on banking principles andcontrolled by the price asked, for advances, instead of expressingthe helplessness and improvidence of an impecunious and invertebrateGovernment. In this manner the new departure might be a convenienthalfway-house on the way from chaos back to sanity. But probably it istoo revolutionary and goes too straight in the teeth of the Bank ofEngland's privilege to receive much practical consideration; and thereis the question whether the public would take the new paper readilyand whether it could be made legal tender.
Sir Edward Holden, in one of those masterly surveys of world financewith which he now instructs the shareholders of the London Joint Cityand Midland Bank, assembled at their annual meeting, gave much of hisattention to an attack on the report of Lord Cunliffe's Committee onCurrency. This was only to be expected, since the Committee had maderecommendations on lines which were largely conservative and didnot embody any of the reforms or changes which had been previouslyadvocated by Sir Edward. Being on this occasion chiefly critical, hedid not make very clear in his latest speech the precise proposalsthat he favours. For them we have to go back to his speech of a yearago, as reported in the _Economist_ of February 2, 1918, p. 171, wherehe stated that "if the Bank (of England) had been working on the sameprinciples as other national banks of issue, there would have beenlittle ground for anxiety," and that these principles are:--
1. One bank of issue and not divided into departments.
2. Notes are created and issued on the security of bills of exchangeand on the cash balance, so that a relation is established between thenotes issued and the discounts.
3. The notes issued are controlled by a fixed ratio of gold to notesor of the cash balance to notes.
4. This fixed ratio may be lowered by the payment of a tax.
5. The notes should not exceed three times the gold or the cashbalance.
As will be remembered, the Cunliffe Committee recommended that thedivision of the Bank of England into an Issue Department and a BankingDepartment, should be retained; that the old principle by which abovea certain fixed limit all notes should be backed by gold, should alsobe retained, but that if at any time a breach of this rule shouldbe found necessary it should be possible, with the consent of theTreasury, and that Bank rate "should be raised to a rate sufficientlyhigh to secure the earliest possible retirement of the excess issue."Since it was formerly only possible to exceed the limit on thefiduciary issue by a breach of the law, under the Chancellor of theExchequer's promise to get an indemnity for it from Parliament, andsince Treasury tradition insisted on a 10 per cent. Bank rate wheneversuch a breach was permitted or contemplated, it will be seen that theCunliffe Committee proposed some considerable modifications in oursystem and hardly justified Sir Edward's assertion that it "proposedthat the Bank should continue to work under the Act of 1844 asheretofore."
At first sight there seems to be a good deal of difference between SirEdward's ideal and Lord Cunliffe's, but is not the difference toa great extent superficial? Whether the Bank be divided into twodepartments, each presenting a separate account, or its whole businessbe regarded as one and stated in one account, seems to be rather atrifling question. And the arguments put forward for their severalviews by the two champions are not strikingly convincing. Sir Edwardwants only one account, because he thinks the consequence would be astronger reserve and fewer changes in bank rate. But a mere change ofbookkeeping such as the amalgamation of the two accounts would notmake a half-pennyworth of difference to the extent of the Bank'sresponsibilities and its ability to meet them, and it is on variationsin these factors that movements in bank rate are in most casesdecided. On the other hand, Lord Cunliffe and his colleagues arguethat the main effect of putting the two departments into one would beto place deposits with the Bank of England in the same position asregards convertibility into gold as is now held by the note. On thispoint Sir Edward's answer is telling: "In reply to this statement, Isay that the depositors at the present time can always get gold bydrawing out notes from the reserve and taking gold from the IssueDepartment. There seems to be little difference between the depositorsattacking gold direct and attacking the gold through the notes in thereserve. If the Bank cannot pay the notes when demanded the wholemachinery stops." Quite so. The notion that the holder of a Bank ofEngland note has now a stronger hold over the Bank's gold than thedepositor seems to be baseless. He can exercise his hold more quicklyperhaps, though even this is doubtful. Since banknotes are notlegal tender at the Bank of England, it is not quite clear that thedepositor would even have to take the trouble to go first to theBanking Department for notes and then to the Issue Department forgold. He might be able to insist on gold in immediate payment of hisdeposit. Still less convincing is the Committee's argument that "theamalgamation of the two departments would inevitably lead in the endto State control of the creation of banking credit generally." Theirreport might have explained why this should be so, for to the ordinarymind the chain of consequence is not apparent. On the whole it is hardto see much good or harm to be achieved by changing the form of theBank return. It might make the Bank's position look stronger, but itcould not make it really stronger. Nor would it really impair thestrength of the note-holder's position as against the depositor,because even now there is no essential difference. It would substitutea more businesslike and simple statement for a form of accounts whichis cumbrous and stupid and Early Victorian--a relic of an age whichproduced the crinoline, the Crystal Palace and the Albert Memorial. Onthe other hand, to alter a statistical record merely for the sake ofsimplicity and symmetry is questionable. Unless we are getting moreand truer information, it is a pity to make comparisons between oneyear and another difficult by changing the form in which figures are given.
A more essential difference between the two policies lies in SirEdward's advocacy of a ratio--three to one--between notes and gold,and the Committee's support of the old fixed line system. By thelatter, if gold comes in, notes to the same extent can be created,and if gold goes out notes to the amount of the export have to becancelled. Under Sir Edward's policy the influx and efflux of goldwould have an effect on the note issue which would be three times theamount of the gold that came in or went out. This at least is thelogical effect of his statement that "the notes should not exceedthree times the gold or the cash balance." This law does not seem tobe quite consistent with his view that the fixed ratio of gold tonotes may be lowered by the payment of a tax; but presumably the taxwould come into operation before the three to one part was reached,and at three to one there would be a firm line drawn. On thisassumption the Committee's argument is a very strong one. "If,"says its report (Cd. 9182, p. 8), "the actual note issue is reallycontrolled by the proportion, the arrangement is liable to bring aboutvery violent disturbances. Suppose, for example, that the proportionof gold to notes is actually fixed at one-third and is operative.Then, if the withdrawal of gold for export reduces the proportionbelow the prescribed limit, it is necessary to withdraw notes in theratio of three to one. Any approach to the conditions under which therestriction would become actually operative would then be likely tocause even greater apprehension than the limitation of the Act of1844." Certainly if, during a foreign drain, for every million of goldthat went out, another two millions of credit, over and above, hadto be cancelled, it is easy to imagine a very jumpy state of mind inLombard Street and on the Stock Exchange. Sir Edward and the Committeeseem to be agreed as to a limit on the note issue, but of the twolimiting systems the old one advocated by the Committee, thoughapparently more severe, would seem to have much less alarmingpossibilities behind it.
A point on which the commercial world does not seem to have made upits mind, however, is whether there should be a limit at all. Underthe old Act there was a limit which could only be passed by a breachof the law. Under the Cunliffe proposal the limit could be passedwith the consent of the Treasury. Sir Edward has not told us of whatmachinery he proposes for the passing of the limit which he lays down;but in view of the great apprehension that an approach to the limitpoint would, as shown by the Committee, produce, it is clear thatthere would have to be a way round. In Germany there is no limit; youpay a tax on the excess issue and go on merrily. In America it wouldseem that the German system has been taken for a model. In his speechon January 29th Sir Edward quoted Senator Robert Owen, who was theprincipal pioneer of the Federal Reserve Bill through the Senate, asfollows:--"The central idea of the system is elastic currency issuedagainst commercial paper and gold, expanding and contracting accordingto the needs of commerce.... It is of great importance that the volumeof these notes should contract when the commerce of the country doesnot require the notes to be circulation, and the reserve board canrequire them to be returned by imposing a tax upon the issue....
Under the reserve system a financial panic is impossible. People willnot hoard currency nor hoard gold when they know that they can getcurrency or get gold when required.... America no longer believesa financial panic possible, and therefore the business men, beingperfectly assured as to the stability of credits, do not hesitate toenter manufacturing and commercial enterprises from which they wouldbe deterred under old conditions of unstable credit." Well, let ushope the Senator is right and that America is right in believing thata financial panic is no longer possible there. But one cannot helpfeeling that such a belief may be rather dangerous in the minds ofpeople so ready to take rose-coloured views as our American cousins.The Federal Reserve system has worked beautifully in a period inwhich American finance has had nothing to do but rake in the enormousprofits of American production at the expense of warring Europe andlend part of them, to be spent in America, to the Allied belligerents.It may work equally well if and when the problem to be faced isdifferent, but it will be interesting to see--for those of us who liveto see--what sort of a tax will be needed to "require" America, in oneof its holiday moods, to return currency that it thinks it needs andthe Federal Reserve Board regards as redundant.
Another point on which Sir Edward lays great stress, in his attackon the Bank Act of 1844 and the Committee which supports its mainprinciples, is the beauty of the bill of exchange as backing for anote issue, as opposed to Government securities. "There is," he says,"no automatic system for the redemption of currency notes as would bethe case if they were issued against bills of exchange, which in duecourse would have to be paid off." Again, "it seems to me that notesshould not be issued against Government securities which may or maynot be paid off, but against bills of exchange which must be met atdue date." This advantage about a bill of exchange is a very realone to the individual holder who can always put himself in funds byletting the contents of his portfolio "run off"; but is there muchin it as a safeguard against excessive issue of currency in times ofexuberance? In such times bills that fall due are pretty sure tobe replaced by new ones drawn against fresh production--sinceover-production is a common symptom of commercial exuberance--oragainst a resale of the goods on which the original bills were based.As long as anyone who can show produce can be certain to get creditand currency, the notion that the maturing of bills of exchange can berelied to restrict currency expansion within safe limits is surely adangerous assumption. The principle of a fixed limit, to be broken incase of real need, but only after some ceremony has been gone throughgiving notice of the fact that a crisis has been reached, seems ratherto be required by the psychology of speculative mankind. But even ifSir Edward's preference for bills of exchange as backing for notes hasall the merits that he claims that is no reason for urging the repealof the Bank Act to secure their use. Because the Bank Act does notforbid it: it merely says, "there shall be transferred, appropriatedand set apart by the said governor and company to the Issue Departmentof the Bank of England securities to the value of," etc. It is thepractice of the Bank to put Government securities into the IssueDepartment, but the terms of the Act do not compel them to do so, andif an excess issue were needed they would seem to be empowered to putany bills that they discounted into the assets held against the noteissue. On the whole the terms of the Act leaving them freedom in thematter, except with regard to the "Government debt" of L11 millions,which is specially mentioned as to be transferred to the IssueDepartment, seem to be preferable to a special stipulation in favourof bills of exchange.
But the most important difference between Sir Edward Holden and theCunliffe Committee seems to be in their attitude towards the goldreserve and the relation between the Bank of England and the rest ofthe items that compose the London money market. The Committee, workingto restore the conditions which made our market the centre of theworld's finance, endeavoured to give back the control of the centralgold reserve to the Bank of England by suggesting, among other things,that the other banks should hand over their gold to it. They omittedto discuss the serious question of the greater difficulty that theBank is likely to find in future in controlling the price of money inthe market, owing to the huge size that the chief clearing banks havenow reached. But a central gold reserve under central control wasevidently the object at which they aimed. Sir Edward will have none ofthis. He says that if this were done the position of the Joint Stockbanks would be weakened, though he does not explain why, since theywould obviously hold notes in place of their gold and so would be ableto meet their customers' demands, now that the latter are accustomedto the use of notes for pocket money. He points out that "the goldwhich was held by the Joint Stock banks before the war proved mostuseful.... At the beginning of the war the banks paid out gold,satisfied the demands of their customers for small currency, and thuseased the situation until currency notes became available." He seemsto have forgotten that the banks, or most of them, refused to partwith their gold, paid their customers in Bank of England notes which,being for L5 at the smallest, were of little use for pocket money, andso drove them to the Bank to get gold; and we had to have a prolongedbank holiday and a moratorium. Sir Edward is in favour of three goldreserves, one to be held by the Government, one by the clearing banks,and one by the Bank of England. If there were differences between thethree controllers of the reserve at a time of crisis the consequencemight be disastrous.
