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War-Time Financial Problems by Hartley Withers

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the State the same amount of War Loan scrip. To do this they would
be obliged to realise a part of their property or to mortgage it, a
process which would seem likely to produce a pretty state of affairs
in the property market; and a very pleasant state of affairs indeed
would arise for the holders of War Loan scrip, since there would be a
large crowd of compulsory buyers in the market from whom the holders
would apparently be able to extort any price that they liked for their

The next stage in the proceedings was a deputation to the Chancellor
of the Exchequer, concerning which more anon, of leaders of various
groups of the Labour Party, to press upon Mr Bonar Law the principle
of what is called "the Conscription of Wealth," and the publication at
or soon after that time, which was about the middle of November, of a
pamphlet on the subject of the "Conscription of Riches," by the War
Emergency Workers' National Committee, 1, Victoria Street, S.W. Among
what this pamphlet describes as "the three practicable methods of
conscripting wealth" No. 1 is as follows:--

A Capital Tax, on the lines of the present Death Duties, which are
graduated from nothing (on estates under L300, and legacies under L20)
up to about 20 per cent. (on very large estates left as legacies to

If a "Death Duty" at the existing rates were now levied simultaneously
on every person in the kingdom possessing over L300 wealth (every
person might be legally deemed to have died, and to be his own heir),
it might yield to the Chancellor of the Exchequer about L900,000,000.
It would be necessary to offer a discount for payment in cash; and in
order to avoid simultaneous forced sales, to accept, in lieu of cash,
securities at a valuation; and to take mortgages on land.

Here it will be seen that the Emergency Workers had improved on the
_Round Table_, and agreed with Mr Gardiner, by providing that the
Government should take securities at a valuation and mortgages on land
in lieu of cash in order to avoid simultaneous forced sales. But they
do not seem to have perceived that, in so far as the Government took
securities or accepted mortgages on land, it would not be getting
money to pay for the war, which was the object of the proposed
Conscription of Wealth, but would only be obtaining property from
which the Government would in due course later on receive an income,
probably averaging about one-twentieth of its value.

Perhaps, however, it would be more correct to say that those who put
the scheme forward did not ignore this drawback to it, but rather
liked it, for reasons quite irrelevant to the objects that they were
apparently pursuing. A good deal of prominence was given about the
same time to the question of a levy on capital in the _New Statesman_
well known to be the organ of Mr Sidney Webb and other members of the
Fabian Society. These distinguished and very intellectual Socialists
would, of course, be quite pleased if, in an apparent endeavour to pay
for the war, they actually succeeded in securing, by the Government's
acquisition of blocks of securities from property owners, that
official control of industry and production which is the object of
State Socialists.

It will be noted, however, in this scheme that no mention is made of
any forms of property to be accepted by the Government in lieu of cash
except securities and mortgages on land. Items such as furniture,
books, pictures and jewellery are ignored, and in one of the articles
in the _New Statesman_, discussing the question of a capital levy, it
was distinctly suggested that these commodities should be left out
of the scheme so as to save the trouble involved by valuation.
Unfortunately, if we leave out these forms of property the natural
result is to stimulate the tendency, lately shown by an unfortunately
large number of patriotic taxpayers, of putting money into pearl
necklaces and other such gewgaws in order to avoid income tax. If
by buying fur coats, old masters and diamond tiaras it will be be
possible in future to avoid paying, not only income tax, but also a
capital levy, it is to be feared that appeals to people to save their
money and invest it in War Bonds are likely to be seriously interfered

Unfortunately, the _Statesman_ was able to announce that the appeal
for this system of taxation had been received with a good deal of
sympathy by the Chancellor of the Exchequer, and the next stage in the
history of the agitation was the publication on Boxing Day in several
of the daily papers of what appeared to be an official summary, issued
through the Central News, of what the Chancellor had said to the
deputation of Labour Leaders introduced by Mr Sidney Webb, which
waited on him, as already described, in the middle of November. Having
pointed out that he had never seen any proposal which seemed to him
to be practicable for getting money during the war by conscripting
wealth, Mr Bonar Law added that, though "perhaps he had not thought
enough about it to justify him in saying so," his own feeling was that
it would be better, both for the wealthy classes and the country, to
have this levy on capital, and reduce the burden of the national debt
when the war was over. It need not be said that this statement by the
Chancellor has been very far from helpful to the efforts of those who
are trying to induce unthrifty citizens to save their money and put it
into National War Bonds for the finance of the war.

"Why," people argue, "should we go out of our way to save and take
these securities if, when the war is over, a large slice of our
savings is to be taken away from us by means of this levy on capital?
If we had been doubting between the enjoyment of such comforts and
luxuries as are possible in war-time and the austere duty of thrift,
we shall naturally now choose the pleasanter path, spend our money on
ourselves and on those who depend on us, instead of saving it up to
be taken away again when the war is over, while those who have spent
their money as they liked will be let off scot free." Certainly, it is
much to be regretted that the Chancellor of the Exchequer should have
let such a statement go forth, especially as he himself admits that
perhaps he has not thought enough about it to justify him in saying
so. If the Chancellor of the Exchequer has not time to think about
what he is going to say to a Labour deputation which approaches him on
an extremely important revolution in our fiscal system, it is surely
high time that we should get one who has sufficient leisure to enable
him to give his mind to problems of this sort when they are put before

In the course of this review of the forms in which suggestions for a
levy on capital have been put forward, some of the difficulties and
injustices inherent in it have already been pointed out. Its advocates
seem as a rule to base the demand for it upon an assumption which
involves a complete fallacy. This is that, since the conscription
of life has been applied during the war, it is necessary that
conscription of wealth should also be brought to bear in order to make
the war sacrifice of all classes equal. For instance, the Emergency
Workers' pamphlet, quoted above, states that, "in view of the fact
that the Government has not shrunk from Compulsory Conscription of
Men," the Committee demands that "for all the future money required
to carry on the war, the Government ought, in common fairness, to
accompany the Conscription of Men by the Conscription of Wealth."

This contention seems to imply that the conscription of men and the
conscription of wealth apply to two different classes; in other words,
that the owners of wealth have been able to avoid the conscription of
men. This, of course, is absolutely untrue. The wealthiest and the
poorest have to serve the country in the front line alike, if they are
fit. The proportion of those who are fit is probably higher among the
wealthy classes, and, consequently, the conscription of men applies
to them more severely. Again, the officers are largely drawn from
the comparatively wealthy classes, and it is pretty certain that the
proportion of casualties among officers has been higher during the war
than among the rank and file. Thus, as far as the conscription of men
is concerned, the sacrifice imposed upon all classes in the community
is alike, or, if anything, presses rather more heavily upon those who
own wealth. Conscription of wealth as well as conscription of life
thus involves a double sacrifice to the owners of property.

This double sacrifice, in fact, the owners of property have, as is
quite right, borne throughout the war by the much more rapid increase
in direct taxation than in indirect. It is right that the owners of
property should bear the heavier monetary burden of the war because
they, having more to lose and therefore more to gain by a successful
end of the war, should certainly pay a larger proportion of its cost.
It was also inevitable that they should do so because, when money is
wanted for the war or any other purpose, it can only be taken in large
amounts from those who have a surplus over what is needed to provide
them with the necessaries and decencies of life. But the argument
which puts forward a capital levy on the ground that the rich have
been escaping war sacrifice is fallacious in itself, and is a wicked
misrepresentation likely to embitter still further the bad feeling
between classes.

Nevertheless, Mr Bonar Law thinks that, since the cost of the war must
inevitably fall chiefly upon the owners of property, and since it
therefore becomes a question of expediency with them whether they
should pay at once in the form of a capital levy or over a long series
of years in increased taxation, he is inclined to think that the
former method is one which would be most convenient to them and best
for the country. This contention cannot be set aside lightly, and
there can be no doubt that if, by making a dead lift, the wealthy
classes of the country could throw off their shoulders a large part of
the burden of the war debt, such a scheme is well worth considering as
long as it does not carry with it serious drawbacks.

It seems to me, however, that the drawbacks are very considerable.
In the first place, I have not seen any really practicable scheme of
redeeming debt by means of a levy on capital In so far as the levy is
paid in the form of surrendered War Loans, it is simple enough. In so
far as it is paid in other securities or mortgages on land or other
forms of property, it is difficult to see how the assets acquired by
the State through the levy could be distributed among the debt
holders whom it is proposed to pay off. Would they be forced to take
securities, mortgages on land, furniture, etc., as the Government
chose to distribute them, or would the Government have to nurse an
enormous holding of various forms of property and gradually realise
them and so pay off debt?

Again, a great injustice would surely be involved by laying the whole
burden of this oppressive levy upon owners of accumulated property, so
penalising those who save capital for the community and letting off
those who squander their incomes. A characteristic argument on this
point was provided by the _New Statesman_ in a recent issue. It argued
that, because ordinary income tax would still be exacted, the contrast
between the successful barrister with an Income of L20,000 a year and
no savings, who would consequently escape the capital levy, and the
poor clergyman who had saved L1000 and would consequently be liable to
it, fell to the ground. In other words, because both lawyer and parson
paid income tax, it was fair that the former should escape the capital
levy while the latter should have to pay it!

But needs must when the devil drives, and in a crisis of this kind it
is not always possible to look too closely into questions of equity in
raising money. It is necessary, however, to look very closely into the
probable economic effects of any suggested form of taxation, and, if
we find that it is likely to diminish the future wealth production
of the nation, to reject it, however attractive it may seem to be
at first sight. A levy on capital which would certainly check the
incentive to save, by the fear that, if such a thing were once
successfully put through, it might very likely be repeated, would dry
up the springs of that supply of capital which is absolutely essential
to the increase of the nation's productive power. Moreover, business
men who suddenly found themselves shorn of 10 to 20 per cent. of
their available capital would find their ability to enter into fresh
enterprise seriously diminished just at the very time when it is
essential that all the organisers of production and commerce in this
country should be most actively engaged in every possible form of
enterprise, in order to make good the ravages of war.



_February_, 1918

The Recent Amalgamations--Will the Provinces suffer?--Consolidation
not a New Movement--The Figures of the Past Three Decades--Reduction
of Competition not yet a Danger--The Alleged Neglect of Local
Interests--Shall we ultimately have One Huge Banking Monopoly?--The
Suggested Repeal of the Bank Act--Sir E. Holden's Proposal.

Banking problems have lately loomed large in the financial landscape.
It will be remembered that about a year and a half ago a Committee
was appointed to consider the creation of a new institution specially
adapted for financing overseas trade and for the encouragement of
industrial and other ventures through their years of infancy, and
that the charter which was finally granted to the British Trade
Corporation, as this institution was ultimately called, roused a
great deal of opposition both on the part of banks and of traders who
thought that a Government institution with a monopoly character
was going to cut into their business with the help of a Government
subsidy. In fact, there was no subsidy at all in question, and the
fears of the trading world of competition on the part of the new
chartered institution only arose owing to its unfortunate name, which
was given to it in order to allay the apprehensions of the banks which
had been provoked by the title originally designed for it, namely, the
British Trade Bank. There seems no reason why this Company should
not do good work for British trade without treading on the toes of
anybody. Although naturally its activities cannot be developed on any
substantial scale until the war is over, its Chairman assured the
shareholders at the end of January that its preliminary spadework was
being carefully attended to.

After this small storm in a teacup had died down those interested in
our banking efficiency were again excited by the rapid progress made
by the process of amalgamation among our great banks, which began to
show acute activity again in the last months of 1917. The suddenly
announced amalgamation of the London and South-Western and London
and Provincial Banks led to a whole host of rumours as to other
amalgamations which were to follow; and though most of these proved to
be untrue a fresh sensation was aroused when the union was announced
of the National Provincial Bank of England and the Union of London and
Smith's Bank. All the old arguments were heard again on the subject of
the objections, from the point of view of industry in the provinces,
to the formation of great banking institutions, with enormous figures
on both sides of the balance-sheet, working from London, often, it was
alleged, with no consideration for the needs of the provincial users
of credit. These latest amalgamations, which have united banks which
already had head offices in London, gave less cause than usual for
these provincial apprehensions, which had far more solid reason behind
them when purely provincial banks were amalgamated with institutions
whose head office was in London. Nevertheless, the argument was heard
that the great size and scale on which these amalgamated banks were
bound to work would necessarily make them more monopolistic and
bureaucratic in their outlook, and less elastic and adaptable in their
dealings with their local customers.

It seems to me that there is so far very little solid ground for any
apprehension on the part of the business community that the recent
development of banking evolution will tend to any damage to their
interests. The banks have grown in size with the growth of industry.
As industry has tended more and more to be worked by big battalions,
it became necessary to have banking institutions with sufficiently
large resources at their command to meet the great requirements of the
huge industrial organisations that they had to serve. Nevertheless,
the tendency towards fewer banks and bigger figures has grown with
extraordinary celerity, as the following table shows:--

SINCE 1886.

December No. of Number of Capital Deposit and Total
31st Banks Branches Paid up Current Liabilities
1886 109 1,547 L38,468,000 L299,195,000 L376,808,000
1891 106 2,245 43,406,000 391,842,000 486,632,000
1896 94 3,051 45,203,000 495,233,000 599,518,000
1901 74 3,935 46,631,000 584,841,000 698,150,000
1906 55 4,840 48,122,000 647,889,000 782,353,000
1911 44 5,417 47,265,000 748,641,000 885,069,000
1916 35 5,993 48,237,000 1,154,877,000 1,316,220,000

This table is taken from the annual banking numbers of the
_Economist_. It will be noticed that in 1886 there were in England 109
joint-stock banks with 1547 offices, whose accounts were tabulated
in the _Economist's_ annual review. Their total paid-up capital was
38-1/2 millions, their deposit and current accounts were just under
300 millions, and their total liabilities were 377 millions. In the
course of thirty years the 109 banks had shrunk by the process of
amalgamation and absorption to thirty-five, that is to say, they had
been divided by three; the number of their offices, however, had been
multiplied by nearly four, while their deposit accounts had grown from
300 millions to 1155, and their total liabilities from 377 to 1316
millions. By the amalgamations announced at the end of 1917, and that
of the County of Westminster with Parr's announced on February 1st,
the number of joint stock banks will be reduced to 32. The picture
would be still more striking if the figures of the private banks were
included, since their number has been reduced, since 1891, from 37 to
6. These figures are eloquent of the manner in which the number of
individual banks has been reduced, while the extent of the banking
accommodation given to the community has enormously grown, so that the
power wielded by each individual bank has increased by the force of
both these processes.

The consequent reduction in competition which is causing some concern
among the trading community has not, as it seems to me, gone far
enough yet to be a serious danger. The idea that the big banks with
offices in London give scant consideration to the needs of their local
customers seems to be so contrary to the interests of the banks that
they would be extraordinarily bad men of business if those who were
responsible for their management allowed it to be the fact. It is
probably nearer the truth that banking competition in the provinces is
still so keen that the London management is very careful not to allow
anything like bureaucratic stiffness to get into the methods by which
their business is managed. By the appointment of local committees they
are careful to do all they can to see that the local interests get all
the credit that is good for them. That local interests get as much
credit as they want is probably very seldom the case, because it is a
natural instinct on the part of an eager business man to want rather
more credit than he ought to have, from a banking point of view.
Business interests, as long as they exist in private hands, will
always want rather more credit than there is available, and it will
always be the duty of the banker to ensure that the country's industry
is kept on a sound basis by checking the tendency of the eager
business man to undertake rather more than is good for him. From the
sentimental point of view it is certainly a pity to have seen many of
the picturesque old private banks extinguished, the partners in which
were in close personal touch with their customers, and entered into
the lives of the local communities in a manner which their modern
counterpart is perhaps unable to do. Nevertheless, it is difficult
to get away from the fact that if these institutions had been as
efficient and as well managed as their admirers depict them to have
been they would hardly have been driven out of existence by the stress
of modern developments and competition. Whatever we may think of
modern competition, in certain of its aspects, we may at least be
sure of this--that it does not destroy an institution which is really
wanted by the business community. And if the complaint of local
interests is true, that they are swamped by the cosmopolitan
aspirations of the great London offices, they always have it in their
power to create an institution of the kind that they want, and by
giving it their business to ensure for it a prosperous career. As long
as no such tendency is visible in the banking world we may be pretty
sure that the views expressed concerning the neglect of local
interests by the enormous banks which have grown up with London
centres in the last thirty years is to a great extent a myth. It
has now announced, however, that the whole problem involved by the
amalgamation process is to be sifted by a committee to be appointed
for this purpose.

Another apprehension has arisen in the minds of those who view with
critical vigilance the present tendencies of business and the
present development of economic opinion among a great section of the
community. If, it is urged, the banks continue to swallow one another
up by the process of amalgamation, how will this tendency end except
in the creation of one huge bank working a gigantic money monopoly
which the Socialistic tendencies of the present day will, with some
reason, insist ought to be taken over by the State for the profit of
the taxpayer? This view is frankly put forward by those advocates of a
Socialistic organisation of society, who say that the modern tendency
of industry towards combinations, rings and trusts is rapidly bringing
the Socialistic millennium within their reach without any effort
on the part of Socialistic preachers. They consider that the trust
movement is doing the work of Socialism, much faster than Socialism
could do it for itself; that, in short, as has been argued above
in regard to banking, the tendency towards centralisation and the
elimination of competition can only end in the assumption by the State
of the functions of industry and finance. If this should be so, the
future is dark for those of us who believe that individual effort
is the soul of industrial and financial progress, and that industry
carried on by Government Departments, however efficient and economical
it might be, would be such a deadly dull and unenterprising business
that all the adaptability and tendency to variation in accordance with
the needs of the moment, which are so strongly shown by individual
enterprise, would be lost, to the great detriment of the material
progress of mankind.

As things are at present, there is little need to fear that
Socialistic organisation of industry could stand up against competent
individual effort. Anybody who has ever had any business dealings
with a Government Department will inevitably shudder when he tries to
imagine how many forms would have to be filled up, how many divisions
of the Department the inevitable mass of papers would have to go
through, and how much delay and tedium would be involved before the
simplest business proposition could be carried out. But, of course, it
is argued by Socialists that Government Departments are only slow and
tied up with red tape because they have so long been encouraged to do
as little as possible, and that as soon as they are really urged to do
things instead of pursuing a policy of masterly inactivity, there is
no reason why they should not develop a promptitude and elasticity
quite as great as that hitherto shown by the business community.
That such a development as this might take place in the course of
generations nobody can deny; at present it must be admitted that with
the great majority of men the money-making incentive is required to
get the best out of them. If the process of education produces so
great a change in the human spirit that men will work as well for the
small salary of the Civil Service, with a K.C.B. thrown in, as they
will now in order to gain the prizes of industry and finance, then
perhaps, from the purely economic point of view, the Socialisation
of banking may be justified. But we are a long way yet from any such
achievement, and if it is the case that the rapid centralisation of
banking power in comparatively few hands carries with it the danger
of an attempt to nationalise a business which requires, above all,
extreme adaptability and sensitiveness to the needs of the moment
as they arise, this is certainly a danger which has to be carefully
considered by those who are responsible for the development of these
amalgamation processes.

And now another great stone has been thrown into the middle of the
banking pond, causing an ever-widening circle of ripples and provoking
the beginning of a discussion which is likely to be with us for some
time to come. Sir Edward Holden, at the meeting of the London City and
Midland Bank shareholders on January 29th, made an urgent demand for
the immediate repeal of the Bank Act of 1844. This Act was passed,
as all men know, in order to restrict the creation of credit in
the United Kingdom. In the early part of the last century the most
important part of a bank's business consisted of the issue of notes,
and banking had been carried on in a manner which the country
considered unsatisfactory because banks had not paid sufficient
attention to the proportion of cash that they ought to hold in their
tills to meet notes if they were presented. Parliament in its wisdom
consequently ordained that the amount of notes which the banks should
be allowed to issue, except against actual metal in their vaults,
should be fixed at the amount of their issue at that time. Above the
limit so laid down any notes issued by the banks were to be backed by
metal. In the case of the Bank of England the limit then established
was L14,000,000, and it was enacted that if any note-issuing bank gave
up its right to a note issue the Bank of England should be empowered
to increase its power to issue notes against securities to the extent
of two-thirds of the power enjoyed by the bank which was giving up its
privilege. By this process the Bank of England's right to issue notes
against securities, what is usually called its fiduciary issue, has
risen to L18,450,000; above that limit every note issued by it has to
be backed by bullion, and is actually backed by gold, though under
the Act one-fifth might be in silver. It was thus anticipated by the
framers of the Act that in future any credit required by industry
could only be granted by an increase in the gold held by the issuing
banks. If the Act had fulfilled the anticipations of the Parliament
which passed it, if English trade had grown to anything like the
extent which it has done since, it could only have done so by the
amassing of a mountain of gold, which would have lain in the vaults of
the Bank of England.

Fortunately, however, the banking community had at its disposal a
weapon of which it was already making considerable use, namely, the
system of issuing credit by means of banking deposits operated on by
cheques. Eight years before Peel's Act was passed two Joint Stock
Banks had been founded in London, although the Bank of England
note-issuing monopoly still made it impossible for any Joint Stock
Bank to issue notes in the London district. It is thus evident that
deposit banking was already well founded as a profitable business when
Peel, and Parliament behind him, thought that they could sufficiently
regulate the country's banking system so long as they controlled the
issue of notes by the Bank of England and other note-issuing banks. It
is perhaps fortunate that Parliament made this mistake, and so enabled
our banking machinery to develop by means of deposit banking, and so
to ignore the hard-and-fast regulations laid upon it by Peel's Act.
This, at least, is what has happened; only in times of acute crisis
have the strict regulations of Peel's Act caused any inconvenience,
and when that inconvenience arose the Act has been suspended by the
granting of a letter of indemnity from the Treasury to the Governor of
the Bank.