In view of the admiration expressed by Sir Edward for the new Americansystem which is so clearly based on central control it is ratherillogical that he should be so strongly in favour of independence onthis side of the water. His opinion is that "the policy of the JointStock banks ought to be to make themselves independent of the Bank ofEngland by maintaining large reserves in their vaults." Independenceand individualism are a great source of strength in most fields offinancial activity, but in view of the great problems that our moneymarket has to face there seems to be much to be said for co-operationand central control, at least until we have got back to a normal stateof affairs with regard to the foreign exchanges.
MEETING THE WAR BILL
January, 1919
The Total War Debt--What are our Loans to the Allies worth?--OtherUncertain Items--The Prospects of making Germany pay--The Right Way toregard the Debt--Our Capital largely intact--A Reform of the IncomeTax--The Debt to America--The Levy on Capital and other Schemes--Theonly Real Aids to Recovery.
A table published week by week by the Economist shows that fromAugust 1, 1914, to November 9, 1918, the Government paid out L8612millions sterling. From this we have to deduct an estimate of theamount that the Government would have spent if there had not been awar, so that we are at once landed in the realm of conjecture. Thelast pre-war financial year saw an expenditure of L198 millions, andit is safe to assume that this figure would have swollen by a fewmillions a year if peace had continued, so that we may take at leastL860 millions from the above total as normal peace expenditure for the4-1/2 years. This gives us L7752 millions as the gross cost of thewar, as far as the period of actual fighting is concerned. From thisfigure, however, we are able to make some big deductions. There areloans to Allies and Dominions, and some other much more readilyrealisable assets than these. We do not know the actual figure of theloans to Allies and Dominions during the war period, because they arenot included in the weekly financial statements. The amount that weborrow abroad is set out week by week--at least, that is believed tobe the meaning of the cryptic item "Other Debt"--but the amount thatwe lend to Allies and Dominions is hidden away in the Supply Servicesor somewhere, and we only get occasional information about it from theChancellor in the course of his speeches on the Budget or on Votes ofCredit. In his last Vote of Credit speech, on November 12, 1918, MrBonar Law gave the chief items of the loans to Allies, and a veryinteresting list it was. The totals up to October 19, 1918, were L1465millions to Allies and L218-1/2 millions to Dominions. The Allieswere indebted to us as follows:--Russia, L568 millions; France, L425millions; Italy, L345 millions; smaller States, L127 millions.[1]
[Footnote 1: Parliamentary Debates, Vol. 110, No. 114, p. 2560.]
Some of these debts may be written off at once, and that cheerfully,seeing that they have been lent brothers-in-arms who have beenhit much harder than we have by the war, and had nothing like ourfinancial strength. The question is, what figure ought we to put onthis asset in deducting it from gross war expenditure in order toarrive at a guess at the real cost? We take our loans to Dominions, ofcourse, as good to the last penny. Mr Bonar Law, in his Budget speechlast April, took our loans to Allies at half their face value. Strictbookkeeping would probably demand a lower figure than 50 per cent.;but let us follow the ex-Chancellor's example and take loans toAllies, which we will estimate at L1480 millions up to November 9th,as good for L740 millions, and loans to Dominions at L220 millions upto the same date, a total of L960 millions, to be deducted from grosswar cost. Concerning L740 millions of this sum, however, there is acertain amount of doubt. No one questions for a moment the solvencyof France and Italy, but in view of the pressure that the war hasexercised on their producing power, and, in the case of France, thecomplication added by the uncertainties of the position in Russia, inwhich French investors are so deeply interested, one cannot feel surethat they will be able at once to make interest payments. Much willdepend on the sums that they are able to recover from Germany againsttheir bill of damages, on which more anon. But in any case it seemslikely that a general scheme of interest funding, as between theAllies, may have to be adopted for some years to come.
As to the other assets that we have to set against our grossexpenditure during the fighting period, they were enumerated by theChancellor in his Budget speech last April in the following terms;--
Balances in agents' hands, debts
due, foodstuffs, etc L375 millions.
Land, securities, buildings and ships 97 "
Stores in Munitions Department
(cost price 325 millions) taken at 100 "
Additions this financial year 100 "
Arrears of taxation 500 "
---
Total[1] L1172
[Footnote 1: Parliamentary Debates, Vol. 105, No. 33, pp. 698-699.]
It will be remembered that in his Budget speech the Chancellor wasproceeding on the assumption that the war would last till March 31stnext--the date at which our financial year ends--and would then beconvenient enough to stop. Happily for us, the valour of our soldiersand those of our Allies, the splendid success of our Fleet and ourmerchantmen In bringing over American troops and their food andequipment with astonishing speed, and the straightforward diplomacyof President Wilson, combined to achieve victory nearly five monthsearlier than the most sanguine had dared to expect. With the verypleasant result--though it is a small matter when compared with theend of the killing of the best of our manhood--that the financialposition is very greatly improved. With regard to the figures givenabove, it should be observed that the "debts" are advances toDominions, but on quite a different basis from our loans to them,being money owed by them against goods and services supplied.[1] Theyand the balances in the hands of agents are both as good as gold.Concerning the others, one is entitled at first sight to feel a gooddeal of scepticism, since such articles as land, buildings, ships andstores, bought or built by Government during a war, are likely to findan extremely sluggish demand when the war is over. However, Mr BonarLaw assured the House that his valuation of these amounts had beenarrived at on a conservative basis, and, what is better still, in hisVote of Credit speech on November 12th, he was able to state thatrevised estimates had shown that their value would be "far greater"than he had previously expected. So perhaps we are entitled to takethem at L1300 millions.
[Footnote 1: Parliamentary Debates, Vol. 105, No. 33, p. 698.]
If so, we get the following results for the cost of the fightingperiod:--
Total Government expenditure,
August 1, 1914, to November
9, 1918 L8612 millions.
Less estimate of normal peace expenditure 860 "
-----
7752 "
Less Loans to Dominions 220 millions.
Less Loans to Allies (half face value) 740 "
Realisable assets 1300 "
----
2260 "
----
Net cost of period L5492 "
If war cost would be good enough to cease with the fighting we shouldthus now be able to see, more or less, how we stand. During thefighting period the Government raised by taxation the sum of L2120millions,[1] from which we have again to deduct L860 millions as anestimate for normal peace taxation, if the war had not happened,leaving L1350 millions as the net war taxation, and L4142 millions asthe net addition to debt from the war.
[Footnote 1: Economist, Nov. 16, 1918.]
But, of course, there are still some large and uncertain sums to comein to both sides of the account. There is the cost of maintaining ourArmy and Navy during the armistice period, the cost of demobilisation,and the cost of putting an end to war munitions contracts running formany months ahead, holders of which will have to be compensated. Whohas enough assurance to venture on an estimate of the cost of theseitems? Shall we guess them at something between L1000 and L1500millions? And when we have made this guess are we at the end of thewar's cost? Ought we not to include pensions to be paid, and if so, atwhat figure? Fifty millions a year for thirty years? If so, there isanother L1500 millions. And interest on war debt, and for how long?
On the other side of the balance-sheet, the only asset that has notyet been included in the calculation is the sum that we are going toreceive from Germany, Some cheery optimists think that it is possiblefor us and for the Allies to make Germany pay the whole of our warcost. If so, we have halcyon days ahead, for not only shall we be ableto repay the whole war debt but also to pay back to the taxpayer allthe L1350 millions that he produced during the war, unless, as seemsmore likely, the Government finds other uses, or abuses, for themoney, and sets its motley horde of wasters to work again. But thisproblem, of course, is not going to arise. It would not be physicallypossible for Germany to pay the whole of the Allies' war cost, exceptin the course of many generations, and, moreover, the Allies havebound themselves not to make any such demand by the rider that theyadded to President Wilson's peace terms, in giving their assent tothem as the basis on which they were prepared to make peace. Earlyin November they stated that President Wilson's reference to"restoration" of invaded countries should, in their view, be expandedinto a claim for compensation "for all damage done to the civilianpopulation of the Allies and to their property by the aggression ofGermany by land, by sea, and from the air."[1] This is letting Germanyoff lightly; but, after stating their readiness to make peace on thebasis of the fourteen points, if amended as above (and also withregard to the Freedom of the Seas question) it is not possible forthe European Allies, as the Prime Minister's late manifesto says theypropose to do[2] to expand this claim for civilian damage into ademand for the whole of their war cost up to the limit of the capacityof the Central Powers to pay, without a serious breach of faith. Sothat the question of how much we can get out of Germany is complicatedby the further uncertainty of the size of the bill for damages that wecan present. It will be big enough. We know that the Germans have sunk8-1/2 million tons of British ships during the war. As to the priceat which, for "restoration" purposes, we shall value those ships andtheir cargoes, and all the civilian property damaged by aircraft andbombardment, this is a matter which it would be obviously improperto discuss; but we may be sure that the bill will mount up to manyhundreds of millions, and it remains to be seen whether, after Belgiumand France have presented their account, it will be possible for us tosecure payment even for all the civilian damage that we have suffered.
[Footnote 1: Times, November 7, 1918.]
[Footnote 2: Times, December 6, 1918.]
It thus appears that the net cost of the fighting period has beensomewhere in the neighbourhood of L5500 millions, taking our loansto Allies at half their face value; and that the armistice anddemobilisation period is likely to cost another L1000 to L1500millions more, to say nothing of pensions and debt charge that will goon for years (unless the supporters of Levy on Capital have their wayand wipe the debt out), and that against this further expenditure wecan set whatever sum is recovered from Germany.
Seeing that our total pre-war debt was L710-1/2 millions, or, omittingwhat the Government returns call the Other Capital Liabilities,L653-1/2 millions, these figures of war debt and war cost are at firstsight somewhat appalling. But there is no reason why they shouldterrify us, and there are several reasons why they are, when looked atwith a discriminating eye, much less frightening than when we firstset them out.
In the first place, we have always to remember that these figures arein after-war pounds, and that the after-war pound is, thanks to theprofligate use by our war Governments of the printing-press and thebanking machine, just about half the size, when measured in actualbuying power, of the pre-war pound. Any one who pays L100 in taxesto-day thereby surrenders claims to about the same amount of goods andservice as he did if he paid L50 in taxes before the war. So that inmaking any comparison between the position now and the position thenwe have to divide the figures of to-day by two.
In the second, we need not be misled by the Jeremiahs who tell us thatnow that we have won the war we have before us the task of paying forit. This is not true, or true only to a small extent--to the extent,that is to say, to which we shall, when all these assets andliabilities have been settled up and balanced, be afflicted with aforeign debt. Let us leave this question on one side for the timebeing, and consider what the position really is with regard to thatpart of the war's cost that has been raised at home. In so far as thathas been done, the war cost has been raised by us while the war wenton. In fact, all the war cost has to be raised by somebody whilethe war goes on, because the war is fought with stuff and servicesproduced at the time and paid for at the time. But when Americans lendus money to pay for some of the stuff that they send us, they pay atthe time and we, or our posterity, have to pay them back later on;this is the only way in which we can make posterity pay for the war,and then it only means that our posterity pays America's. It is notpossible to carry on war with wealth that is going to be produced someday. The effort of self-sacrifice that war demands has to be made bysomebody during its progress--otherwise the war could not be fought.