Under Peel's Act the present rather anomalous form of the Bank of
England's Weekly Return was also laid down. It shows, as all men know,
two separate statements; one of the Issue Department and the other of
the Banking Department. The Issue Department's statement shows the
notes issued as a liability, and on the assets side Government debt
and other securities (which are, in fact, also Government securities),
amounting to L18,450,000 as allowed by the Act, and a balance of gold.
The Banking Department's statement shows capital, "Rest" or reserve
fund, and deposits, public and other, among the liabilities, and on
the other side of the account Government and other securities, all the
notes issued by the Issue Department which are not in circulation, and
a small amount of gold and silver which the Banking Department holds
as till money.

Sir Edward Holden's proposal is that the Act should be repealed
practically in accordance with the system which has been adopted by
the German Reichsbank. The principles which he enumerates, as those on
which other national banks of issue work, are as follows:--

1. One bank of issue, and not divided into departments.

2. Notes are created and issued on the security
of bills of exchange and on the cash balance, so that
a relation is established between the notes issued
and the discounts.

3. The notes issued are controlled by a fixed
ratio of gold to notes or of the cash balance to notes.

4. This fixed ratio may be lowered on payment
of a tax.

5. The notes should not exceed three times the
gold or cash balance.

By this revolution Sir Edward would abolish all legal restriction on
the issue of notes by the Bank of England. It would hold a certain
amount of gold or a certain amount of cash balance against its notes,
but in the "cash balance" Sir Edward apparently would include 11
millions odd of Government debt, or of Treasury notes. As long as its
notes were only three times the amount of the gold or of the "cash
balance," and were backed as to the other two-thirds by bills of
exchange, the situation would be regarded as normal, but if, owing to
abnormal circumstances, the Bank desired to increase the amount of
notes issued against bills of exchange only and to reduce the ratio of
its gold or its cash balance to its notes, it would, at any time, be
enabled to do so by the payment of a tax, without going through the
humiliating necessity for an appeal to the Treasury to allow it to
exceed the legal limit.

At the same time, by the abolition of Peel's Act the cumbrous methods
of stating the Bank's position, as published week by week in the Bank
Return, would be abolished. The two accounts would be put together,
with the result that the Bank's position would be apparently stronger
than it appears to be under the present system, which makes the
Banking Department's Return weak at the expense of the great strength
that it gives to the appearance of the Issue Department. This will be
shown from the following statement given by Sir Edward Holden of the
Return as issued on January 16th, and as amended according to his



Notes Issued .. L76,076,000 Gold .................. L57,626,000
Government Debt ....... 11,015,000
Other Securities ...... 7,435,000
----------- -----------
L76,076,000 L76,076,000
Ratio of Gold to Notes Issued = 75.7 per cent.


Capital ....... L14,553,000 Government Securities ...... L56,768,000
Rest .......... 3,363,000 Other Securities ........... 92,278,000
Deposits-- Notes .......... L30,750,000
Public L41,416,000 Gold and Silver 1,143,000
Other 121,589,000
----------- 163,005,000 ------------- 31,893,000
Other Liabilities ... 18,000
----------- -----------
L180,939,000 L180,939,000

Ratio of Cash Balance to Liabilities = 19.6 per cent.

JANUARY 16, 1918.

Capital L14,553,000
Rest 3,363,000
Notes Issued (circulation) 45,325,000
Deposits 163,005,000
Other Liabilities 18,000

Gold L58,768,000
Currency Notes 11,015,000
___________ L69,783,000

Government Securities 56,768,000
Other Securities 7,435,000
_________ 64,203,000

Other Securities 92,278,000

Ratio of Gold to Notes =129.7 per cent.
" " Cash Balance to Liabilities = 33.5 "

It need not be said that these proposals have aroused the liveliest
interest. At the Bank Meetings held since then several chairmen
have been asked by their shareholders to express their views on Sir
Edward's proposed revolution. Sir Felix Schuster pronounced cautiously
in favour of the revision of the Bank Act, and said that he had
advocated it seventeen years ago. Lord Inchcape, at the National
Provincial Meeting, thought that the matter required careful
consideration. Most of us will agree with this view. There is
certainly much to be said for a reform of the Weekly Statement of the
Bank of England, giving, it may be added, a good deal more detail
than Sir Edward's revised balance-sheet affords. But concerning his
proposal to reconstruct our system of note issue on a foreign model,
there is certain to be much difference of opinion. In the first place,
owing to the development of our system of banking by deposit and
cheque rather than by issue and circulation of notes, the note issue
is not nearly so important a business in normal times in this country
as it is in Germany and France. Moreover, the check imposed upon our
banking community by the need for an appeal to the Treasury before it
can extend its note issue beyond a certain point often acts with, a
salutary effect, and the view has even been expressed that if that
check were taken away from our system it might be difficult, if not
impossible, to maintain the gold standard which has been of such
enormous value in building up the prestige of London as a financial
centre. I do not think there is much weight in this argument, since,
under Sir Edward's plan, the note issue could only be increased
against discounts, and the Bank, by the charge that it made for
discounts, would still be able to control the situation. From the
practical point of view of the present moment, a strong objection
to the scheme is that it would open the door to fresh inflation by
unrestricted credit-making just when the dangers of this process are
beginning to dawn even on the minds of our rulers.



_March_, 1918

Another Government Committee--The Fallacy of imitating
Germany--Prussianising British Commerce--The Inquiry into the
Companies Acts--Will Labour Influence dominate the Report?--Increased
Production the Great Need--Will it be met by tightening up the
Companies Acts?--The Dangers of too much Strictness--Some Reforms
necessary--Publicity, Education, Higher Ideals the only Lasting
Solution--The Importance of Foreign Investments--Industry cannot take
all Risks and no Profits.

Every week--almost every day--brings with it the announcement of some
new committee considering some question that may, or may not, arise
now or when the war is over. Especially in the realm of finance has
the Government's output of committees been notably prolific of
late. We have had a Committee on Currency, a Committee on Banking
Amalgamations, and a Committee appointed, humorously enough, by the
Ministry of Reconstruction to consider what measures, if any, should
be taken to protect the public interest in connection with the policy
of industrial combinations--a policy which the Board of Trade has
been sedulously fostering. Now comes a Committee to inquire "what
amendments are expedient in the Companies Acts, 1908-1917, principally
having regard to the circumstances arising out of the war, and to the
developments likely to arise on its conclusion, and to report to the
Board of Trade and to the Ministry of Reconstruction." It is composed
of the Right Hon. Lord Wrenbury (chairman), Mr A.S. Comyns Carr,
Sir F. Crisp, Mr G.W. Currie, M.P., Mr F. Gaspard Farrer, Mr Frank
Gore-Browne, K.C., Mr James Martin, the Hon. Algernon H. Mills, Mr
R.D. Muir, Mr C.T. Needham, M.P., Mr H.A. Payne, Sir Owen Philipps,
M.P., Sir William Plender, Mr O.C. Quekett, and Mr A.W. Tait. The
secretary is Mr W.W. Coombs, 55, Whitehall, S.W. 1. There are some
good names on the Committee. Mr. Gaspard Farrer represents a great
issuing house; Sir Frank Crisp, company lawyers; Sir William Plender,
the accountants; Mr O.C. Quekett, the Stock Exchange; and Sir Owen
Philipps, the shipping interest. Nevertheless, one cannot help
shuddering when one considers the dangers that threaten British
finance and industry from ill-considered measures which might possibly
be recommended by a Committee influenced by the atmosphere of the
present outlook on financial and commercial affairs.

One of the interesting features of the present war atmosphere is the
fact that, now when we are fighting as hard as we can to defeat all
that is meant by Prussianism a great many of our rulers and public
men are doing their best to impose Prussianising methods upon this
unfortunate country, merely because it is generally assumed that
Prussian methods have been shown, during the course of the war, to
carry with them a certain amount of efficiency. It is certainly true
that Prussian methods do very well as applied to the Prussians and
submitted to by other races of Germans. On the other hand, it is at
least open to argument that the British method of freedom, individual
initiative, elasticity and adaptability have produced results, during
the present war, which have so far been paralleled by no other country
engaged in the contest. Working on interior lines with the assistance
of docile and entirely submissive allies, Germany has certainly done
wonderful things in the war, but it by no means follows that the
verdict of posterity will not give the palm of achievement to England,
who has not only carried out everything that she promised to do before
the war, but has incidentally and in the course of it created and
equipped an Army on a Continental scale, and otherwise done very much
more for the assistance of her Allies than was contemplated before the
war began.

It is untrue to say that we were unprepared for the war. We were
more than prepared to do all that we promised to do. What we were
unprepared for was finding ourselves required to turn ourselves
into, not only the greatest naval Power in the world, but one of the
greatest military Powers also. This demand was sprang upon us, and we
have met it with extraordinary success. The whole idea that Germany's
achievement has been such as to warrant any attempt on our part to
model our institutions on her pattern seems to me to fall to pieces
as soon as one looks calmly at the actual results produced by the
different systems. Moreover, even if we were to admit that Germany's
achievement in the war has been immeasurably greater than ours, it
still would not follow that we could improve matters here by following
the German system. It ought not to be necessary to observe that a
system which is good for one nation or individual is not necessarily
good for another. In the simple matter of diet, for instance, a most
scientifically planned diet given to a child who does not happen to
like it will not do that child any good. These things ought to be
obvious, but unfortunately in these times, which call for eminently
practical thought and effort, there is a curious doctrinaire spirit
abroad, and the theorist is continually encouraged to imagine how much
better things would be if everything were quite different, whereas
what we want is the application of practical common sense to practical
facts as they are.

In the realm of finance the freedom and individual initiative and
elasticity of our English system have long been the envy of the world.
Our banking system, as was shown, on an earlier page, has always
worked with much less restriction on the part of legislative and
official interference than any other, and, with the help of this
freedom from official control, English bankers and finance houses had
made London the financial centre of the world before the war. The
attempt of Parliament to control banking by Peel's Act of 1844 was
quietly set aside by the banking machinery through the development of
the use of cheques, which made the regulations imposed on the note
issue a matter of quite minor importance, except in times of severe
crisis, when these regulations could always be set aside by an
appeal to the Chancellor of the Exchequer. There was no Government
interference in the matter of new issues of securities on the London
Stock Exchange or of the quotations granted to new securities by the
Committee of the Stock Exchange. Now the Companies Acts are to be
revised in view of what may be necessary after the war, and there
is only too much reason to fear that mistakes may occur through the
imposition of drastic restrictions, which look so easy to work on
paper, but are more than likely to have the actual effect of doing
much more harm than good.

"Circumstances arising out of the war and developments likely to arise
on its conclusion" give this Committee a roving commission to consider
all kinds of things, which may or may not happen, in the light of
wisdom which may be put before it by interested witnesses, and, worse
still, in the light of semi-official pressure to produce a report
which will go down well with the House of Commons. Our politicians are
at present in a state of extreme servility before the enterprising
gentlemen who are now at the head of what is called the Labour Party.
Every one will sympathise with the aspirations of this party in so
far as they aim at bettering the lot of those who do the hard and
uninteresting work of the world, and giving them a larger share of the
productions that they help to turn out; but that is not the same
thing as giving obsequious attention to the views which their
representatives may have concerning the management of financial
affairs, on the subject of which their knowledge is necessarily
limited and their outlook is likely to be, to a certain extent,
prejudiced. A recent manifesto put forward by the leaders of the new
Labour Party includes in its programme the acquisition by the nation
of the means of production--in other words, the expropriation of
private capitalists. The Labour people very probably think that by
this simple method they will be able to save the labourer the cost
of providing capital and the interest which is paid for its use; and
people who are actuated by this fallacy, which implies that the rate
paid to capital is thinly disguised robbery, inevitably have warped
views concerning the machinery of finance and the earnings of
financiers. These views, expressed in practical legislation, might
have the most serious effects not only upon England's financial
supremacy but also on the industrial activity which that financial
supremacy does so much to maintain and foster.

What, after the war, will be the most important need, from the
material point of view, for the inhabitants of this country? However
the war may end, and whatever may happen between now and the end of
it, there can be only one answer to this question, and that answer
is greatly increased production. The war has already diminished our
capital resources to the extent of the whole amount that we have
raised by borrowing abroad, that is to say, by pledging the production
of our existing capital, and by selling to foreign countries the
foreign securities in which our capitalists had invested during
the previous century. No one knows the extent to which our capital
resources have been impaired by these two processes, but it may be
guessed at as somewhere in the neighbourhood of 1500 millions; that
is to say, about 10 per cent. of a liberal estimate of the total
accumulated property of the country at the beginning of the war. To
this direct diminution in our capital resources we have to add the
impossibility, which has existed during the war, of maintaining our
factories and industrial equipment in first-class working order by
expenditure on account of depreciation of plant. On the other side
of the balance-sheet we can put a large amount of new machinery
introduced, which may or may not be useful for industrial purposes
after the war; greatly improved methods of organisation, the effect of
which may or may not be spoilt when the war is over by uncomfortable
relations between Capital and Labour; and our loans to Allies and
Dominions, some of which may have to be written off, and most of which
will return us no interest for some time to come, or will at first pay
us interest if we lend our debtors the money to pay it with. What the
country will need, above all, on the material side, is an abundant
revenue, which can only be produced by vigorous and steady effort in
industry, which, again, can only be forthcoming if the machinery of
credit and finance is given the fullest possible freedom to provide
every one who wants to engage in industry and increase the output of
the country with the financial facilities, without which nothing can
be done.

Is it, then, wise at such a time to impose restrictions by a drastic
tightening up of the Companies Act, upon those who wish by financial
activity, to further the efforts of industries and producers? On the
contrary, it would seem to be a time to give the greatest possible
freedom to the financial machine so that there shall be the least
possible delay and difficulty in providing enterprise with the
resources that it needs. We can only make good the ravages of war by
activity in production and strict economy in consumption. What we want
to do is to stimulate the people of this country to work as hard as
they can, to produce as much as possible, to consume as little as
possible on unnecessary enjoyment and luxury, and, so, by procuring
a big balance of production over consumption, to have the largest
possible volume of available goods for sale to the rest of the world,
in order to rebuild our position as a creditor country, which the
war's demands upon us have to some extent impaired.

It is a commonplace that if it had not been for the great mass of
foreign securities, which this country held at the beginning of the
war, we could not nearly so easily have financed the enormous amount
of food and munitions which we have had to provide for our population,
for our armies, and for the population and armies of our Allies. If,
instead of holding a mass of easily marketable securities, we had had
to rely, in order to pay for our purchases of foreign goods, on the
productions of our own mines and factories, and on our power to borrow
abroad, then we should have had to restrict very greatly the number of
men we have put into the firing-line so as to keep them at home for
productive work, or, by the enormous amount of our borrowings, we
should have cheapened the value of British credit abroad to a much
greater extent than has been the case. Our position as a great
creditor country was an enormously valuable asset, not only during the
war but also before it, both from a financial and industrial point of
view. It gave us control of the foreign exchanges by enabling us, at
any time, to turn the balance of trade in our favour by ceasing for a
time to lend money abroad, and calling upon foreign countries to pay
us the interest due from them. The financial connections which it
implied were of the greatest possible assistance to us in enhancing
British prestige, and so helping our industry and commerce to push the
wares that they produced and handled.

Reform of the Companies Acts has often before the war been a more or
less burning question. Whenever the public thought that it had been
swindled by the company promoting machinery, it used to write letters
to the newspapers and point out that it was a scandal that the sharks
of the City should be allowed to prey upon the ignorant public,
and that something ought to be done by Parliament to insure that
investments offered to the public should somehow or other be made
absolutely watertight and safe, while by some unexplained method the
public would still be somehow able to derive large benefits from
fortunate speculations in enterprises which turned out right. Every
one must admit there have been some black pages in the history
of British company promoting, and that many swindles have been
perpetrated by which the public has lost its money and dishonest and
third-rate promoters have retired with the spoil. The question is,
however, what is the remedy for this admitted and glaring evil? Is it
to be found by making the Companies Laws so strict that no respectable
citizen would venture to become a director owing to the fear of penal
servitude if the company on whose board he sat did not happen to pay a
dividend, and that no prospectus could be issued except in the case of
a concern which had already stood so severe a test that its earning
capacity was placed beyond doubt? It would certainly be possible by
legislative enactment to make any security that was offered as safe as
Consols, and less subject to fluctuation in value. But when this had
been done the effect would be very much like the effect upon rabbits
of the recent fixing of their price. No more securities would be

It is certainly extremely important for the future financial and
industrial development of this country that the machinery of finance
and company promotion should be made as clean as possible. What we
want to do is to make everybody see that a great increase in output is
required, that this great increase in output can only be brought about
if there is a great increase in the available amount of capital, that
capital can only be brought into being by being saved, and that it is
therefore everybody's business, both for his own sake and that of the
country, to earn as much as he can and save as much as he can so that
the country's capital fund can be increased; so that industry, which
will have many difficult problems to face when the war is over, shall
be as far as possible relieved from any difficulty of finding all the
capital that it needs. To produce these results it is highly necessary
to increase the confidence of the public in the machinery of the Stock
Exchange, in company promotion and all financial issues. Any one who
sincerely believes that these results can be produced by tightening up
the Companies Acts is not only entitled but bound to press as hard as
he can for the securing of this object. But is this the right way to
do it? There is much to be said at first sight for making more strict
the regulations under which prospectuses have to be issued under the
Companies Acts, demanding a franker statement of the profits in the
past, a fuller statement concerning the prices paid to vendors, and
the prices paid by vendors to sub-vendors, and so forth. Any one who
sits down with a pre-war industrial prospectus in his hand can find
many openings for the hand of the reformer. The accounts published by
public companies might also be made fuller and more informing with
advantage. But even if these obviously beneficial reforms were carried
out, there would always be danger of their evasion. They might tend to
the placing of securities by hole-and-corner methods without the issue
of prospectuses at all, and to all the endless devices for dodging the
law which are so readily provided as soon as any attempt is made
by legislation to go too far ahead of public education and public

This is the real solution of this problem--publicity, the education of
the public, and a higher ideal among financiers. As long as the public
likes to speculate and is greedy and ignorant enough to be taken in by
the wiles of the fraudulent promoter, attempts by legislation to check
this gentleman's enterprise will be defeated by his ingenuity and the
public's eagerness to be gulled. The ignorance of the public on the
subject of its investments is abysmal, as anybody knows who is brought
into practical touch with it. Just as the cure for the production of
rotten and fraudulent patent medicines thrust down the public's throat
by assiduous advertising is the education of the public concerning the
things of its stomach, so the real cure for financial swindles is the
education of the public concerning money matters, and its recognition
of the fact that it is impossible to make a fortune in the City
without running risks which involve the possible, not to say probable,
loss of all the money with which the speculator starts. When once
the public has learnt to distinguish between a speculation and an
investment, and has also learnt honesty enough to be able to know
whether it wants to speculate or invest, it will have gone much
further towards checking the activity of the fraudulent promoter
than any measure that can be recommended by the most respectable and
industrious of committees. At the same time, it must be recognised
by those responsible for our finance, that it is their business,
and their interest, to keep the City's back premises clean; because
insanitary conditions in the back yard raise a stink which fouls the
whole City.

In the meantime, if gossip is to be believed, some of the members of
the Government have the most disquieting intentions concerning the
kind of regulations which they wish to impose on the activities of the
City, especially in its financial branch. It is believed that some of
the bright young gentlemen who now rule us are in favour of Government
control over the investment of money placed at home, and the
prohibition of the issue of foreign securities; and it is even
whispered that a fantastic scheme for controlling the profits of all
industrial companies, by which anything earned above a certain level
is to be seized for the benefit of the nation, is now a fashionable
project in influential Parliamentary circles. Every one must, of
course, admit that a certain amount of control will be necessary for
some time after the war. It may not be possible at once to throw open
the London Money Market to all borrowers, leaving them and it to
decide between them who is to be first favoured with a supply of the
capital for which there will be so large a demand when the war is
over. Certain industries, those especially on which our export trade
depends, will have to be first served in the matter of the provision
of capital. If it is a choice between the engineering or shipbuilding
trades and a company that wants to start an aeroplane service between
London and Brighton for the idle rich, it would not be reasonable,
during the first few months after the war, that the unproductive
project should be able, by bidding a high price for capital, to
forestall the demand of the more useful producer. And with regard
to the issue of foreign securities, there is this to be said, that
foreign securities placed in London have the same effect upon foreign
exchange as the import into England of goods shipped from any country;
that is to say, for the time being they turn the exchange against us.
On the other hand, it is a well-known commonplace that imports of
securities have to be balanced by exports of goods or services; and
as the times when our export trade is most active are those when most
foreign securities are being placed in London, it follows that any
restrictions placed upon the issue of foreign securities in London
will hinder rather than help that recovery in our export trade which
is so essential to the restoration of our position as a creditor

Moreover, our rulers must remember this, that in War-time, when all
the letters sent abroad are subject to the eye of the Censor, it is
possible to control the export of British funds abroad; but that in
peace time (unless the censorship is to continue), it will not be
possible to check foreign investment by restricting the issuing of
foreign securities in London. If people see better rates to be
earned abroad and more favourable prospects offered by the price
of securities on foreign Stock Exchanges, they will invest abroad,
whether securities are issued in London or not. As for the curious
suggestion that the profits of industrial companies are henceforward
to be limited and the whole balance above a statutory rate to be taken
over by the State for the public good, this would be, in effect, the
continuance on stricter lines of the Excess Profits Duty. As a war
measure the Excess Profits Duty has much to be said for it at a time
when the Government, by its inflationary policy, is putting large
windfalls of profit into the hands of most people who have to hold a
stock of goods and have only to hold them to see them rise in value.
The argument that the State should take back a large proportion of
this artificially produced profit is sound enough; but, if it is
really to be the case that industry is to be asked for the future to
take all the risk of enterprise and handover all the profit above
a certain level to the Government, the reply of industry to such a
proposition would inevitably be short, emphatic, unprintable, and by
no means productive of revenue to the State.