That effort of self-sacrifice we have already made in so far as wehave paid for our war cost out of money raised at home. That money hasbeen raised in three ways--by taxation, by borrowing saved money, andby inflation. When it is raised by taxation the sacrifice is obvious,and, in nearly all cases, inevitable: we pay our larger war taxes andso we have less to spend on ourselves, and so we go without things. Afew people raise money to pay taxes during war by borrowing or draftson capital, but they are probably so exceptional that their case neednot be considered. We transfer our buying power to the Government tobe used for the fighters, and so we set free the labour and materialthat used to go in providing us with comforts and pleasures; ourcompetition for goods is reduced, and so the Government is able to getwhat it needs out of the nation's production, which is _pro tanto_relieved of our demand. The same thing happens when the Governmentgets money for the war by borrowing money that we save. We reduceexpenditure, and transfer buying power to the State and diminish ourdemand on the nation's production, or that of its foreign supplies. Ifthe whole war cost had been met by these two methods there need havebeen little or no increase in prices here, and the cost of the warwould have been about half what it has been. Of the two methods,taxation is obviously the cleaner, simpler and more honest. Byborrowing, the State hires those who have a margin to put part of itat the disposal of the State at a time of national crisis, instead oftaking it from them outright. As most of the taxation involved bythe subsequent debt charge falls on those who have a margin (as itobviously should) the result is that the people who subscribed to theloans are afterwards taxed to pay themselves interest and to repaythemselves their debt.
This subsequent taxation falls on them all alike in proportion totheir ability to pay, or would if the income tax was more equitablyimposed; those who have subscribed their fair share to the loans havean offset, in the interest that they receive, against the taxation;those who subscribed less are properly penalised, those who subscribedmore are properly benefited. If only the income tax did not make theposition of fathers of families so unjust, the whole arrangement wouldlook, at first sight, quite fair, though rather absurd and clumsy,involving all this subscribing and taxing and paying back instead ofan outright tax and having done with it. But in fact a very graveinequity is involved by this business of borrowing for war, and laidupon just the people whom we ought, above all, to treat most fairly,namely, those who fight for us. The soldiers and sailors risk theirlives for a pittance during the war, while their brothers and sistersand cousins and uncles and aunts, left at home in security andcomfort, earn bloated profits and wages, and put them, or part ofthem, into War Loans; then when the fighters come back, very likelywith their business and connection ruined or lost, they are expectedto contribute to the taxation that goes into the pockets ofdebt-holders.
Inflation, the third method of paying for war, again produces the sameeffect of a reduction of consumption by the civilian population, butin a roundabout manner, which works at first without being noticed,and so is particularly dear to the adroit politician. By it nobodytransfers buying power to the Government, but the Government andthe bankers, who are generally most reluctant accessories to thetransaction, between them create new buying power, which, coming intoa restricted market for goods in addition to all the existing buyingpower, simply forces everybody to consume less because the money intheir pockets fetches less goods owing to the rise in prices.
The evil attached to this system is obvious enough. It amounts to atax on the general consumer in proportion to his consumption, and soit lays the sacrifice on the shoulders of those least able to bear it.No Government would have the courage to impose such a tax openly andfrankly. All the warring Governments in varying degrees have used thisroundabout device of imposing it, very likely being quite unawareof the fraud on the consumer that they were perpetrating. Our ownGovernment, in fact, having first added by this process to a rise inthe price of bread, then reduced it by a special subsidy--a pleasanttouch of Alice in Wonderland finance. This mode of taxing by raisingprices hits, of course, all those who live on fixed incomes andsalaries and wages. Those who can strike, or take more out of theconsumer, can evade it, and so it falls on the weakest shoulders andincidentally produces friction, discontent and dangerous suspicion.But even it works at the time when it happens. Each creation of newbuying power gives the Government, for the moment, control of so muchin goods and services at the expense of the consumer; but when oncethe new buying power has been distributed by the State's payments itis in the hands of the nation as a whole. If the process ceased, thenation would still have control of the whole of its output, which isits income, though the injustice involved, to those who are not strongenough to resist the effects of higher prices, would continue.
Thus, whatever means--straightforward or devious--are used forfinancing war, it is paid for while it goes on by the warring countryif the financing is done at home, or by its foreign creditors if thefinancing is done abroad. And it is, necessarily, almost entirely paidfor out of income, that is, out of current production. It is curiousto find that many people still seem to think that the whole cost ofthe war has come out of capital. Luckily for us it could not be done,or only to a very small extent. Our capital mostly consisted ofrailways, factories, ships, roads, agricultural land, machinery,houses and other things that could not be taken and shot out of a gun.These things we have still got, and though many of them are not insuch good shape as they were, some of them are much better equippedand organised. We have drawn on our stocks of materials and goods--howfar it is impossible to say; we have lost 8-1/2 million tons ofshipping by war losses; in the meantime we have built, bought andcaptured 5-1/2 millions of new tonnage, and we have a claim againstthe Germans for such tonnage. On capital account we have suffered bywear and tear in so far as our upkeep has been neglected owing to lackof labour during the war, and by depletion of materials and stocks,and also, of course, by the fact that if the war had not happened,we should, if pre-war calculations were correct, have put some L1700millions into new investments at home and abroad during the 4-1/4years of fighting and some more hundreds of millions during theafter-war period of Government borrowing and restriction on privateinvestment. But a very large part of the money that went into victorywould otherwise have gone not to capital account but into the pleasantfrivolities, embellishments and vulgarities that made life an amusingabsurdity in days before the war.
If, then, the war sacrifice was made during the war, in so far as itscost was raised at home, how far is it true that we are now faced withthe business of paying for it? If taxation were equitable it wouldonly be to the extent that those who ought to have made the sacrificeand did not, will in future have to pay interest to those who did, ortheir representatives. So that the first thing we have to do is tomake taxation equitable, that is, lay it on the taxpayer in proportionto his ability to pay. There will still remain the injustice to thosewho have fought for us, which might be cured, or amended, by specialexemptions. With taxation on a really sound basis no further sacrificewould be involved by the debt charge, and no diminution of thenation's wealth or consuming power, which will depend, as always, onits output of goods and services; but only a transfer of consumingpower from taxpayers to debt-holders in accordance with the sacrificemade by the latter during the war. What we produce as a nation weshall consume as a nation, subject to the extent that we financed thewar during its course by operations abroad.
These operations were twofold. We sold to foreigners part of ourholdings of foreign securities, thereby and to this extent paying forwar cost out of capital--out of the investments made by ourselvesand our forbears in America and elsewhere. Mr Bonar Law, in a recentinterview in the _Observer_, stated that we had sent back to theUnited States practically the whole of our holdings of Americansecurities to be sold or pledged as collateral for loans, and that thevalue of them was three billion dollars--L600 millions sterling. Anyof them that have only been pledged can presumably be used to meet theloans raised as they fall due, and so will lighten our burden in thematter of repayment. These loans raised abroad are the second mode offoreign financing. By it we had raised up to November 9th nearly L1300millions, as shown by the _Economist's_ table, and to that extent wehave pledged our future production and that of our posterity, to meetthe annual service for interest and repayment. On the other hand, allthis sum and more we have (as shown above) lent to our Allies andDominions, so that the ex-Chancellor was well justified in his boastthat we had only borrowed to finance our Allies, and that we had beenself-sufficient for our own war cost.[1]
[Footnote 1: Budget Speech, Parliamentary Debates, vol. 105, No. 33.]
In other words, all that we needed for the war we were able to produceourselves, or to obtain in exchange for our produce and assets. Onpaper, therefore, our position as a creditor country is only impairedby our sales of securities. But that is only so on paper. In fact, theloans that we have raised abroad are good debts that have to be met tothe last penny, and are a first charge on our future output, but theadvances that we have made to our Allies, much harder hit than we areby the war, are assets on which we cannot depend. They were taken inour balance-sheet above at half their face value, but there is much tobe said for writing them off altogether and tearing up the I.O.U.'sof our foreign brothers-in-arms. Their need is greater than ours, itwould be little satisfaction to receive interest and repayment fromthem, and the payment due from them, involving difficult problems oftaxation for them, would not help the good relations with them which,we hope, may be a lasting effect of the war. And such an act ofrenunciation on our part would do something towards a restorationof the spirit with which we entered on war, a spirit which has beenseriously demoralised during its course, largely owing to the resultsof our faulty finance, which encouraged profiteering in all classes.
In any case, there is our position. We have a big debt to meet athome and abroad, and we are weakened on capital account by foreignindebtedness, wear and tear of plant and dimunition of stocks andmaterials. Wear and tear and depletion we can soon make good if we setto work and work hard, if our bureaucracy takes away the fetters ofits restrictions and controls (instead of making further additionsto the "Black List" even after the armistice!), and if our rulingwiseacres will refrain from trying to stimulate industry by taxing rawand half-raw materials. For the debt charge many pleasant andsimple fancy strokes are suggested. The Levy on Capital is popular,especially with those who do not own any, but its advocacy is by nomeans confined to them. Mr Pethick Lawrence has published a persuasivelittle book about it, but I cannot see that he meets the objectionsto it. These are, the difficulty of valuation, the fact that in manycases it would have to be paid by instalments, and so would be merelyanother form of income tax, its sparing of the waster and penalisingof the saver, and, consequently, the grave danger that it would checkaccumulation and so dry up the springs of capital. Mr Stilwellhas produced a "Great Plan to Pay for the War," by which all thebelligerents and neutrals who have been involved in expense by the warwould receive World Bonds from an International Congress for whatthey have spent owing to the war, and would then pay one another anyinternational debts by exchanging these World Bonds, and deal with thehome debt by paying it off in new currency raised on the World Bonds.But, surely, to pay off war debt with a huge addition to currency,making war's inflation many times worse, would be a disastrousbeginning to that new era which is alleged to be dawning.
By hard work, sparing consumption of luxuries, and a big industrialoutput, we can soon make the debt charge look smaller and smaller ascompared with our aggregate income. Our foreign debt we can only meetby shipping goods and rendering services. But since it was all raisedto be lent to our Allies and our lending of it was essential to avictory which has rid mankind of a terrible menace, it is surelyreasonable that our creditors should not press for repayment in thefirst few difficult years, but should fund our short-dated debts intoloans with twenty-five or thirty years to run. As to the home debt,we can only lighten its burden on the taxpayer by making taxationequitable. To this end reform of the income tax is an urgent need. Wehave to lighten its pressure much more effectively on those who arebringing up families, and by collecting it through employers make itan effective and just tax on those of the working class whose earningsand family liabilities make them fairly subject to it.
The Total War Debt--What are our Loans to the Allies worth?--OtherUncertain Items--The Prospects of making Germany pay--The Right Way toregard the Debt--Our Capital largely intact--A Reform of the IncomeTax--The Debt to America--The Levy on Capital and other Schemes--Theonly Real Aids to Recovery.