_April_, 1918

The Figures of the National Budget--A Large Increase in Revenue and
a Larger in Expenditure--Comparisons with Last Year and with the
Estimates--The Proportions borne by Taxation still too Low--The Folly
of our Policy of Incessant Borrowing--Its Injustice to the Fighting

At first sight the figures of revenue and expenditure for the year
ending March 31st are extremely satisfactory, at any rate on the
revenue side. The Chancellor anticipated a year ago a revenue from
taxation and State services of L638 millions, and the receipts into
the Exchequer on these accounts actually amount to L707 millions. On
the expenditure side, however, the increase over the Budget estimate
was very much greater. The estimate was L2290 millions, and the actual
amount expended was L2696 millions. Instead, therefore, of a deficit
of L1652 millions having to be met by borrowing, there was an actual
gap, to be filled by this method, of, roughly, L1990 millions.

To take the revenue side of the matter first, this being by far the
most cheering and satisfactory, we find that the details of the
revenue, as compared with last year's, were as follows:--

Year ending Year ending
Mar. 31, 1918. Mar. 31, 1917. Increase. Decrease.
Customs 71,261,000 70,561,000 700,000 ---
Excise 38,772,000 56,380,000 --- 17,608,000
Estate, etc.,
Duties 31,674,000 31,232,000 442,000 ---
Stamps 8,300,000 7,878,000 422,000 ---
Land Tax 665,000 640,000 25,000 ---
House Duty 1,960,000 1,940,000 20,000 ---
Income Tax and
Super Tax 239,509,000 205,033,000 34,476,000 ---
Excess Profits
Duties, etc. 220,214,000 139,920,000 80,294,000 ---
Land Value
Duties 685,000 521,000 164,000 ---
Postal Service 35,300,000 34,100,000 1,200,000 ---
Crown Lands 690,000 650,000 40,000 ---
Sundry Loans, etc. 6,056,250 8,055,817 --- 1,999,567
Miscellaneous 52,148,315 16,516,765 35,631,550 ---
----------- ----------- ----------- -----------
707,234,565 573,427,582 153,414,550 19,607,567
| |
Net Increase.

A more interesting comparison perhaps is to take the actual receipts
during the past financial year and compare them, not with the former
year, but with the estimates of the expected yield of the various
items. In this case we get the following comparisons:--

[Transcriber's Note: Corrected a typo in the table: "Sundry Loans"
line should have a minus(-) instead of a plus(+) as printed.]

Actual. Estimated. Difference.
Customs 71,261,000 70,750,000 + 511,000
Excise 38,772,000 34,950,000 + 3,822,000
Estate Duties 31,674,000 29,000,000 + 2,674,000
Stamps 8,300,000 8,000,000 + 300,000
Land Tax and House Duty 2,625,000 2,600,000 + 25,000
Income Tax and Super Tax 239,509,000 224,000,000 + 15,509,000
Excess Profits Tax 220,214,000 200,000,000 + 20,214,000
Land Value Duties 685,000 400,000 + 285,000
Postal Services 35,300,000 33,700,000 + 1,600,000
Crown Lands 690,000 600,000 + 90,000
Sundry Loans, etc. 6,056,000 7,500,000 - 1,444,000
Miscellaneous 52,148,000 27,100,000 + 25,048,000

Certainly, the country is entitled to congratulate itself on this
tremendous evidence of elasticity of revenue, and to a certain extent
on the effort that it has made in providing this enormous sum of money
from the proceeds of taxation and State services. But when this much
has been admitted we have to hasten to add that the figures are not
nearly so big as they look, and that there is much less "to write
home about," as the schoolboy said, than there appears to be at first
sight. Those champions of the Government methods of war finance who
maintain that we have, during the past year, multiplied the pre-war
revenue, of roughly, L200 millions by more than 3-1/2, so arriving at
the present revenue of over L700 millions, are not comparing like
with like. The statement is perfectly true on paper, and expressed in
pounds sterling, but then the pound sterling of to-day is an entirely
different article from the pre-war pound sterling. Owing to the system
of finance pursued by our Government, and by every other Government
now engaged in the war, of providing for a large part of the country's
goods by the mere manufacture of new currency and credit, the
buying power of the pound sterling has been greatly depreciated.
By multiplying the amount of legal tender currency in the shape of
Treasury notes, of token currency in the shape of silver and bronze
coinage, and of banking currency through the bank deposits which
are swollen by the banks' investments in Government securities, the
Government has increased the amount of currency passing from hand to
hand in the community while, at the same time, the volume of goods
to be purchased has not been increased with anything like the same
rapidity, and may, in fact, have been, actually decreased. The
inevitable result has been a great flood of new money with a greatly
depreciated value. Index numbers show a rise of over 100 per cent.
in the average prices of commodities during the war. It is, however,
perhaps unfair to assume that the buying power of the pound has
actually been reduced by a half, but it is certainly safe to say that
it has been reduced by a third. Therefore, the revenue raised by the
Government during the past year has to be reduced by at least a third
before we are justified in comparing our war achievements with the
Government's pre-war revenue. If we take one-third off L707 millions
it reduces the total raised during the past year by revenue to about
L470 millions, less than two and a half times the pre-war revenue.

From another point of view our satisfaction with the tremendous
figures of the past year's revenue has to be to some extent qualified.
The great elasticity shown by the big increase of actual achievement
over the Budget estimate has been almost entirely in revenue items
which cannot be expected to continue to serve us when the war is
over. The total increase in the receipts over estimate amounts to L69
millions, and of this L20 millions was provided by the Excess Profits
Duty, a fiscal weapon which was invented during the war, and for
the purpose of the war. It has always been assumed that it would be
discontinued as soon as the war was over, and if it should not be
discontinued its after-war effect is likely to be very unfortunate at
a time when our industrial effort requires all the encouragement
that it can get. Another L25 millions was provided by miscellaneous
revenue, and this windfall again must be largely due to operations
connected with the war. Finally, the L15-1/2 millions by which
the income tax exceeded the estimate must again be largely due to
inflation and extravagance on the part of the Government, which, by
manufacturing money, and then spending it recklessly, puts big profits
and big incomes into the hands of those who have stocks of goods to
sell or who are in a position to produce them.

If, therefore, the satisfaction with which we regard the big total of
the Government's revenue receipts has to be considerably modified in
the cold light of close observation, the enormous increase on the
expenditure side gives us very little comfort and calls for the most
determined and continued criticism if our reckless Government is to be
made to turn over a new leaf. In the early days of the war there was
much excuse for wasting money. We had to improvise a great Army, and
a great organisation for equipping it; there was no time then to look
too closely into the way the money was being spent, but this excuse is
long obsolete. It is not possible to waste money without also wasting
the energy and working power of the nation; on this energy and working
power the staying power of the country depends in its struggle to
avert the greatest disaster that can be imagined for civilisation,
that is, the victory of the German military power. Seeing that for
many months past we have no longer been obliged to finance Russia, and
to provide Russia with the mass of materials and the equipment that
she required, the way in which our expenditure has mounted up
during the course of the year is a very serious blot on the year's
balance-sheet. We spent during the year ending March 31st, L2696
millions against L2198 millions in the previous year, an increase of
close upon L500 millions; L63 millions of this increase were due to
interest on war debt, the rest of it was due to increased cost of the
war, and few business men will deny that very many of these extra
millions might have been saved if our rulers and our bureaucratic
tyrants had been imbued with any real sense of the need for conserving
the energy of the nation.

Much has been done by the Committee on National Expenditure to bring
home to the Government opportunities for economy, and methods by which
it can be secured. Can we be equally confident that much has been done
by the Government to carry out the advice that has been given by this
Committee? The Treasury is frequently blamed for its inability to
check the rapacity and extravagance of the spending Departments. It is
very likely that the Treasury might have done more if it had not been
led by its own desire for a short-sighted economy into economising on
its own staff, the activity and efficiency of which was so absolutely
essential to the proper spending of the nation's money. But when this
has been admitted, the fact remains that the Treasury cannot, or can
only with great difficulty, be stronger on the side of economy than
the Chancellor of the Exchequer, and that the task of the Chancellor
of the Exchequer of imposing economy on a spendthrift War Cabinet is
one of extreme difficulty. I hope it is not necessary to say that I do
not urge economy from any sordid desire to save the nation's money if,
by its spending, victory could be secured or brought a day nearer. I
only urge it because I believe that the conservation of our resources
is absolutely necessary to maintain our staying power, and that these
resources are at present being scandalously wasted by the Government.
Inter-departmental competition is still complained of in the latest
report of the National Committee on Expenditure, and there seems to be
still very little evidence that the Government Departments have yet
possessed themselves of the simple fact that it is only out of these
resources that victory can be secured, and that any waste of them is
therefore a crime against the cause of liberty and progress.

It is possible that before these lines are in print the Chancellor
will have brought in his new Budget, and therefore any attempt to
forecast the measures by which he will meet next year's revenue would
be even more futile than most other endeavours at prophecy. But from
the figures of last year as they are before us we see once more that
the proportion of expenditure raised by revenue still leaves very much
to be desired; L707 millions out of, roughly, L2700 millions is not
nearly enough. It is true that on the expenditure side large sums have
been put into assets which may some day or other be recoverable, and
it is therefore impossible to assume with any approach to accuracy
what the actual cost of the war has been for us during the past year.
We have made, for instance, very large advances to our Allies and
Dominions, and it need not be said that our advances to our own
Dominions may be regarded as quite as good as if they were still in
our own pockets; but in the case of our Allies, our loans to Russia
are a somewhat questionable asset, and our loans to our other
brothers-in-arms cannot be regarded as likely to be recoverable for
some time to come, owing to the severity with which the war's pressure
has been laid upon them. With regard to the other assets in which
the Government has invested our money, such as factories, machinery,
ships, supplies and food, etc., it is at least possible that
considerable loss may be involved in the realisation of some of them.
It is, however, possible that the actual cost of the war to us during
the year that is past may turn out some day to have been in the
neighbourhood of L2000 millions. If, on the other hand, we deduct from
the L700 millions raised by revenue the L200 millions which represent
the normal pre-war cost of Government to this country we find that the
proportion of war's cost raised out of revenue is slightly over 25 per
cent. This proportion must be taken with all reserve for the reasons
given above, but in any case it is very far below the 47 per cent. of
the war's cost raised out of revenue by our ancestors in the course of
the Napoleonic wars.

It seems to me that this policy of raising so large a proportion
of the war's cost by borrowing is one that commends itself to
short-sighted politicians, but is by no means in the interests of the
country as a whole, or of the taxpayers who now and hereafter have to
find the money for paying for the war. In so far as the war's needs
have to be met abroad, borrowing abroad is to some extent inevitable
if the borrowing nation has not the necessary resources and labour
available to turn out goods for export to exchange against those which
have to be purchased abroad, but in so far as the war's needs are
financed at home, the policy of borrowing is one that should only
be used within the narrowest possible limits. By its means the
Government, instead of making the citizens pay by taxation for the
war as it goes on, hires a certain number of them to pay for it by
promising them a rate of interest, and their money back some day.
The interest and the sinking fund for redemption have to be found by
taxation, and so the borrowing process merely postpones taxation from
the war period to the peace period. During the war period taxation can
be raised comparatively easily owing to the patriotic stimulus and
the simplification of the industrial problem which is provided by the
Government's insatiable demand for commodities. When the days of peace
return, however, there will be very grave disturbance and dislocation
in industry, and it will have once more to face the problem of
providing goods, not for a Government which will take all that it can
get, but for a public, the demands of which will be uncertain, and
whose buying power will be unevenly distributed, and difficult to
calculate. The process, therefore, which postpones taxation during
the war period to the peace period seems to be extraordinarily
short-sighted from the point of view of the nation's economic
progress. Recovery after the war may be astonishingly rapid if all
goes well, but this can only happen if every opportunity is given to
industry to get back to peace work with the least possible friction,
and a heavy burden of after-war taxation, such as we shall inevitably
have to face if our Chancellors of the Exchequer continue to pile up
the debt charge as they have done in the past, will be anything but
helpful to those whose business it will be to set the machinery of
industry going under peace conditions.

As things are, if we continue to add anything like L2000 millions a
year to the National Debt, it will not be possible to balance the
after-war Budget without taxation on a heavier scale than is now
imposed, or without retaining the Excess Profit Duty, and so stifling
industry at a time when it will need all the fresh air that it can
get. Apart from this expedient, which would seem to be disastrous from
the point of view of its effect upon fresh industry, the most widely
advertised alternative is the capital levy, the objections to which
are patent to all business men. It would involve an enormously costly
and tedious process of valuation, its yield would be problematical,
and it might easily deal a blow at the incentive to save on which the
supply of capital after the war entirely depends. A much higher rate
of income tax, especially on large incomes, is another solution of the
problem, and it also might obviously have most unfortunate effects
upon the elasticity of industry. A tax on retail purchases has much to
be said in its favour, but against it is the inequity inseparable from
the impossibility of graduating it according to the ability of the
taxpayer to bear the burden; and a general tariff on imported goods,
though it would be welcomed by the many Protectionists in our midst,
can hardly be considered as a practical fiscal weapon at a time when
the need for food, raw material, and all the equipment of industry
will make it necessary to import as rapidly and as cheaply as possible
in order to promote our after-war recovery.

Apart from these purely economic arguments against the high proportion
of the war's costs that we are meeting by borrowing, there is the much
more important fact of its bad effect on the minds of our soldiers,
and of those members of the civilian population who draw mistaken
inferences from its effects. From the point of view of our soldiers,
who have to go and fight for their country at a time when those who
are left at home are earning high wages and making big profits, it is
evidently highly unfair that the war should be financed by a method
which postpones taxation. The civilian population left at home,
earning high profits and high wages, should clearly pay as much as
possible during the war by immediate taxation, so that the burden of
taxation may be relieved for our soldiers when they return to civil
life. In view of the hardships and dangers which our soldiers have to
face, and the heroism with which they are facing them, this argument
should be of overwhelming strength in the eyes of every citizen who
has imagination enough to conceive what our fighting men are doing for
us and how supreme is our duty to do everything to relieve them from
any other burden except those which the war compels them to face.
There is also the fact that many members of our uninstructed
industrial population believe that the richer classes are growing
richer owing to the war, and battening on the proceeds of the loans.
I do not think that this is true; on the contrary, I believe that
the war has brought a considerable shifting of buying power from the
well-to-do classes to the manual workers. Nevertheless, in these times
misconceptions are awkwardly active for evil. The well-to-do classes
as a whole are not really benefited by having their future incomes
pledged in order to meet the future debt charge, and if, at the same
time, they are believed to be acquiring the right to wealth, which
wealth they will have themselves to provide, the fatuity of the
borrowing policy becomes more manifest. For these reasons it is
sincerely to be hoped that our next fiscal year will be marked by
a much higher revenue from taxation, a considerable decrease in
expenditure, and a consequently great improvement in the proportion of
war's cost met out of revenue, on what has been done in the past year.
At our present rate of taxation we are not nearly meeting, out of
permanent taxes, the sum which will be needed when the war is over
for peace expenditure on the inevitably higher scale, pensions, and
interest and sinking fund on war debt.



_May_, 1918

The New Budget--Our own and Germany's Balance-sheets--The Enemy's
Difficulties--Mr Bonar Law's Optimism--Special Advantages which Peace
will bring to Germany--A Comparison with American Finance--How much
have we raised from Revenue?--The Value of the Pound To-day--The 1918
Budget an Improvement on its Predecessors--But Direct Taxation still
too Low--Deductions from the Chancellor's Estimates.

One of the most interesting passages in a Budget speech of unusual
interest was that in which the Chancellor of the Exchequer compared
the financial methods of Germany and of this country, as shown by
their systems of war finance. He began by admitting that it is
difficult to make any accurate calculation on this subject, owing
to the very thick mist of obscurity which envelops Germany's actual
performance in the matter of finance since the war began. As the
Chancellor says, our figures throughout have been presented with the
object of showing quite clearly what is our financial position. Most
of the people who are obliged to study the figures of Government
finance would feel inclined to reply that, if this is really so, the
Chancellor and the Treasury seem to have curiously narrow limitations
in their capacity for clearness. Very few accountants, I imagine,
consider the official figures, as periodically published, as models of
lucidity. Nevertheless, we can at least claim that in this respect the
figures furnished to us by the Government during the war have been
quite as lucid as those which used to be presented in time of peace,
and it is greatly to the credit of the Treasury that, in spite of the
enormous figures now involved by Government expenditure, the financial
statements have been published week by week, quarter by quarter, and
year by year, with the same promptitude and punctuality that marked
their appearance in peace-time. In Germany, the Chancellor says, it
has not been the object of German financial statements to show the
financial position quite clearly. It is, therefore, difficult to make
an exact statement, but he was able to provide the House with a series
of very interesting figures, taken from the statements of the German
Finance Ministers themselves.

His first point is with regard to the increase of expenditure. The
alarming rate with which our expenditure has so steadily grown appears
to be paralleled also in Germany. Up to June, 1916, Germany's monthly
expenditure was L100 millions. It has now risen to over L187 millions.
That means to say that their expenditure per diem is L6-1/4 millions,
almost the same as ours, although our expenditure includes items such
as separation allowances and other matters of that kind, borne by the
States and municipalities in Germany, and so not appearing in the
German imperial figures.

As to the precise extent of the German war debt, there is no
certainty, but the Chancellor was able to tell the House that the last
German Vote of Credit, which was estimated to carry them on to June or
July, brings the total amount of all their Votes of Credit to L6200
millions, and that it is at least certain that that amount has been
added to their War Debt, because their taxation during the war has not
covered peace expenditure plus debt charge. Up to 1916 they imposed no
new taxation. In 1916 they imposed a war increment tax, something in
the nature of a capital levy, which is stated to have brought in L275
millions. They added also that year L25 millions nominally to their
permanent revenue. In 1917 they added in addition L40 millions to
their permanent revenue, "Assuming, therefore, that their estimates
were realised, the total amount of new taxation levied by them since
the beginning of the war comes to L365 millions, as against our L1044
millions. This L365 millions is not enough to pay the interest upon
the War Debt which had been accumulated up to the end of the year."

Mr Bonar Law then proceeded to give an estimate of what the German
balance-sheet will be a year hence on the same basis on which he had
calculated ours. With regard to our position, he had calculated that
on the present basis of taxation we shall have a margin of four
millions at the end of the present year if peace should then break
out. As will be shown later, this estimate of his is somewhat
optimistic, but at any rate our position, compared with that of
Germany, may be described as on velvet. A year hence the German War
Debt will be not less than L8000 millions. The interest on that will
be at least L400 millions, a sinking fund at 1/2 per cent. will be L40
millions. Their pension engagements, which will be much higher than
ours owing to their far heavier casualties, have been estimated at
amounts ranging as high as L200 millions. The Chancellor was sure
that he was within the mark in saying that it will be at least L150
millions. Their normal pre-war expenditure was L130 millions, so that
they will have to face a total expenditure at the end of the war of
L720 millions. On the other side of the account their pre-war revenue
was L150 millions. They have announced their intention of this year
raising additional permanent Imperial revenue amounting to L120
millions. From the nature of the taxes the Chancellor considers it
very difficult to believe that this amount will be realised, but,
assuming that it is, it will make their total additional revenue L185
millions. That, added to the pre-war revenue, gives a total of L335
millions, showing "a deficit at the end of this year, comparing
the revenue with the expenditure, of L385 millions at least." The
Chancellor added that if that were our position he would certainly
think that bankruptcy was not far from the British Government.

Another point that the Chancellor was able to make effectively, in
comparing our war revenue with Germany's, was the fact that, with the
exception of the war increment tax, scarcely any of the additional
revenue has been obtained from the wealthier classes in Germany.
Taxation has been indirect and on commodities which are paid for by
the masses of the people. "The lesson to be drawn from these facts is
not difficult to see. The rulers of Germany, in spite of their hopes
of indemnity, must realise that financial stability is one of the
elements of national strength. They have not added to their financial
stability." The reason for this failure the Chancellor considers to be
largely psychological. It is, in the first place, because they do not
care to add to discontent by increased taxation all over the country,
but "it is still more due to this, that in Germany the classes which
have any influence on or control of the Government are the wealthier
classes, and the Government have been absolutely afraid to force
taxation upon them."

It is certainly very pleasant to be able to contemplate the financial
blunders by which Germany is so greatly increasing the difficulties
that it will have to face before the war is over. On the other hand,
we have to recognise that the Chancellor, with that incorrigible
optimism of his, has committed the common but serious error of
over-stating his case by leaving out factors which are in Germany's
favour, as, for instance, that Germany's debt is to a larger extent
than ours held at home. Since the war began we have raised over L1000
millions by borrowing abroad. Our public accounts show that the item
of "Other Debt," which is generally believed to refer to debt raised
abroad, now amounts to L958 millions, while one of our loans in
America, which is separately stated in the account because it was
raised under a special Act, amounted to L51-1/2 millions. It is also
quite possible that fair amounts of our Treasury bills, perhaps also
of our Temporary Advances and of our other war securities, have been
taken up by foreigners; but quite apart from that the two items
already referred to now amount to more than L1000 millions, though at
the end of March last their amount was only L988 millions. It is also
well known that we have during the course of the war realised abroad
the cream of our foreign investments, American Railroad Bonds,
Municipal and Government holdings in Scandinavia, Argentina, and
elsewhere, to an amount concerning which no accurate estimate can be
made, except by those who have access to the Arcana of the Treasury.
It may, however, be taken as roughly true that so far the extent of
our total borrowings and realisation of securities abroad has been
balanced by our loans to our Allies and Dominions, which amounted at
the end of March last to L1526 millions. We have thus entered into an
enormous liability on foreign debts and sold a batch of very excellent
securities on which we used to receive interest from abroad in the
shape of goods and services, against which we now hold claims upon our
Allies and Dominions, in respect to the greater part of which it would
be absurd to pretend that we can rely on receiving interest for some
years after the war, in view of the much greater economic strain
imposed by the war upon our Allies.