A table published week by week by the Economist shows that fromAugust 1, 1914, to November 9, 1918, the Government paid out L8612millions sterling. From this we have to deduct an estimate of theamount that the Government would have spent if there had not been awar, so that we are at once landed in the realm of conjecture. Thelast pre-war financial year saw an expenditure of L198 millions, andit is safe to assume that this figure would have swollen by a fewmillions a year if peace had continued, so that we may take at leastL860 millions from the above total as normal peace expenditure for the4-1/2 years. This gives us L7752 millions as the gross cost of thewar, as far as the period of actual fighting is concerned. From thisfigure, however, we are able to make some big deductions. There areloans to Allies and Dominions, and some other much more readilyrealisable assets than these. We do not know the actual figure of theloans to Allies and Dominions during the war period, because they arenot included in the weekly financial statements. The amount that weborrow abroad is set out week by week--at least, that is believed tobe the meaning of the cryptic item "Other Debt"--but the amount thatwe lend to Allies and Dominions is hidden away in the Supply Servicesor somewhere, and we only get occasional information about it from theChancellor in the course of his speeches on the Budget or on Votes ofCredit. In his last Vote of Credit speech, on November 12, 1918, MrBonar Law gave the chief items of the loans to Allies, and a veryinteresting list it was. The totals up to October 19, 1918, were L1465millions to Allies and L218-1/2 millions to Dominions. The Allieswere indebted to us as follows:--Russia, L568 millions; France, L425millions; Italy, L345 millions; smaller States, L127 millions.[1]
[Footnote 1: Parliamentary Debates, Vol. 110, No. 114, p. 2560.]
Some of these debts may be written off at once, and that cheerfully,seeing that they have been lent brothers-in-arms who have beenhit much harder than we have by the war, and had nothing like ourfinancial strength. The question is, what figure ought we to put onthis asset in deducting it from gross war expenditure in order toarrive at a guess at the real cost? We take our loans to Dominions, ofcourse, as good to the last penny. Mr Bonar Law, in his Budget speechlast April, took our loans to Allies at half their face value. Strictbookkeeping would probably demand a lower figure than 50 per cent.;but let us follow the ex-Chancellor's example and take loans toAllies, which we will estimate at L1480 millions up to November 9th,as good for L740 millions, and loans to Dominions at L220 millions upto the same date, a total of L960 millions, to be deducted from grosswar cost. Concerning L740 millions of this sum, however, there is acertain amount of doubt. No one questions for a moment the solvencyof France and Italy, but in view of the pressure that the war hasexercised on their producing power, and, in the case of France, thecomplication added by the uncertainties of the position in Russia, inwhich French investors are so deeply interested, one cannot feel surethat they will be able at once to make interest payments. Much willdepend on the sums that they are able to recover from Germany againsttheir bill of damages, on which more anon. But in any case it seemslikely that a general scheme of interest funding, as between theAllies, may have to be adopted for some years to come.
As to the other assets that we have to set against our grossexpenditure during the fighting period, they were enumerated by theChancellor in his Budget speech last April in the following terms;--
Balances in agents' hands, debts
due, foodstuffs, etc L375 millions.
Land, securities, buildings and ships 97 "
Stores in Munitions Department
(cost price 325 millions) taken at 100 "
Additions this financial year 100 "
Arrears of taxation 500 "
---
Total[1] L1172
[Footnote 1: Parliamentary Debates, Vol. 105, No. 33, pp. 698-699.]
It will be remembered that in his Budget speech the Chancellor wasproceeding on the assumption that the war would last till March 31stnext--the date at which our financial year ends--and would then beconvenient enough to stop. Happily for us, the valour of our soldiersand those of our Allies, the splendid success of our Fleet and ourmerchantmen In bringing over American troops and their food andequipment with astonishing speed, and the straightforward diplomacyof President Wilson, combined to achieve victory nearly five monthsearlier than the most sanguine had dared to expect. With the verypleasant result--though it is a small matter when compared with theend of the killing of the best of our manhood--that the financialposition is very greatly improved. With regard to the figures givenabove, it should be observed that the "debts" are advances toDominions, but on quite a different basis from our loans to them,being money owed by them against goods and services supplied.[1] Theyand the balances in the hands of agents are both as good as gold.Concerning the others, one is entitled at first sight to feel a gooddeal of scepticism, since such articles as land, buildings, ships andstores, bought or built by Government during a war, are likely to findan extremely sluggish demand when the war is over. However, Mr BonarLaw assured the House that his valuation of these amounts had beenarrived at on a conservative basis, and, what is better still, in hisVote of Credit speech on November 12th, he was able to state thatrevised estimates had shown that their value would be "far greater"than he had previously expected. So perhaps we are entitled to takethem at L1300 millions.
[Footnote 1: Parliamentary Debates, Vol. 105, No. 33, p. 698.]
If so, we get the following results for the cost of the fightingperiod:--
Total Government expenditure,
August 1, 1914, to November
9, 1918 L8612 millions.
Less estimate of normal peace expenditure 860 "
-----
7752 "
Less Loans to Dominions 220 millions.
Less Loans to Allies (half face value) 740 "
Realisable assets 1300 "
----
2260 "
----
Net cost of period L5492 "
If war cost would be good enough to cease with the fighting we shouldthus now be able to see, more or less, how we stand. During thefighting period the Government raised by taxation the sum of L2120millions,[1] from which we have again to deduct L860 millions as anestimate for normal peace taxation, if the war had not happened,leaving L1350 millions as the net war taxation, and L4142 millions asthe net addition to debt from the war.
[Footnote 1: Economist, Nov. 16, 1918.]
But, of course, there are still some large and uncertain sums to comein to both sides of the account. There is the cost of maintaining ourArmy and Navy during the armistice period, the cost of demobilisation,and the cost of putting an end to war munitions contracts running formany months ahead, holders of which will have to be compensated. Whohas enough assurance to venture on an estimate of the cost of theseitems? Shall we guess them at something between L1000 and L1500millions? And when we have made this guess are we at the end of thewar's cost? Ought we not to include pensions to be paid, and if so, atwhat figure? Fifty millions a year for thirty years? If so, there isanother L1500 millions. And interest on war debt, and for how long?
On the other side of the balance-sheet, the only asset that has notyet been included in the calculation is the sum that we are going toreceive from Germany, Some cheery optimists think that it is possiblefor us and for the Allies to make Germany pay the whole of our warcost. If so, we have halcyon days ahead, for not only shall we be ableto repay the whole war debt but also to pay back to the taxpayer allthe L1350 millions that he produced during the war, unless, as seemsmore likely, the Government finds other uses, or abuses, for themoney, and sets its motley horde of wasters to work again. But thisproblem, of course, is not going to arise. It would not be physicallypossible for Germany to pay the whole of the Allies' war cost, exceptin the course of many generations, and, moreover, the Allies havebound themselves not to make any such demand by the rider that theyadded to President Wilson's peace terms, in giving their assent tothem as the basis on which they were prepared to make peace. Earlyin November they stated that President Wilson's reference to"restoration" of invaded countries should, in their view, be expandedinto a claim for compensation "for all damage done to the civilianpopulation of the Allies and to their property by the aggression ofGermany by land, by sea, and from the air."[1] This is letting Germanyoff lightly; but, after stating their readiness to make peace on thebasis of the fourteen points, if amended as above (and also withregard to the Freedom of the Seas question) it is not possible forthe European Allies, as the Prime Minister's late manifesto says theypropose to do[2] to expand this claim for civilian damage into ademand for the whole of their war cost up to the limit of the capacityof the Central Powers to pay, without a serious breach of faith. Sothat the question of how much we can get out of Germany is complicatedby the further uncertainty of the size of the bill for damages that wecan present. It will be big enough. We know that the Germans have sunk8-1/2 million tons of British ships during the war. As to the priceat which, for "restoration" purposes, we shall value those ships andtheir cargoes, and all the civilian property damaged by aircraft andbombardment, this is a matter which it would be obviously improperto discuss; but we may be sure that the bill will mount up to manyhundreds of millions, and it remains to be seen whether, after Belgiumand France have presented their account, it will be possible for us tosecure payment even for all the civilian damage that we have suffered.
[Footnote 1: Times, November 7, 1918.]
[Footnote 2: Times, December 6, 1918.]
It thus appears that the net cost of the fighting period has beensomewhere in the neighbourhood of L5500 millions, taking our loansto Allies at half their face value; and that the armistice anddemobilisation period is likely to cost another L1000 to L1500millions more, to say nothing of pensions and debt charge that will goon for years (unless the supporters of Levy on Capital have their wayand wipe the debt out), and that against this further expenditure wecan set whatever sum is recovered from Germany.
Seeing that our total pre-war debt was L710-1/2 millions, or, omittingwhat the Government returns call the Other Capital Liabilities,L653-1/2 millions, these figures of war debt and war cost are at firstsight somewhat appalling. But there is no reason why they shouldterrify us, and there are several reasons why they are, when looked atwith a discriminating eye, much less frightening than when we firstset them out.
In the first place, we have always to remember that these figures arein after-war pounds, and that the after-war pound is, thanks to theprofligate use by our war Governments of the printing-press and thebanking machine, just about half the size, when measured in actualbuying power, of the pre-war pound. Any one who pays L100 in taxesto-day thereby surrenders claims to about the same amount of goods andservice as he did if he paid L50 in taxes before the war. So that inmaking any comparison between the position now and the position thenwe have to divide the figures of to-day by two.
In the second, we need not be misled by the Jeremiahs who tell us thatnow that we have won the war we have before us the task of paying forit. This is not true, or true only to a small extent--to the extent,that is to say, to which we shall, when all these assets andliabilities have been settled up and balanced, be afflicted with aforeign debt. Let us leave this question on one side for the timebeing, and consider what the position really is with regard to thatpart of the war's cost that has been raised at home. In so far as thathas been done, the war cost has been raised by us while the war wenton. In fact, all the war cost has to be raised by somebody whilethe war goes on, because the war is fought with stuff and servicesproduced at the time and paid for at the time. But when Americans lendus money to pay for some of the stuff that they send us, they pay atthe time and we, or our posterity, have to pay them back later on;this is the only way in which we can make posterity pay for the war,and then it only means that our posterity pays America's. It is notpossible to carry on war with wealth that is going to be produced someday. The effort of self-sacrifice that war demands has to be made bysomebody during its progress--otherwise the war could not be fought.
That effort of self-sacrifice we have already made in so far as wehave paid for our war cost out of money raised at home. That money hasbeen raised in three ways--by taxation, by borrowing saved money, andby inflation. When it is raised by taxation the sacrifice is obvious,and, in nearly all cases, inevitable: we pay our larger war taxes andso we have less to spend on ourselves, and so we go without things. Afew people raise money to pay taxes during war by borrowing or draftson capital, but they are probably so exceptional that their case neednot be considered. We transfer our buying power to the Government tobe used for the fighters, and so we set free the labour and materialthat used to go in providing us with comforts and pleasures; ourcompetition for goods is reduced, and so the Government is able to getwhat it needs out of the nation's production, which is _pro tanto_relieved of our demand. The same thing happens when the Governmentgets money for the war by borrowing money that we save. We reduceexpenditure, and transfer buying power to the State and diminish ourdemand on the nation's production, or that of its foreign supplies. Ifthe whole war cost had been met by these two methods there need havebeen little or no increase in prices here, and the cost of the warwould have been about half what it has been. Of the two methods,taxation is obviously the cleaner, simpler and more honest. Byborrowing, the State hires those who have a margin to put part of itat the disposal of the State at a time of national crisis, instead oftaking it from them outright. As most of the taxation involved bythe subsequent debt charge falls on those who have a margin (as itobviously should) the result is that the people who subscribed to theloans are afterwards taxed to pay themselves interest and to repaythemselves their debt.