Germany, of course, has been doing these things also. Germany has
parted with her foreign securities. She was selling them in blocks for
some weeks before the war, and Germany, of course, has done everything
that she could in order to induce neutrals, during the course of the
war, to buy securities from her and to subscribe to her War Loans.
Nevertheless, it cannot have been possible for Germany to carry out
these operations to anything like the extent that we have, partly
because her credit has not been nearly so good, partly because her
ruthless and brutal conduct of the war has turned the sentiment of the
world against her, and partly because the measures that we have taken
to check remittances and transfers of money have not been altogether
ineffective. On this side of the problem Germany has therefore an
advantage over us, that her war finance, pitiful a$ it has been, has,
not owing to any virtue of hers, but owing to force of circumstances,
raised her a problem which is to a great extent internal, and will not
have altered her relation to the finance of other countries so much as
has been the case with regard to ourselves. We also have to remember
that the process of demobilisation will be far simpler, quicker, and
cheaper for Germany than for us. Even if the war ended to-morrow the
German Army would not have far to go in order to get home, and we
hope that by the time the war ends the German Army will all have been
driven back into its own country and so will be on its own soil, only
requiring to be redistributed to its peace occupations. Our Army will
have to be fetched home, firstly, over Continental railways, probably
battered into a condition of much inefficiency, and then in ships, of
which the supply will be very short. The process will be very slow and
very costly. Our Overseas Army will have to be sent back to distant
Dominions, and the Army of our American Allies will have to be ferried
back over the Atlantic. Consequently if Germany is able to obtain
anything like the supply of raw material that she requires she will be
able to get back to peace business much more quickly than any of her
Anglo-Saxon enemies, and this is an advantage on her side which it
would be unwise to ignore in considering the bad effects on her
after-war activities of the very questionable methods by which she has
financed and is financing the war.

Since we are indulging in these comparisons, it may be interesting to
consider how our American Allies are showing in this matter of war
finance. The _Times_, in its "City Notes" of April 15th, observed, in
connection with the unexpectedly small amount of the third Liberty
Loan, that the reason why the smaller figure was adopted for the issue
was that it seems quite certain now that the original estimate for
the expenditure in the fiscal year ending June 30th next was much too
high. This estimate was 18,775 million dollars. The _Times_ stated
that the realised amount is likely to be hardly more than 12,000
million dollars, of which about 4500 million dollars will represent
loans to Allies, and that the estimate for the year's largely
increased tax revenue was 3886 million dollars, which now seems
likely to be exceeded by the receipts. If this be so, out of a total
expenditure of L2400 millions, of which L900 millions will be lent to
the Allies, the Americans are apparently raising nearly L800 millions
out of revenue. Therefore if we deduct from both sides of the account
the pre-war expenditure of about L215 millions and deduct also the
loans to Allies from the expenditure, it leaves the cost of the war
to America L1285 millions for this year and the war revenue L562
millions. If these figures are correct it would thus appear that
America is raising nearly half its actual war cost out of revenue as
the war goes on.

On the other hand, in the New York _Commercial Chronicle_ of April 6th
the total estimated disbursements for the year are still stated at
over 16,000 million dollars, that is to say, L3200 millions roughly,
so that there seems to be considerable uncertainty as to what the
actual amount of the expenditure of the United States will be during
the year ending on June 30th. In any case, there can be no question
that if the very high proportion of war cost paid out of revenue shown
by the _Times_ figures proves to be correct, it will be largely owing
to accident or misfortune; if America's war expenditure has not
proceeded nearly as fast as was expected, it will be, no doubt, owing
not to economies but to shortcomings in the matter of delivery of war
goods which the Government had expected to pay for in the course
of the fiscal year. It certainly would have been expected that the
Americans would in this matter of war finance be in a position to set
a very much higher standard than any of the European belligerents
owing to the enormous wealth that the country has acquired during the
two and a half years in which it, in the position of a neutral, was
able to sell its produce at highly satisfactory prices to the warring
Powers without itself having to incur any of the expenses of war. On
the other hand, its great distance from the actual seat of operations
will naturally make it difficult for the American Government to impose
taxation as freely as might have been done in the case of peoples
which are actually on the scene of warfare; so that it is hardly safe
to count on American example to improve the standard of war finance
which has been so lamentably low in Europe in the course of the
present war. According to their original estimates the proportion of
war cost borne out of taxation seems to have been on very much the
same level as ours, and this has all through the war been very much
lower than the results achieved by our ancestors at the time of the
Napoleonic and Crimean wars.

On this point the proportion of our expenditure, which has been borne
out of revenue, the Chancellor stated that up to the end of last
financial year, March 31, 1918, the proportion of total expenditure
borne out of revenue was 26.3 per cent. On the estimates which he
submitted to the House in his Budget speech on April 22nd, the
proportion of total expenditure met out of revenue during the current
financial year will be 28.3 per cent., and the proportion calculated
over the whole period to the end of the current year will be 26.9 per
cent. These proportions, however, are between total revenue and total
expenditure during the war period. The proportion, of course, is
not so high when we try to calculate actual war revenue and war
expenditure by deducting on each side at a rate of L200 millions a
year as representing normal expenditure and revenue and leaving out
advances to Allies and Dominions. On this basis the proportion of war
expenditure met out of war revenue up to March 31, 1918, was, the
Chancellor stated, 21.7 per cent. For the year 1917-18 it was 25.3 per
cent., for the current year it will be 26.5 per cent., and for the
whole period up to the end of the current year 23.3 per cent. The
corresponding figures for the Napoleonic and Crimean wars are given by
Sir Bernard Mallet in his book on British Budgets as 47 per cent. and
47.4 per cent. So that it will be seen that, judged by this test, our
war finance, though very much better than Germany's, is not on so high
a standard as that set by previous wars. It is true, of course, that
the rate of expenditure during the present war has been on a scale
which altogether dwarfs the outgoing in any previous struggle. The
Napoleonic War is calculated to have cost some L800 millions, having
lasted some twenty-three years. Last year we spent L2696 millions, of
which near L2000 millions may be taken as war cost, after deducting
normal expenditure and loans to Allies.

Nevertheless, this argument of the enormous cost of the present war
does not seem to me to be a good reason why the war should be financed
badly, but rather a reason for making every possible effort to finance
it well Are we doing so? At first sight it is a great achievement to
have increased our total revenue from L200 millions before the war to
L842 millions, the amount which we are expected to receive during
the current year on the basis of the proposed additions to taxation,
without taking into account any revenue from the suggested luxury tax.
But, as I have already pointed out, the comparison of war pounds with
pre-war pounds is in itself deceptive. The pounds that we are paying
to-day in taxation are by no means the pounds that we paid before the
war; their value in effective buying power has been diminished by
something like one half. So that even with the proposed additions to
taxation we shall not have much more than doubled the revenue of the
country from taxation and State services as calculated in effective
buying power. When we consider how much is at stake, that the very
existence, not only of the country but of civilisation, is endangered
by German aggression, it cannot be said that in the matter of taxation
the country is doing anything like what it ought to have done or
anything like what it would have done, willingly and readily, if a
proper example had been set by the leading men among us, and if the
right kind of financial lead had been given to the country by its

When we look at the details of the Budget, it will be seen that the
Chancellor has made a considerable advance upon his achievement of a
year ago, when he imposed fresh taxation amounting to L26 millions,
twenty of which came from excess profits duty, and could therefore
not be counted upon as permanent, in his Budget for a year which
was expected to add over L1600 millions to the country's debt,
and actually added nearly L2000 millions. For the present year he
anticipates an expenditure of L2972 millions, and he is imposing fresh
taxation which will realise L68 millions in the current year and
L114-1/2 millions in a full year. On the basis of taxation at which it
stood last year he estimates for an increase of L67 millions, income
tax and super-tax on the old basis being expected to bring in L28
millions more, and excess profits duty L80 millions more, against
which decreases were estimated at L3-1/2 millions in Excise and L37
millions in miscellaneous. He thus expects to get a total increase on
the last year's figures of L135 millions, making for the current year
a total revenue of L842 millions, and leaving a total deficit of
L2130 millions to be provided by borrowing. Increases in taxation
on spirits, beer, tobacco, and sugar bring in a total of nearly L41
millions. An increase of a penny in the stamp duty on cheques is
estimated to bring in L750,000 this year and a million in a full year,
and the increases in the income tax and the super-tax will bring in
L23 millions in the present year and L61 millions in a full year.
Increases in postal charges will bring in L3-1/2 millions this year
and L4 millions in a full year.

There has been little serious criticism of these changes in taxation
except that many people, who seem to regard the penny post as a kind
of fetish, have expressed regret that the postal rate of the letter
should be raised to 1-1/2 d. This addition seems to me to be merely an
inadequate recognition of the depreciation of the buying power of the
penny and to be fully warranted by the country's circumstances. Either
it will bring in revenue or it will save the Post Office labour, and
whichever of these objects is achieved will increase the country's
power to continue the war. The extra penny stamp on cheques has been
rather absurdly objected to as being likely to increase inflation.
Since the effect of it is likely to be that people will draw a smaller
number of small cheques, and will make a larger number of their
purchases by means of Treasury notes, the tax will merely result
in the substitution of one form of currency for another, and it is
difficult to see how this process will in any way increase inflation.
Other arguments might be adduced, which make it undesirable to
increase the outstanding amounts of Treasury notes, but in the matter
of inflation through addition to paper currency, it seems to me that
the proposed tax is entirely blameless. The increase of a shilling in
income tax and super-tax produced a feeling of relief in the City,
being considerably lower than had been anticipated. It is hardly the
business of the Chancellor of the Exchequer in this most serious
crisis to produce feelings of relief among the taxpayers, and it seems
to me a great pity that he did not make much freer use of these most
equitable forms of taxation, having first made arrangements (which
could easily have been done) by which their very severe pressure would
have been relieved upon those who have families to bring up. Death
duties, again, he altogether omitted as a source of extra revenue. His
proposed luxury tax he has left to be evolved by the wisdom of a
House of Commons Committee, and has thereby given plenty of time to
extravagantly minded people to lay in a store of stuff before the tax
is brought into being.

Space will not allow me to deal fully with the Chancellor's very
interesting analysis of our position as he expects it to be at the end
of the financial year on the supposition that the war was then over.
He expects a revenue then of L540 millions on the present basis,
making, with the yield of the new taxes in a full year, L654 millions
in all, without including the excess profits duty, and he expects an
after-war expenditure of L650 millions, including L50 millions for
pensions and L380 millions for debt charge. It seems to me that
his expectation of after-war revenue is too high, and of after-war
expenditure is too low. He says that the estimates have been carefully
made, but that they include "a recovery from the absence of war
conditions," but surely the absence of war conditions is much more
likely to produce a diminution than a recovery in taxation. Under the
present circumstances, with prices continually rising, the profits of
those who grow or hold stocks of goods of any kind automatically swell
The rise in prices has only to cease, to say nothing of its being
turned into a fall, to produce at once a big check in those profits,
and when we consider the enormous dislocation likely to be produced by
the beginning of the peace period expectations of an elastic revenue
when the war is over seem to be almost criminally optimistic.

The Chancellor arrived at his after-war debt charge of L380 millions
by estimating for a gross debt on March 31, 1919, of L7980 millions,
which he reduces to a net debt of L6856 millions by deducting half
the expected face value of loans to Allies, L816 millions, and L308
millions for loans to Dominions and India's obligation. But is he,
in fact, entitled to count on receiving any interest at all from our
Allies for some years to come after the war? If not, then on that
portion of our debt which is represented by loans to Allies we shall
have to meet interest for ourselves. He also gave an imposing list of
assets in the shape of balances in hand, foodstuffs, land, securities,
building ships, stores in munitions department, and arrears of
taxation, amounting in all to nearly L1200 millions. It is certainly
very pleasant to consider that we shall have all these valuable assets
in hand; but against them we have to allow, which the Chancellor
altogether omitted to do, for the big arrears of expenditure and the
huge cost of demobilisation, which is at least likely to absorb the
whole of them. On the whole, therefore, although we can claim that
our war finance is very much better than that of our enemies, it is
difficult to avoid the conclusion that it might have been very
much better than it is, and that it is not nearly as good as it is
represented to be by the optimistic fancy of the Chancellor of the



_June_, 1918

An Inopportune Proposal--What is Currency?--The Primitive System of
Barter--The Advantages possessed by the Precious Metals--Gold as
a Standard of Value--Its Failure to remain Constant--Currency and
Prices--The Complication of other Instruments of Credit--No Substitute
for Gold in Sight--Its Acceptability not shaken by the War--A
Fluctuating Standard not wholly Disadvantageous--An International
Currency fatal to the Task of Reconstruction--Stability and Certainty
the Great Needs.

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

Since, however, the question is in the air, it may be as well to
consider what is wrong with our present methods, and what sort of
improvements are suggested by the reformers. At present, as every one
knows, international payments are in normal times ultimately settled
by shipments from one country to another of gold. Gold has achieved
this position for reasons which have been described in all the
currency text-books. Mankind proceeded from a state of barter to a
condition in which one particular commodity was used as the chief
means of payment simply because this process was found to be much
more convenient. Under a system of barter an exchange could only be
effected between two people who happened to be possessed each of them
of the thing which the other one wanted, and also at the same time to
want the thing which the other one possessed, and the extent of their
mutual wants had to lit so exactly that they were able to carry out
the desired exchange. It must obviously have been rare that things
happened so fortunately that mutually advantageous exchanges were
possible, and the text-books invariably call attention to the
difficulties of the baker who wanted a hat, but was unable to supply
his need because the hatter did not want bread but fish or some other

It thus happened that we find in primitive communities one particular
commodity of general use being selected for the purpose of what is
now called currency. It is very likely that this process arose quite
unconsciously; the hatter who did not want bread may very likely have
observed that the baker had something, such as a hit of leather, which
was more durable than bread, and which the hatter could be quite
certain that either he himself would want at some time, or that
somebody else would want, and he would therefore always be able to
exchange it for something that he wanted. All that is needed for
currency in a primitive or any other kind of people is that it should
be, in the first place, durable, in the second place in universal
demand, and, in the third place, more or less portable. If it also
possessed the quality of being easily able to be sub-divided without
impairing its value, and was such that the various pieces into which
it was sub-divided could be relied on not to vary in desirability,
then it came near to perfection from the point of view of currency.

All these qualities were possessed in an eminent degree by the
precious metals. It is an amusing commentary on the commonly assumed
material outlook of the average man that the article which has won its
way to supremacy as currency by its universal desirability, should be
the precious metals which are practically useless except for purposes
of ornamentation. For inlaying armour and so adorning the person of a
semi-barbarous chief, for making into ornaments for his wives, and for
the embellishment of the temples of his gods, the precious metals had
eminent advantages, so eminent that the practical common sense of
mankind discovered that they could always be relied upon as being
acceptable on the part of anybody who had anything to sell. In
the matter of durability, their power to resist wear and tear was
obviously much greater than that of the hides and tobacco and other
commodities then fulfilling the functions of currency in primitive
communities. They could also be carried about much more conveniently
than the cattle which have been believed to have fulfilled the
functions of currency in certain places, and they were capable of
sub-division without any impairing of their value, that is to say, of
their acceptability. Merely as currency, precious metals thus have
advantages over any other commodity that can be thought of for this

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

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

But, as has been said, the question is very greatly complicated by
the addition of credit instruments to the volume of money, and this
complication has been made still more complicated by the fact that
many economists have refused to regard as money anything except actual
metal, or at least such credit instruments as are legal tender, that
is to say, have to be taken in payment for commodities, whether the
seller wishes to do so or not. For example, many people who are
interested in currency questions would regard at the present moment in
this country gold, Bank of England notes, Treasury notes, and silver
and copper up to their legal limits as money, but would deny this
title to cheques. It seems to me, however, that the fact that the
cheque is not and cannot be legal tender does not in practice affect
or in any way impair the effectiveness of its use as money. As a
matter of fact cheques drawn by a good customer of a good bank are
received all over the country day by day in payment for an enormous
volume of goods. In so far as they are so received, their effect upon
prices is exactly the same as that of legal tender currency. This
fact is now so generally recognised that the Committee on National
Expenditure has called attention to the financing of the war by bank
credits as one of the reasons for the inflation of prices which has
done so much to raise the cost of the war. It is, in fact, being
generally recognised that the power of the bankers to give their
customers credits enabling them to draw cheques amounts in fact to
an increase in the currency just as much as the power of the Bank of
England to print legal tender notes, and the power of the Government
to print Treasury notes.

Thus it has happened that by the evolution of the banking system
the use of the precious metals as currency has been reinforced and
expanded by the printing of an enormous mass of pieces of paper,
whether in the form of notes, or in the form of cheques, which
economise the use of gold, but have hitherto always been based on the
fact that they are convertible into gold on demand, and in fact have
only been accepted because of this important proviso. Gold as currency
was so convenient and perfect that its perfection has been improved
upon by this ingenious device, which prevented its actually passing
from hand to hand as currency, and substituted for it an enormous mass
of pieces of paper which were promises to pay it, if ever the holders
of the paper chose to exercise their power to demand it. By this
method gold has been enabled to circulate in the form of paper
substitutes to an extent which its actual amount would have made
altogether impossible if it had had to do its circulation, so to
speak, in its own person. From the application of this great economy
to gold two consequences have followed; the first is that the
effectiveness of gold as a standard of value has been weakened because
this power that banks have given to it of circulating by substitute
has obviously depreciated its value by enormously multiplying the
effective supply of it. Depreciation in the buying power of money, and
a consequent rise in prices, has consequently been a factor which
has been almost constantly at work for centuries with occasional
reactions, during which the process went the other way. Another
consequence has been that people, seeing the ease with which pieces of
paper can be multiplied, representing a right to gold which is only in
exceptional cases exercised, have proceeded to ask whether there is
really any necessity to have gold behind the paper at all, and whether
it would not be possible to evolve some ideal form of super-paper
which could take the place of gold as the basis of the ordinary paper
which is created by the machinery of credit, which would be made
exchangeable into it on demand instead of into gold.

It is difficult to say how far the events of the war have contributed
to the agitation for the substitution for gold of some other form of
international currency. It would seem at first sight that the position
of gold at the centre of the credit system has been shaken owing
to the fact that in Sweden and some other neutral countries the
obligation to receive gold in payment for goods has been for the time
being abrogated. The critics of the gold standard are thus enabled
to say, "See what has happened to your theory of the universal
acceptability of gold. Here are countries which refuse to accept any
more gold in payment for goods. They say, 'We do not want your gold
any more. We want something that we can eat or make into clothes to
put on our backs.'" This is certainly an extremely curious development
that is one of the by-products of war's economic lessons. But I do not
feel quite sure that it has really taught us anything new. All that
has ever been claimed for gold is that it is universally acceptable
when men are buying and selling together under more or less normal
circumstances. It has always been recognised that a shipwrecked crew
on a desert island would be unlikely to exchange the coco-nuts or fish
or any other commodities likely to sustain life which they could find,
for any gold which happened to be in the possession of any of them,
except with a view to their being possibly picked up by a passing
ship, and returning to conditions under which gold would reassume its
old privilege of acceptability.

During the war the shipping conditions have been such that many
countries have been hard put to it, especially if they were contiguous
to nations with which the Entente is at present at war, to get the
commodities which they needed for their subsistence. The Entente, with
its command of the sea, has found it necessary to ration them so that
they should have no available surplus to hand on to the enemy. They
have very naturally endeavoured to resist these measures, and in order
to do so have made use of the power that they exercise by their being
in possession of commodities which the Entente desires. They
have shown a tendency to say that they would not part with these
commodities unless the Entente allowed them to have a larger
proportion of things needed for subsistence than the Entente thought
necessary for them, and it was as part of this battle for larger
imports of necessaries that gold has been to some extent looked upon
askance as means of payment, the preference being given to things
to eat and wear rather than to the metal. These wholly abnormal
circumstances, however, do not seem to me to be any proof that gold
will after the war be any less acceptable as a means of payment than
before. The Germans are usually credited with considerable sagacity in
money matters, with rather more, in fact, I am inclined to think, than
they actually possess; they, at any rate, show a very eager desire to
collect together and hold on to the largest possible store of gold,
obviously with a view to making use of it when the war is over in
payment for raw materials, and other commodities of which they are
likely to find themselves extremely short. America also has shown a
strong tendency to maintain as far as possible within its borders the
enormous amount of gold which the early years of the war poured into
its hands. While such is the conduct of the chief foreign nations, it
is also interesting to note that one comes across a good many people
who, in spite of all the admonitions of the Government to all good
citizens to pay their gold into the banks, still hold on to a small
store of sovereigns in the fear of some chain of circumstances arising
in which only gold would be taken in payment for commodities. On the
whole, I am inclined to think that the power of gold as a desirable
commodity merely because it is believed to be always acceptable has
not been appreciably shaken by the events of the war.

This does not alter the fact that, as has been shown above, gold,
complicated by the paper which has been based upon it, cannot claim
to have risen to full perfection as a standard of value. In
primitive times the question of the standard of value hardly arises.
Transactions are for the most part carried out and concluded at once,
and any seller who takes a piece of metal in payment for his goods
does so with the rough knowledge of what that piece of metal will buy
for him at the moment, and that is the only point which concerns
him. The standard of value only becomes important when under settled
conditions of society long-term contracts bulk large in economic
transactions. A man who makes an investment which entitles him to 5
per cent. interest, and repayment in 30 years' time, begins to be very
seriously interested in the question of what command over commodities
his annual income of 5 per cent. will give him, and whether the
repayment of his money at the end of 30 years will represent the
repayment of anything like the same amount of buying power as his
money now possesses. It is here, of course, that gold has failed
because, as we have seen, the process has been a fairly steady one of
depreciation in the buying power of the alleged standard and a rise in
the prices of other commodities. This means to say that the investor
who has accepted repayment at the end of 30 years of the amount that
he lent, be it L100 or L10,000, has found that the money repaid to him
had by no means the same buying power as the money which he originally

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