This subsequent taxation falls on them all alike in proportion totheir ability to pay, or would if the income tax was more equitablyimposed; those who have subscribed their fair share to the loans havean offset, in the interest that they receive, against the taxation;those who subscribed less are properly penalised, those who subscribedmore are properly benefited. If only the income tax did not make theposition of fathers of families so unjust, the whole arrangement wouldlook, at first sight, quite fair, though rather absurd and clumsy,involving all this subscribing and taxing and paying back instead ofan outright tax and having done with it. But in fact a very graveinequity is involved by this business of borrowing for war, and laidupon just the people whom we ought, above all, to treat most fairly,namely, those who fight for us. The soldiers and sailors risk theirlives for a pittance during the war, while their brothers and sistersand cousins and uncles and aunts, left at home in security andcomfort, earn bloated profits and wages, and put them, or part ofthem, into War Loans; then when the fighters come back, very likelywith their business and connection ruined or lost, they are expectedto contribute to the taxation that goes into the pockets ofdebt-holders.
Inflation, the third method of paying for war, again produces the sameeffect of a reduction of consumption by the civilian population, butin a roundabout manner, which works at first without being noticed,and so is particularly dear to the adroit politician. By it nobodytransfers buying power to the Government, but the Government andthe bankers, who are generally most reluctant accessories to thetransaction, between them create new buying power, which, coming intoa restricted market for goods in addition to all the existing buyingpower, simply forces everybody to consume less because the money intheir pockets fetches less goods owing to the rise in prices.
The evil attached to this system is obvious enough. It amounts to atax on the general consumer in proportion to his consumption, and soit lays the sacrifice on the shoulders of those least able to bear it.No Government would have the courage to impose such a tax openly andfrankly. All the warring Governments in varying degrees have used thisroundabout device of imposing it, very likely being quite unawareof the fraud on the consumer that they were perpetrating. Our ownGovernment, in fact, having first added by this process to a rise inthe price of bread, then reduced it by a special subsidy--a pleasanttouch of Alice in Wonderland finance. This mode of taxing by raisingprices hits, of course, all those who live on fixed incomes andsalaries and wages. Those who can strike, or take more out of theconsumer, can evade it, and so it falls on the weakest shoulders andincidentally produces friction, discontent and dangerous suspicion.But even it works at the time when it happens. Each creation of newbuying power gives the Government, for the moment, control of so muchin goods and services at the expense of the consumer; but when oncethe new buying power has been distributed by the State's payments itis in the hands of the nation as a whole. If the process ceased, thenation would still have control of the whole of its output, which isits income, though the injustice involved, to those who are not strongenough to resist the effects of higher prices, would continue.
Thus, whatever means--straightforward or devious--are used forfinancing war, it is paid for while it goes on by the warring countryif the financing is done at home, or by its foreign creditors if thefinancing is done abroad. And it is, necessarily, almost entirely paidfor out of income, that is, out of current production. It is curiousto find that many people still seem to think that the whole cost ofthe war has come out of capital. Luckily for us it could not be done,or only to a very small extent. Our capital mostly consisted ofrailways, factories, ships, roads, agricultural land, machinery,houses and other things that could not be taken and shot out of a gun.These things we have still got, and though many of them are not insuch good shape as they were, some of them are much better equippedand organised. We have drawn on our stocks of materials and goods--howfar it is impossible to say; we have lost 8-1/2 million tons ofshipping by war losses; in the meantime we have built, bought andcaptured 5-1/2 millions of new tonnage, and we have a claim againstthe Germans for such tonnage. On capital account we have suffered bywear and tear in so far as our upkeep has been neglected owing to lackof labour during the war, and by depletion of materials and stocks,and also, of course, by the fact that if the war had not happened,we should, if pre-war calculations were correct, have put some L1700millions into new investments at home and abroad during the 4-1/4years of fighting and some more hundreds of millions during theafter-war period of Government borrowing and restriction on privateinvestment. But a very large part of the money that went into victorywould otherwise have gone not to capital account but into the pleasantfrivolities, embellishments and vulgarities that made life an amusingabsurdity in days before the war.
If, then, the war sacrifice was made during the war, in so far as itscost was raised at home, how far is it true that we are now faced withthe business of paying for it? If taxation were equitable it wouldonly be to the extent that those who ought to have made the sacrificeand did not, will in future have to pay interest to those who did, ortheir representatives. So that the first thing we have to do is tomake taxation equitable, that is, lay it on the taxpayer in proportionto his ability to pay. There will still remain the injustice to thosewho have fought for us, which might be cured, or amended, by specialexemptions. With taxation on a really sound basis no further sacrificewould be involved by the debt charge, and no diminution of thenation's wealth or consuming power, which will depend, as always, onits output of goods and services; but only a transfer of consumingpower from taxpayers to debt-holders in accordance with the sacrificemade by the latter during the war. What we produce as a nation weshall consume as a nation, subject to the extent that we financed thewar during its course by operations abroad.
These operations were twofold. We sold to foreigners part of ourholdings of foreign securities, thereby and to this extent paying forwar cost out of capital--out of the investments made by ourselvesand our forbears in America and elsewhere. Mr Bonar Law, in a recentinterview in the _Observer_, stated that we had sent back to theUnited States practically the whole of our holdings of Americansecurities to be sold or pledged as collateral for loans, and that thevalue of them was three billion dollars--L600 millions sterling. Anyof them that have only been pledged can presumably be used to meet theloans raised as they fall due, and so will lighten our burden in thematter of repayment. These loans raised abroad are the second mode offoreign financing. By it we had raised up to November 9th nearly L1300millions, as shown by the _Economist's_ table, and to that extent wehave pledged our future production and that of our posterity, to meetthe annual service for interest and repayment. On the other hand, allthis sum and more we have (as shown above) lent to our Allies andDominions, so that the ex-Chancellor was well justified in his boastthat we had only borrowed to finance our Allies, and that we had beenself-sufficient for our own war cost.[1]
[Footnote 1: Budget Speech, Parliamentary Debates, vol. 105, No. 33.]
In other words, all that we needed for the war we were able to produceourselves, or to obtain in exchange for our produce and assets. Onpaper, therefore, our position as a creditor country is only impairedby our sales of securities. But that is only so on paper. In fact, theloans that we have raised abroad are good debts that have to be met tothe last penny, and are a first charge on our future output, but theadvances that we have made to our Allies, much harder hit than we areby the war, are assets on which we cannot depend. They were taken inour balance-sheet above at half their face value, but there is much tobe said for writing them off altogether and tearing up the I.O.U.'sof our foreign brothers-in-arms. Their need is greater than ours, itwould be little satisfaction to receive interest and repayment fromthem, and the payment due from them, involving difficult problems oftaxation for them, would not help the good relations with them which,we hope, may be a lasting effect of the war. And such an act ofrenunciation on our part would do something towards a restorationof the spirit with which we entered on war, a spirit which has beenseriously demoralised during its course, largely owing to the resultsof our faulty finance, which encouraged profiteering in all classes.
In any case, there is our position. We have a big debt to meet athome and abroad, and we are weakened on capital account by foreignindebtedness, wear and tear of plant and dimunition of stocks andmaterials. Wear and tear and depletion we can soon make good if we setto work and work hard, if our bureaucracy takes away the fetters ofits restrictions and controls (instead of making further additionsto the "Black List" even after the armistice!), and if our rulingwiseacres will refrain from trying to stimulate industry by taxing rawand half-raw materials. For the debt charge many pleasant andsimple fancy strokes are suggested. The Levy on Capital is popular,especially with those who do not own any, but its advocacy is by nomeans confined to them. Mr Pethick Lawrence has published a persuasivelittle book about it, but I cannot see that he meets the objectionsto it. These are, the difficulty of valuation, the fact that in manycases it would have to be paid by instalments, and so would be merelyanother form of income tax, its sparing of the waster and penalisingof the saver, and, consequently, the grave danger that it would checkaccumulation and so dry up the springs of capital. Mr Stilwellhas produced a "Great Plan to Pay for the War," by which all thebelligerents and neutrals who have been involved in expense by the warwould receive World Bonds from an International Congress for whatthey have spent owing to the war, and would then pay one another anyinternational debts by exchanging these World Bonds, and deal with thehome debt by paying it off in new currency raised on the World Bonds.But, surely, to pay off war debt with a huge addition to currency,making war's inflation many times worse, would be a disastrousbeginning to that new era which is alleged to be dawning.
By hard work, sparing consumption of luxuries, and a big industrialoutput, we can soon make the debt charge look smaller and smaller ascompared with our aggregate income. Our foreign debt we can only meetby shipping goods and rendering services. But since it was all raisedto be lent to our Allies and our lending of it was essential to avictory which has rid mankind of a terrible menace, it is surelyreasonable that our creditors should not press for repayment in thefirst few difficult years, but should fund our short-dated debts intoloans with twenty-five or thirty years to run. As to the home debt,we can only lighten its burden on the taxpayer by making taxationequitable. To this end reform of the income tax is an urgent need. Wehave to lighten its pressure much more effectively on those who arebringing up families, and by collecting it through employers make itan effective and just tax on those of the working class whose earningsand family liabilities make them fairly subject to it.
THE CURRENCY REPORT
December, 1918
Currency Policy during the War--Its Disastrous Mediaevalism--TheReport of the Cunliffe Committee--A Blast of Common Sense--TheCondemnation of our War Finance--Inflation and the Rise in Prices--TheFigures of the Present Position--The Break in the Old Relation betweenLegal Tender and Gold--How to restore it--Stop Borrowing and reducethe Floating Debt--Return to the Old System--The Committee's SaneConservatism--A Sound Currency vital to National Recovery.
Among the many features of the late war (how comfortable it is to talkabout the "late war"!) that seem likely to astonish the historianof the future, perhaps the thing that will surprise him most is thebehaviour of the warring Governments in currency matters. It issurely, a most extraordinary thing after all that has been thought,said and written about monetary policy since money was invented thatas soon as a great economic effort was necessary on the part of theleading civilised Powers, they should all have fallen back on the oldmediaeval dodge of depreciating the currency, varied to suit modernneeds, in order to pay part of their war bill, and should havecontinued this policy throughout the course of the war, in spite ofthe obvious results that it was producing in the shape of unrest,suspicion and bitterness on the part of the working classes, who verynaturally thought that the consequent rise in prices was due to themachinations of unscrupulous capitalists who were exploiting them. Itis even possible that the historian of a century hence may ascribe tothis cause the beginning of the end of our present economic system,based on the private ownership of capital, for it is very evident thatwe have not yet seen the end of the harvest that this bitterness anddiscontent are producing.
A less important but still very objectionable consequence of the floodof currency and credit that the Government has poured out to fill agap in its war finance is the encouragement that it has given to ahost of monetary quacks who believe that all the financial ills ofthe world can be saved if only you give it enough money to handle,oblivious of the effect on prices of mere multiplication of claims togoods without a corresponding increase in the volume of goods. Theseenthusiasts have seen that during war a Government can produce moneyas fast as it likes, and since they think that producing money makesevery one happy they propose to adopt this simple method for payingoff war debt, restarting trade and generally creating a monetarymillennium. How far their nostrums are likely to be adopted, noone can yet say, but some of the utterances of our rulers make oneshudder.
Into this atmosphere of quackery and delusion the report of theCommittee on Currency and Foreign Exchanges breathes a refreshingblast of sound common sense. Everybody ought to read it. It costs buttwopence; it is only a dozen pages long, and it is described (if youwant to order it) as Cd. 9182. In view of the many attacks that havebeen made on our banking system--especially the Bank Act of 1844--byChambers of Commerce and others before the war, it is rathersurprising that so little criticism should have been heard of thisReport, which practically advocates a return, as rapidly as possible,to the practice and principles imposed by that Act. It may be thatpeace, and all the preoccupations that have followed it, have absorbedmen's minds so entirely that questions of currency seem to be anuntimely irrelevance; or possibly the very heavy weight of theCommittee's authority may have silenced the opposition to itsrecommendations. Presided over by Lord Cunliffe, the late Governor ofthe Bank, and including Sir John Bradbury and Professor Pigou and animposing list of notable bankers, it was a body whose opinioncould only be challenged by critics gifted with the most sereneself-confidence.
One of the most interesting--especially to advocates of soundfinance--points in its Report is the implied condemnation that itpronounces on the methods by which the war has been financed by ourrulers. It points out that "the need of the Government for fundswherewith to finance the war in excess of the amounts raised bytaxation or by loans from the public has made necessary the creationof credits in their favour with the Bank of England.... The balancescreated by these operations passing by means of payments tocontractors and others to the Joint Stock banks have formed thefoundation of a great growth in their deposits, which have alsobeen swelled by the creation of credits in connection with thesubscriptions to the various War Loans.... The greatly increased volume of bank deposits, representing a corresponding increase ofpurchasing power and, therefore, tending in conjunction with othercauses to a great rise of prices, has brought about a correspondingdemand for legal tender currency which could not have been satisfiedunder the stringent provisions of the Act of 1844." Here we have thestory of bad war finance put as clearly as it can be. Because theGovernment was not able to raise all the money needed for the war onsound lines--that is, by taxation and loans to it of money saved byinvestors--it had recourse to credits raised for it by the Bank ofEngland and the other banks against Treasury Bills, Ways and MeansAdvances, War Loans, War Bonds, and loans to customers who were takingup War Loans, etc. Thereby as these credits created fresh depositsthere was a huge increase in the community's purchasing power; andsince the supply of goods to be purchased was stationary or reduced,the only result was a great increase in prices which made the war,perhaps, nearly twice as costly as it need have been and producedall the suspicion and unrest that has already been referred to.Considering that the Committee included an ex-Governor of the Bankand the Permanent Secretary to the Treasury it could hardly have beenexpected to use much plainer language concerning the failure of ourrulers to get money out of us in the right way for the war andthe vigour with which they made use of the demoralising weapon ofinflation.
It followed as a necessary consequence that the volume of legal tendercurrency had to be greatly increased. As prices rose wages rosewith them, and so much more "cash" was needed in order to pay for aturnover of goods which, fairly constant in volume, demanded morecurrency because of their inflated prices. As the Committee says inits Report (page 5): "Given the necessity for the creation of bankcredits in favour of the Government for the purpose of financing warexpenditure, these issues could not be avoided. If they had not beenmade, the banks would have been unable to obtain legal tender withwhich to meet cheques drawn for cash on their customers' accounts. Theunlimited issue of currency notes in exchange for credits at the Bankof England is at once a consequence and an essential condition of themethods which the Government have found necessary to adopt in order tomeet their war expenditure."
The effect of these causes upon the amount of legal tender currency(other than subsidiary coin) in the banks and in circulation issummarised by the Committee in the following table:--
"The amounts on June 30, 1914, may be estimated as follows:--
"Fiduciary Issue of the Bank of England L18,450,000
"Bank of England Notes issued against
gold coin or bullion 38,476,000
"Estimated amount of gold coin held
by Banks (excluding gold coin held
in the Issue Department of the
Bank of England) and in public
circulation 123,000,000
___________
"Grand total L179,926,000
___________
"The corresponding figures on July 10, 1918, as nearly as they can beestimated, were:--
"Fiduciary Issue of the Bank of England 18,450,000
Currency Notes not covered by gold 230,412,000
___________
"Total Fiduciary Issues [1] L248,862,000
Bank of England Notes issued against
coin and bullion 65,368,000
Currency Notes covered by gold 28,500,000
Estimated amount of gold coin held
by Banks (excluding gold coin held
by Issue Department of Bank of
England), say 40,000,000
___________
"Grand total L382,730,000
"[Footnote 1: The notes issued by Scottish and Irish banks which havebeen made legal tender during the war have not been included in theforegoing figures. Strictly the amount (about L5,000,000) by whichthese issues exceed the amount of gold and currency notes held bythose banks should be added to the figures of the present fiduciaryissues given above.]
"There is also a certain amount of gold coin still in the hands of thepublic which ought to be added to the last-mentioned figure, but theamount is unknown."
It will be noted that the gold held by the banks (other than the Bankof England) and by the public has declined from L123 to L40 millions,according to the Committee's estimate, while, on the other hand, thecirculation of bank notes has risen by L27 millions and the issue ofcurrency notes has taken place to the tune of L259 millions (at thedate of the Report; it is now nearly L300 millions), making a netaddition to legal tender currency of over L200 millions. When wealso remember that there has been a very heavy coinage of silver andcopper, that the Bank of England's deposits have risen by over L100millions and the deposits of the other banks by nearly L700 millions,and all this at a time when most of the industrial activity of thecountry was going into the production of destructive weapons and thesupport of those who were using them, the behaviour of commodities ofordinary use in rising by nearly 100 per cent. seems to be an exampleof remarkable moderation. With all this new buying power in the handsof the community there is little wonder that some people shouldthink that we have enormously increased our wealth during this mostdestructive and costly war, and should then feel hurt and disappointedwhen they find that this new buying power is robbed of all itsbeauty by the fact that its efficiency as buying power is seriouslydiminished by its mere quantity.
Such being the state of affairs--a great mass of new credit andcurrency based on securities--it is clear that our currency has beendeprived for the time being of that direct relation with its goldbasis that used in former time to regulate its volume according toworld prices and our international trade position. As the Committeesays, "It is not possible to judge to what extent legal tendercurrency may in fact be depreciated in terms of bullion. But it ispractically certain that there has been some depreciation, and to thisextent therefore the gold standard has ceased to be effective." Verywell, then, what has to be done to get back to the old state of thingsunder which there was a more or less automatic check on the creationof credit and the issue of currency? This check worked by a systemwhich was elastic and simple. It was not entirely automatic, becauseits working had to be controlled by the Bank of England, which, by theaction of its discount rate, could, more or less, quicken or check theworking of the machine. Legal tender currency could only be increasedby imports of gold; and exports of gold reduced the available amountof legal tender currency; and since a stock of legal tender currencywas essential to meet the demands upon them that bankers madepossible by creating credits, there was thus an Indirect and variableconnection between the country's gold stock and the extent to whichbankers would think it prudent to multiply credits. If credits weremultiplied too fast, our currency was depreciated in value as comparedwith those of other countries and the exchanges went against us andgold either was exported or began to look as if it might be exported.If it was exported the legal tender basis of credit was reduced andthe creation of credit was checked. If the Directors of the Bank ofEngland thought it inadvisable that gold should be exported theycould, by raising the rate of discount and taking artificial measuresto control the supply of credit, produce, without the actual loss ofgold, the effects which that loss would have brought about.
The keystone of the system was the rigid link between legal tendercurrency and gold. This was secured by the provisions of the Bank Actof 1844, which laid down that above a certain line--which was beforethe war roughly L18-1/2 millions--every Bank of England note issuedshould have gold behind it, pound for pound. In other words, the Bankof England note was, for practical purposes, a bullion certificate.The legal limit on the fiduciary issue (that is, the issue of L18-1/2millions against securities, not gold) could only be exceeded by abreach of the law. The many critics of our banking system seized onthis hard-and-fast restriction and accused it of making our systeminelastic as compared with the German arrangement, under which thelegal limit could at any time be exceeded on payment of a tax or fineon any excess perpetrated. These critics might have been right iflegal tender currency had been the only, or even the predominant,means of payment in England. But, as every office boy knows, it wasnot. Legal tender--gold and Bank of England notes--was hardly everseen in commercial and financial transactions on a serious scale. Wepaid, sometimes, our retail purchases of goods and services in gold;and Bank notes were a popular mode of payment on racecourses and inother places where transactions took place between people who were notvery certain of one another's standing or good faith. But the greatbulk of payments was made in the cheque currency which our bankers haddeveloped outside of the law and could create as fast as prudence--andan eye to the supply of legal tender which every holder of a chequehad a right to demand--allowed them to do so. While cheques providedthe currency of commerce, another form of "money" was produced, againwithout any restriction by the Act, by the pleasant convention whichcaused a credit in the Bank of England's books to be regarded as"cash" for balance-sheet purposes by the banks. These advantagesgave the English system a freedom and elasticity, in spite of thestrictness of the law that regulated the issue of paper currency, thatenabled it to work in a manner that, judged by the test of practicalresults, had one great advantage over that of any of the rivalcentres. It alone in days before the war fulfilled the functions of aninternational banker by being ready at all times and without questionto pay out the gold that was, in the last resort, the final means ofsettling international balances.
It is the object of Lord Cunliffe's Committee to restore as quicklyas possible the system which, has thus been tried by the test ofexperience, "After the war," they say in their Report, "our goldholdings will no longer be protected by the submarine danger, and itwill not be possible indefinitely to continue to support the exchangeswith foreign countries by borrowing abroad. Unless the machinery whichlong experience has shown to be the only effective remedy for anadverse balance of trade and an undue growth of credit is oncemore brought into play there will be very grave danger of a creditexpansion in this country and a foreign drain of gold which mightjeopardise the convertibility of our note issues and the internationaltrade position of the country.... We are glad to find that there wasno difference of opinion among the witnesses who appeared before us asto the vital importance of these matters." The first measure that theyput forward as essential to this end is the cessation at the earliestpossible moment of Government borrowings. "A large part of the creditexpansion arises, as we have shown, from the fact that the expenditureof the Government during the war has exceeded the amounts which theyhave been able to raise by taxation or by loans from the actualsavings of the people. They have been obliged therefore to obtainmoney through the creation of credits by the Bank of England and theJoint Stock banks, with the result that the growth of purchasing powerhas exceeded that of purchasable goods and services." It is thereforeessential that as soon as possible the State should not only livewithin its income but should begin to reduce indebtedness, especiallythe floating debt, which, being largely held by the banks, has beena cause of credit creation on a great scale. "The shortage of realcapital must be made good by genuine savings. It cannot be met by thecreation of fresh purchasing power in the form of bank advances tothe Government or to manufacturers under Government guarantee orotherwise, and any resort to such expedients can only aggravate theevil and retard, possibly for generations, the recovery of the countryfrom the losses sustained during the war." With these weighty wordsthe Committee brushes aside a host of schemes that have been urged forputting everything right by devising new machinery for the manufactureof new credit. That new credits will be needed for industry after waris obvious, but what else are our banks for, if not to provide it?They can only be set free to provide it on the scale required if, bythe necessary reduction of the floating debt, they are relieved of thelocking up of their funds in Government securities, which has been oneof the bad results of our bad war finance.
It goes without saying that the Committee does not recommend thecontinuance in peace of the differential rates for home and foreignmoney that were introduced as a war measure with a view to loweringa rate at which the Government borrowed at home for war purposes. Itwould evidently be too severe a strain on human nature to attempt towork such a system, except in war-time, when the artificial conditionsby which the market was surrounded made it both feasible and desirableto do so. With regard to the note issue, the Committee proposes areturn to the old system and a strictly drawn line for the amount ofthe fiduciary note issue, the whole note issue (with the exception ofthe few surviving private note issues) being put into the hands of theBank of England, all notes being payable in gold in London onlyand being made legal tender throughout the United Kingdom. Thesesuggestions are subject to any special arrangements that may be madewith regard to Scotland and Ireland. An early resumption of thecirculation of gold for internal purposes is not contemplated. Thepublic has become used to paper money, which is in some ways moreconvenient and cheaper; and the luxury of a gold circulation is onethat we can hardly afford at present. Gold will be kept by the Bank ofEngland in a central reserve, and all the other banks should, it issuggested, transfer to it the whole of their present holdings of themetal. In order to give the Bank of England a closer control of thebullion market the Committee thinks it desirable that the export ofgold coin or bullion should, in future, be subject to the conditionthat such coin or bullion had been obtained from the Bank for thepurpose. This measure would give the Bank of England a very closecontrol of the bullion market, so close that there is a danger thatif this control were too rigorously exercised, gold that now comes tothis country might be diverted, with a view to more advantageous sale,to other centres. The amount of the fiduciary issue is a matterthat the Committee leaves open to be determined after experience ofpost-war conditions. They "think that the stringent principles ofthe Act (of 1844) have often had the effect of preventing dangerousdevelopments, and the fact that they have had to be temporarilysuspended on certain rare and exceptional occasions (and those limitedto the earlier years of the Act's operation, when experience ofworking the system was still immature) does not," in their opinion,invalidate this conclusion. So they propose that the separation of theIssue or Banking Departments should be maintained, but that in futureif an emergency arose requiring an increase in the amount of fiduciarycurrency, this should not involve a breach of the law, but should bemade legal (as it is now under the Currency and Bank Notes Act of1914), subject to the consent of the Treasury.
It is not proposed at present to secure the circulation of paperinstead of gold by legislation. The Committee considers that "informalaction on the part of the banks may be expected to accomplish allthat is required." If necessary, however, it points out thatthe circulation of gold could be prevented by making the notesconvertible, at the discretion of the Bank of England, into coin orbar gold. The amount which, in the opinion of the Committee, should beaimed at for the central gold reserve is L150 millions (a sum which isalready almost in sight on its figures quoted above); and "untilthis amount has been reached and maintained concurrently with asatisfactory foreign exchange position for a period of at least ayear," it thinks that the policy of reducing the uncovered note issue"as and when opportunity offers" should be consistently followed. Howthis opportunity is going to "offer" is not made clear; but presumablya reflow of notes from circulation can only happen through a fall inprices or a reduction in bank deposits by the liquidation of advancesmade to the Government, directly or indirectly, by the banks.
Concerning the difficult problem of replacing the Bradbury notes byBank of England notes of L1 and 10s., an ingenious suggestion is madeby the Committee. It observes that there would be some awkwardnessin transferring the issue to the Bank of England before the futuredimensions of the fiduciary issue have been arrived at; and itsuggests that during the transitional period any expansion in Treasurynotes that may take place should be covered, not as now, by Governmentsecurities, but by Bank of England notes taken from the Bank. By thismeans any demands for new currency would operate in the normal way toreduce the reserve of the Banking Department, "which would have to berestored by raising money rates and encouraging gold imports," and soa step would have been taken to getting back to a business basis inthe currency system and away from the profligate printing-press policyof the war period.
Such are the suggestions made by this distinguished body for therestoration of our currency. Little has been said against them in theway of serious criticism, but their conservative tendency and thefact that they practically recommend a return to the _status quo_ hascaused some impatience among the financial Hotspurs who proposed tobegin to build a new world by turning everything upside down. Inmatters of finance this process is questionable, interesting as theresult would undoubtedly be. To get to work on tried lines and then,when once industry and finance have recovered their old activity, toamend the machine whenever it is creaking seems to be a more sensibleplan than to delay our start until we have fashioned a new heavenand earth, and then very probably find that they do not work. If themachine is to be set moving, it can only be done by close co-operationbetween the Bank of England and the other banks which have grown byamalgamation into institutions the size of which seem likely tomake the task of central control more difficult than ever. On thisimportant point the Committee is curiously silent. But it recommendsthe adoption of a suggestion made by a Committee of Bankers, whoproposed that banks should in future be required "to publish a monthlystatement showing the average of their weekly balance-sheets duringthe month." (Will this requisition apply to the Bank of England?) Thisis a welcome suggestion as far as it goes, but unless something isdone by co-operative action to make the Bank rate more automatic inits influence on the actions of the other banks, the difficulty ofmaking it effective seems likely to be considerable.
Getting the currency right is a most important matter for the futureof our financial position. Another is the question of our debt toforeigners. Most of this debt we owe to America, and we only owe itbecause we had to finance our Allies. We surely ought to be able toarrange with America that anything that we have to do in giving ourAllies time before asking for repayment they also should do forus--within limits, say, up to thirty years. In view of all that theyhave made and we have lost by this war waged for the cause of allmankind, this would seem to be reasonable concession on America'spart.
Currency Policy during the War--Its Disastrous Mediaevalism--TheReport of the Cunliffe Committee--A Blast of Common Sense--TheCondemnation of our War Finance--Inflation and the Rise in Prices--TheFigures of the Present Position--The Break in the Old Relation betweenLegal Tender and Gold--How to restore it--Stop Borrowing and reducethe Floating Debt--Return to the Old System--The Committee's SaneConservatism--A Sound Currency vital to National Recovery.
Among the many features of the late war (how comfortable it is to talkabout the "late war"!) that seem likely to astonish the historianof the future, perhaps the thing that will surprise him most is thebehaviour of the warring Governments in currency matters. It issurely, a most extraordinary thing after all that has been thought,said and written about monetary policy since money was invented thatas soon as a great economic effort was necessary on the part of theleading civilised Powers, they should all have fallen back on the oldmediaeval dodge of depreciating the currency, varied to suit modernneeds, in order to pay part of their war bill, and should havecontinued this policy throughout the course of the war, in spite ofthe obvious results that it was producing in the shape of unrest,suspicion and bitterness on the part of the working classes, who verynaturally thought that the consequent rise in prices was due to themachinations of unscrupulous capitalists who were exploiting them. Itis even possible that the historian of a century hence may ascribe tothis cause the beginning of the end of our present economic system,based on the private ownership of capital, for it is very evident thatwe have not yet seen the end of the harvest that this bitterness anddiscontent are producing.
A less important but still very objectionable consequence of the floodof currency and credit that the Government has poured out to fill agap in its war finance is the encouragement that it has given to ahost of monetary quacks who believe that all the financial ills ofthe world can be saved if only you give it enough money to handle,oblivious of the effect on prices of mere multiplication of claims togoods without a corresponding increase in the volume of goods. Theseenthusiasts have seen that during war a Government can produce moneyas fast as it likes, and since they think that producing money makesevery one happy they propose to adopt this simple method for payingoff war debt, restarting trade and generally creating a monetarymillennium. How far their nostrums are likely to be adopted, noone can yet say, but some of the utterances of our rulers make oneshudder.
Into this atmosphere of quackery and delusion the report of theCommittee on Currency and Foreign Exchanges breathes a refreshingblast of sound common sense. Everybody ought to read it. It costs buttwopence; it is only a dozen pages long, and it is described (if youwant to order it) as Cd. 9182. In view of the many attacks that havebeen made on our banking system--especially the Bank Act of 1844--byChambers of Commerce and others before the war, it is rathersurprising that so little criticism should have been heard of thisReport, which practically advocates a return, as rapidly as possible,to the practice and principles imposed by that Act. It may be thatpeace, and all the preoccupations that have followed it, have absorbedmen's minds so entirely that questions of currency seem to be anuntimely irrelevance; or possibly the very heavy weight of theCommittee's authority may have silenced the opposition to itsrecommendations. Presided over by Lord Cunliffe, the late Governor ofthe Bank, and including Sir John Bradbury and Professor Pigou and animposing list of notable bankers, it was a body whose opinioncould only be challenged by critics gifted with the most sereneself-confidence.
One of the most interesting--especially to advocates of soundfinance--points in its Report is the implied condemnation that itpronounces on the methods by which the war has been financed by ourrulers. It points out that "the need of the Government for fundswherewith to finance the war in excess of the amounts raised bytaxation or by loans from the public has made necessary the creationof credits in their favour with the Bank of England.... The balancescreated by these operations passing by means of payments tocontractors and others to the Joint Stock banks have formed thefoundation of a great growth in their deposits, which have alsobeen swelled by the creation of credits in connection with thesubscriptions to the various War Loans.... The greatly increased volume of bank deposits, representing a corresponding increase ofpurchasing power and, therefore, tending in conjunction with othercauses to a great rise of prices, has brought about a correspondingdemand for legal tender currency which could not have been satisfiedunder the stringent provisions of the Act of 1844." Here we have thestory of bad war finance put as clearly as it can be. Because theGovernment was not able to raise all the money needed for the war onsound lines--that is, by taxation and loans to it of money saved byinvestors--it had recourse to credits raised for it by the Bank ofEngland and the other banks against Treasury Bills, Ways and MeansAdvances, War Loans, War Bonds, and loans to customers who were takingup War Loans, etc. Thereby as these credits created fresh depositsthere was a huge increase in the community's purchasing power; andsince the supply of goods to be purchased was stationary or reduced,the only result was a great increase in prices which made the war,perhaps, nearly twice as costly as it need have been and producedall the suspicion and unrest that has already been referred to.Considering that the Committee included an ex-Governor of the Bankand the Permanent Secretary to the Treasury it could hardly have beenexpected to use much plainer language concerning the failure of ourrulers to get money out of us in the right way for the war andthe vigour with which they made use of the demoralising weapon ofinflation.
It followed as a necessary consequence that the volume of legal tendercurrency had to be greatly increased. As prices rose wages rosewith them, and so much more "cash" was needed in order to pay for aturnover of goods which, fairly constant in volume, demanded morecurrency because of their inflated prices. As the Committee says inits Report (page 5): "Given the necessity for the creation of bankcredits in favour of the Government for the purpose of financing warexpenditure, these issues could not be avoided. If they had not beenmade, the banks would have been unable to obtain legal tender withwhich to meet cheques drawn for cash on their customers' accounts. Theunlimited issue of currency notes in exchange for credits at the Bankof England is at once a consequence and an essential condition of themethods which the Government have found necessary to adopt in order tomeet their war expenditure."
The effect of these causes upon the amount of legal tender currency(other than subsidiary coin) in the banks and in circulation issummarised by the Committee in the following table:--
"The amounts on June 30, 1914, may be estimated as follows:--
"Fiduciary Issue of the Bank of England L18,450,000
"Bank of England Notes issued against
gold coin or bullion 38,476,000
"Estimated amount of gold coin held
by Banks (excluding gold coin held
in the Issue Department of the
Bank of England) and in public
circulation 123,000,000
___________
"Grand total L179,926,000
___________
"The corresponding figures on July 10, 1918, as nearly as they can beestimated, were:--
"Fiduciary Issue of the Bank of England 18,450,000
Currency Notes not covered by gold 230,412,000
___________
"Total Fiduciary Issues [1] L248,862,000
Bank of England Notes issued against
coin and bullion 65,368,000
Currency Notes covered by gold 28,500,000
Estimated amount of gold coin held
by Banks (excluding gold coin held
by Issue Department of Bank of
England), say 40,000,000
___________
"Grand total L382,730,000
"[Footnote 1: The notes issued by Scottish and Irish banks which havebeen made legal tender during the war have not been included in theforegoing figures. Strictly the amount (about L5,000,000) by whichthese issues exceed the amount of gold and currency notes held bythose banks should be added to the figures of the present fiduciaryissues given above.]
"There is also a certain amount of gold coin still in the hands of thepublic which ought to be added to the last-mentioned figure, but theamount is unknown."
It will be noted that the gold held by the banks (other than the Bankof England) and by the public has declined from L123 to L40 millions,according to the Committee's estimate, while, on the other hand, thecirculation of bank notes has risen by L27 millions and the issue ofcurrency notes has taken place to the tune of L259 millions (at thedate of the Report; it is now nearly L300 millions), making a netaddition to legal tender currency of over L200 millions. When wealso remember that there has been a very heavy coinage of silver andcopper, that the Bank of England's deposits have risen by over L100millions and the deposits of the other banks by nearly L700 millions,and all this at a time when most of the industrial activity of thecountry was going into the production of destructive weapons and thesupport of those who were using them, the behaviour of commodities ofordinary use in rising by nearly 100 per cent. seems to be an exampleof remarkable moderation. With all this new buying power in the handsof the community there is little wonder that some people shouldthink that we have enormously increased our wealth during this mostdestructive and costly war, and should then feel hurt and disappointedwhen they find that this new buying power is robbed of all itsbeauty by the fact that its efficiency as buying power is seriouslydiminished by its mere quantity.
Such being the state of affairs--a great mass of new credit andcurrency based on securities--it is clear that our currency has beendeprived for the time being of that direct relation with its goldbasis that used in former time to regulate its volume according toworld prices and our international trade position. As the Committeesays, "It is not possible to judge to what extent legal tendercurrency may in fact be depreciated in terms of bullion. But it ispractically certain that there has been some depreciation, and to thisextent therefore the gold standard has ceased to be effective." Verywell, then, what has to be done to get back to the old state of thingsunder which there was a more or less automatic check on the creationof credit and the issue of currency? This check worked by a systemwhich was elastic and simple. It was not entirely automatic, becauseits working had to be controlled by the Bank of England, which, by theaction of its discount rate, could, more or less, quicken or check theworking of the machine. Legal tender currency could only be increasedby imports of gold; and exports of gold reduced the available amountof legal tender currency; and since a stock of legal tender currencywas essential to meet the demands upon them that bankers madepossible by creating credits, there was thus an Indirect and variableconnection between the country's gold stock and the extent to whichbankers would think it prudent to multiply credits. If credits weremultiplied too fast, our currency was depreciated in value as comparedwith those of other countries and the exchanges went against us andgold either was exported or began to look as if it might be exported.If it was exported the legal tender basis of credit was reduced andthe creation of credit was checked. If the Directors of the Bank ofEngland thought it inadvisable that gold should be exported theycould, by raising the rate of discount and taking artificial measuresto control the supply of credit, produce, without the actual loss ofgold, the effects which that loss would have brought about.
The keystone of the system was the rigid link between legal tendercurrency and gold. This was secured by the provisions of the Bank Actof 1844, which laid down that above a certain line--which was beforethe war roughly L18-1/2 millions--every Bank of England note issuedshould have gold behind it, pound for pound. In other words, the Bankof England note was, for practical purposes, a bullion certificate.The legal limit on the fiduciary issue (that is, the issue of L18-1/2millions against securities, not gold) could only be exceeded by abreach of the law. The many critics of our banking system seized onthis hard-and-fast restriction and accused it of making our systeminelastic as compared with the German arrangement, under which thelegal limit could at any time be exceeded on payment of a tax or fineon any excess perpetrated. These critics might have been right iflegal tender currency had been the only, or even the predominant,means of payment in England. But, as every office boy knows, it wasnot. Legal tender--gold and Bank of England notes--was hardly everseen in commercial and financial transactions on a serious scale. Wepaid, sometimes, our retail purchases of goods and services in gold;and Bank notes were a popular mode of payment on racecourses and inother places where transactions took place between people who were notvery certain of one another's standing or good faith. But the greatbulk of payments was made in the cheque currency which our bankers haddeveloped outside of the law and could create as fast as prudence--andan eye to the supply of legal tender which every holder of a chequehad a right to demand--allowed them to do so. While cheques providedthe currency of commerce, another form of "money" was produced, againwithout any restriction by the Act, by the pleasant convention whichcaused a credit in the Bank of England's books to be regarded as"cash" for balance-sheet purposes by the banks. These advantagesgave the English system a freedom and elasticity, in spite of thestrictness of the law that regulated the issue of paper currency, thatenabled it to work in a manner that, judged by the test of practicalresults, had one great advantage over that of any of the rivalcentres. It alone in days before the war fulfilled the functions of aninternational banker by being ready at all times and without questionto pay out the gold that was, in the last resort, the final means ofsettling international balances.
It is the object of Lord Cunliffe's Committee to restore as quicklyas possible the system which, has thus been tried by the test ofexperience, "After the war," they say in their Report, "our goldholdings will no longer be protected by the submarine danger, and itwill not be possible indefinitely to continue to support the exchangeswith foreign countries by borrowing abroad. Unless the machinery whichlong experience has shown to be the only effective remedy for anadverse balance of trade and an undue growth of credit is oncemore brought into play there will be very grave danger of a creditexpansion in this country and a foreign drain of gold which mightjeopardise the convertibility of our note issues and the internationaltrade position of the country.... We are glad to find that there wasno difference of opinion among the witnesses who appeared before us asto the vital importance of these matters." The first measure that theyput forward as essential to this end is the cessation at the earliestpossible moment of Government borrowings. "A large part of the creditexpansion arises, as we have shown, from the fact that the expenditureof the Government during the war has exceeded the amounts which theyhave been able to raise by taxation or by loans from the actualsavings of the people. They have been obliged therefore to obtainmoney through the creation of credits by the Bank of England and theJoint Stock banks, with the result that the growth of purchasing powerhas exceeded that of purchasable goods and services." It is thereforeessential that as soon as possible the State should not only livewithin its income but should begin to reduce indebtedness, especiallythe floating debt, which, being largely held by the banks, has beena cause of credit creation on a great scale. "The shortage of realcapital must be made good by genuine savings. It cannot be met by thecreation of fresh purchasing power in the form of bank advances tothe Government or to manufacturers under Government guarantee orotherwise, and any resort to such expedients can only aggravate theevil and retard, possibly for generations, the recovery of the countryfrom the losses sustained during the war." With these weighty wordsthe Committee brushes aside a host of schemes that have been urged forputting everything right by devising new machinery for the manufactureof new credit. That new credits will be needed for industry after waris obvious, but what else are our banks for, if not to provide it?They can only be set free to provide it on the scale required if, bythe necessary reduction of the floating debt, they are relieved of thelocking up of their funds in Government securities, which has been oneof the bad results of our bad war finance.
It goes without saying that the Committee does not recommend thecontinuance in peace of the differential rates for home and foreignmoney that were introduced as a war measure with a view to loweringa rate at which the Government borrowed at home for war purposes. Itwould evidently be too severe a strain on human nature to attempt towork such a system, except in war-time, when the artificial conditionsby which the market was surrounded made it both feasible and desirableto do so. With regard to the note issue, the Committee proposes areturn to the old system and a strictly drawn line for the amount ofthe fiduciary note issue, the whole note issue (with the exception ofthe few surviving private note issues) being put into the hands of theBank of England, all notes being payable in gold in London onlyand being made legal tender throughout the United Kingdom. Thesesuggestions are subject to any special arrangements that may be madewith regard to Scotland and Ireland. An early resumption of thecirculation of gold for internal purposes is not contemplated. Thepublic has become used to paper money, which is in some ways moreconvenient and cheaper; and the luxury of a gold circulation is onethat we can hardly afford at present. Gold will be kept by the Bank ofEngland in a central reserve, and all the other banks should, it issuggested, transfer to it the whole of their present holdings of themetal. In order to give the Bank of England a closer control of thebullion market the Committee thinks it desirable that the export ofgold coin or bullion should, in future, be subject to the conditionthat such coin or bullion had been obtained from the Bank for thepurpose. This measure would give the Bank of England a very closecontrol of the bullion market, so close that there is a danger thatif this control were too rigorously exercised, gold that now comes tothis country might be diverted, with a view to more advantageous sale,to other centres. The amount of the fiduciary issue is a matterthat the Committee leaves open to be determined after experience ofpost-war conditions. They "think that the stringent principles ofthe Act (of 1844) have often had the effect of preventing dangerousdevelopments, and the fact that they have had to be temporarilysuspended on certain rare and exceptional occasions (and those limitedto the earlier years of the Act's operation, when experience ofworking the system was still immature) does not," in their opinion,invalidate this conclusion. So they propose that the separation of theIssue or Banking Departments should be maintained, but that in futureif an emergency arose requiring an increase in the amount of fiduciarycurrency, this should not involve a breach of the law, but should bemade legal (as it is now under the Currency and Bank Notes Act of1914), subject to the consent of the Treasury.
It is not proposed at present to secure the circulation of paperinstead of gold by legislation. The Committee considers that "informalaction on the part of the banks may be expected to accomplish allthat is required." If necessary, however, it points out thatthe circulation of gold could be prevented by making the notesconvertible, at the discretion of the Bank of England, into coin orbar gold. The amount which, in the opinion of the Committee, should beaimed at for the central gold reserve is L150 millions (a sum which isalready almost in sight on its figures quoted above); and "untilthis amount has been reached and maintained concurrently with asatisfactory foreign exchange position for a period of at least ayear," it thinks that the policy of reducing the uncovered note issue"as and when opportunity offers" should be consistently followed. Howthis opportunity is going to "offer" is not made clear; but presumablya reflow of notes from circulation can only happen through a fall inprices or a reduction in bank deposits by the liquidation of advancesmade to the Government, directly or indirectly, by the banks.
Concerning the difficult problem of replacing the Bradbury notes byBank of England notes of L1 and 10s., an ingenious suggestion is madeby the Committee. It observes that there would be some awkwardnessin transferring the issue to the Bank of England before the futuredimensions of the fiduciary issue have been arrived at; and itsuggests that during the transitional period any expansion in Treasurynotes that may take place should be covered, not as now, by Governmentsecurities, but by Bank of England notes taken from the Bank. By thismeans any demands for new currency would operate in the normal way toreduce the reserve of the Banking Department, "which would have to berestored by raising money rates and encouraging gold imports," and soa step would have been taken to getting back to a business basis inthe currency system and away from the profligate printing-press policyof the war period.
Such are the suggestions made by this distinguished body for therestoration of our currency. Little has been said against them in theway of serious criticism, but their conservative tendency and thefact that they practically recommend a return to the _status quo_ hascaused some impatience among the financial Hotspurs who proposed tobegin to build a new world by turning everything upside down. Inmatters of finance this process is questionable, interesting as theresult would undoubtedly be. To get to work on tried lines and then,when once industry and finance have recovered their old activity, toamend the machine whenever it is creaking seems to be a more sensibleplan than to delay our start until we have fashioned a new heavenand earth, and then very probably find that they do not work. If themachine is to be set moving, it can only be done by close co-operationbetween the Bank of England and the other banks which have grown byamalgamation into institutions the size of which seem likely tomake the task of central control more difficult than ever. On thisimportant point the Committee is curiously silent. But it recommendsthe adoption of a suggestion made by a Committee of Bankers, whoproposed that banks should in future be required "to publish a monthlystatement showing the average of their weekly balance-sheets duringthe month." (Will this requisition apply to the Bank of England?) Thisis a welcome suggestion as far as it goes, but unless something isdone by co-operative action to make the Bank rate more automatic inits influence on the actions of the other banks, the difficulty ofmaking it effective seems likely to be considerable.
Getting the currency right is a most important matter for the futureof our financial position. Another is the question of our debt toforeigners. Most of this debt we owe to America, and we only owe itbecause we had to finance our Allies. We surely ought to be able toarrange with America that anything that we have to do in giving ourAllies time before asking for repayment they also should do forus--within limits, say, up to thirty years. In view of all that theyhave made and we have lost by this war waged for the cause of allmankind, this would seem to be reasonable concession on America'spart.
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